n the world of finance, there are a lot of technicalities that are unfamiliar to the general populace. And yet the growing trend of investment opportunities, bank securities, and lots of other instruments is quite apparent. If we look at it not from the perspective of an ultra-skeptic but rather a neutral view, we will realize the utter redundancy of many of such inventions. At this point in history, these institutions have become so integrated to our lives that we can’t simply discard these ideas, but we can be conscious of what is actually going on here.
The Banking System as a Tool for the Ultra-Wealthy
In reality, anyone who is well-conversant on the topics of finance, banking, and insurance or who is an expert in those fields will confidently and quite naively defend their position and instill a sense that all is above board and well. The truth of the matter is they are already too drunk on the sweet but adulterated nectar of that industry. The purpose of this article is not to disprove or prove the redundancy of every financial institution. Then I would be challenging the whole of humanity. By this I mean that, although there are people who have utterly capitalized on the money market and sold their soul to the money god, there are other perfectly sane and ethical people who vouch for these institutions. If not, then they are involved with it one way or another. Isn’t everyone? I can say for myself that I am.
The rise of Islamic finance has been framed as a more ethical alternative to conventional banking, rooted in Sharia law and designed to promote fairness and social justice. Historically, Islamic finance traces its origins back to the advent of Islam in the 7th century, but modern Islamic banking began to take shape in the 1960s and 1970s with institutions like Dubai Islamic Bank. Since then, global Islamic financial assets have surged from less than $600 billion in 2007 to over $1.3 trillion by 2012, reflecting a growing demand for Sharia-compliant financial products among Muslims worldwide. However, despite its ethical underpinnings, many projects within Islamic finance have faced significant challenges, often succumbing to commercialization and profit-driven motives akin to those of traditional banks.Recent trends have also seen the emergence of Islamic finance models in cryptocurrency, raising concerns about practicality and the potential for scams. While the fundamental concept of banking—facilitating money lending and borrowing—seems straightforward, the complexities arise when ethical considerations are layered onto financial transactions. Critics argue that many Islamic financial products fail to deliver on their ethical promises, leading to disillusionment among consumers who expected a more principled approach to finance.
The banking system has increasingly become a tool for the ultra-wealthy, functioning like a piggy bank where they store their wealth and withdraw funds whenever necessary. This dynamic raises questions about the source of the seemingly endless money supply that these elites access, often appearing to materialize out of thin air. The reality is that financial instruments such as derivatives play a significant role in this phenomenon. Derivatives, which are contracts whose value is derived from an underlying asset or financial instrument, allow banks and investors to engage in speculative betting on various financial outcomes, including the likelihood of loan repayments. For instance, during the 2008 financial crisis, mortgage-backed securities—essentially derivatives—were created by pooling numerous home loans and selling shares of this pool to investors. This practice led to widespread speculation on housing prices, with many betting that they would continue to rise indefinitely. When the housing market collapsed, it resulted in massive losses for those involved, highlighting how derivatives can distort financial realities and contribute to systemic risk. Furthermore, the leverage involved in trading derivatives means that banks can hold positions worth significantly more than their actual capital. This excessive risk-taking can lead to catastrophic failures, as seen in cases like the collapse of Barings Bank and the near-collapse of AIG, which suffered losses exceeding $18 billion due to risky derivative trades.
I mean, it is a common attribute of any man to earn easy money. That is why we bet and gamble. It is not necessarily owing to the thrill of it but rather the possibility of making money with less effort. And through this impetus and motivation, a lot of scams have been invented which ultimately made the poor even more destitute. To mention a few so that we don’t get bogged down in presumptions; check frauds, phishing, ACH fraud, identity theft, investment scams, social engineering, mortgage fraud, bank impersonation scams and myriad others. The sad part is that we have come so far in history or timeline of this industry that at this point it has gone through many transformations but ultimately like always it is for the benefit of the upper class.
Bringing capitalism down to the poor
Key Concepts
Microcredit: Small loans provided primarily to impoverished individuals to promote entrepreneurship and economic development.
Financial Inclusion: The effort to provide access to financial services for all, particularly marginalized populations.
Debt Traps: Situations where borrowers are unable to repay loans due to high interest rates, leading to a cycle of borrowing.
The historical context of microfinance reveals that while it has made strides in providing financial services to over 200 million clients globally, it has also led to significant issues such as over-indebtedness and borrower exploitation.
Why I say that these institutions are insidious is because of the not so recent emergence of microfinance.
There have been countless research papers that show the promising side of this concept. A lot of people still unaware of the failures of these concepts are exhuming these concepts. As Professor Yunus came to the limelight recently he was once again awash with all kinds of laudatory remarks from people for supporting his country. We are once again hearing titles such as ‘Banker to the poor’ and ‘savior’ etc. Although little do we know how much of a failure the concepts were.
For the sake of clarification, the micro credit banking established by Dr Yunus is not an NGO. During the Wharton’s MBA commencement he spoke with Knowledge at Wharton, where he said, “We are not trying to create a non-profit. That was not our intention. Our intention was to persuade the bankers to lend money to poor people, so my struggle was always with the bankers ….. it was an extension of the bank’s activities.”
The micro-credit movement, which began in the 1970s, is rooted in right-wing/neoliberal politics and ideology, rather than the socialist/leftist/redistributionist political tradition that led to previous local experiments in small-scale finance.
And when, the similar cold war era, the US was losing trust of the many South American countries, owing to bad policies and their unsolicited intervention to tackle communism from taking over, the micro-credit scheme was implemented by USAID in an attempt to thwart such possibilities. But these were small scale operations compared to how Dr Yunus revolutionized the concept. These kinds of small loan institutions got their investments and subsidies from external benefactors and also from international donor community. But the neoliberal policymakers couldn’t tolerate such controlled market interventions which seemed unfair. Thus to fund itself and sustain in the competitive market these MCIs commercialized themselves.
Before discussing the reasons for the failure, we need to understand how this system is actually helping the poor. First of all, when there is market demand for capital or there is growing trend of entrepreneurship in a country the banking system thrives there. But there are so many conventional banks that give loans to SMEs and large industries. Why the need of MCIs? There are people who are living below the poverty line and they have small family businesses. Most of the time, product and services they offer are directed towards and availed by the other people of poorer status. To make it clearer, the customers of such informal economy rarely have the disposable income to have access to these lower order goods and services. As the MCIs helped these poor people finance their small business, this scarcity of demand for those products became a problem. Who are they going to sell these products to? When the people who are targeted are even poorer than the sellers. This is where the supply and demand forces of the market were misunderstood by Yunus.
Bangladesh’s local marketplaces were already overcrowded with struggling informal micro-enterprises. It was incorrect to believe that there was enough demand to support new micro-enterprises or expand current ones. Yunus thought that supply would eventually create its own demand. The poverty rate abruptly plummeted in the 2000s which was linked to these schemes by some poeple. In actuality there is no substantive proof of this happening. In other words, correlation simply doesn’t mean causation. That is what happened during the famine. There were insufficient food supply but not so insufficient that it would cause a famine. In reality the purchasing power was diminished at that time. So even after having enough food, the country faced the deadliest famine in its whole history of famines.
Consequences for Microfinance Institutions (MFIs)
The crises have also had significant repercussions for MFIs themselves. Many institutions faced operational and financial challenges, leading to:
Increased Portfolio at Risk (PAR): The rise in loan defaults directly impacts MFIs’ financial health. For example, the global financial crisis saw PAR30 rates increase from less than 3% in 2007 to over 5% in 2009.
Declining Profitability: As repayment rates drop, MFIs experience reduced revenues, leading to a decline in profitability. This situation is exacerbated by high operational costs associated with managing a large number of delinquent accounts.
Institutional Failures: Some MFIs have collapsed under the weight of these challenges. The failure of large institutions serves as a stark reminder of the vulnerabilities within the sector, particularly when they prioritize growth over sustainable practices
There seemed to appear some transient hopes for microfinance. As compared to the commercial banks that usually have loan repayment rate of around 50% or sometimes even lower, MFIs have loan payment of around more than 90% is a staggering figure during the initial years of its inception. But at what cost? These are external results only as the actual reason for such a low default rate was shrouded with property loss, fear of being indebted and losing dignity. The micro business owners who are targeted by MFIs, are usually unsuccessful in their informal callings. And it is a well known fact that small businesses become rarely successful due to lack of consistent and strong investment capital. So when these poor people fail in their business, which is almost always, they are hounded by the loan sharks from these banks. Which ultimately forces them sell their family properties, sometimes even their homes to repay the loan for fear of losing everything. These tragedies cripples them forever. So just because loan repayment are high doesn’t mean that the MFI scheme is successful. It costs these poor people an arm and a leg to repay the loans.
So, basically, poor are not safe anymore from the dirty hands of capitalism. Let’s look at some major microfinance crisis.
Crisis Event | Year | Key issues |
Grameen Bank Crisis | 1998 | Shift towards profit over social goals; emergence of ‘Grameen II’ model |
Peruvian Crisis | Late 1980s | Economic instability leading to high default rates and regulatory failures |
Andhra Pradesh Crisis | 2010 | Suicides among borrowers due to aggressive lending practices and high interest rates |
Internal Factors Contributing to Crises
Organizational Design: Many MFIs lack effective governance structures, leading to mismanagement.
Excess Liquidity: An abundance of funds can result in lax lending practices and increased risk of defaults.
High Interest Rates: While intended to ensure profitability, exorbitant rates can discourage repayment and push borrowers into debt traps.
Social Consequences
The social implications of such financial strain are profound. Reports have documented cases where over-indebtedness has led to severe mental health issues, including anxiety and depression. Tragically, there are instances where individuals have resorted to suicide due to the unbearable pressure of repayment. The expectation that microcredit would empower women has also been challenged; instead of fostering independence, many women remain trapped in a cycle of debt that exacerbates their economic vulnerability.
Institutional Failures
Microfinance institutions (MFIs) themselves are not immune from criticism. The push for profitability has often overshadowed social objectives, leading to what is termed mission drift. Many MFIs prioritize growth and financial sustainability over the welfare of their clients, resulting in aggressive lending practices that target vulnerable populations without adequate risk assessment. This commercialization of microfinance has created an environment where high profits are pursued at the expense of ethical lending practices.
Regulatory Challenges
Moreover, the lack of stringent regulations governing MFIs contributes to these issues. In many regions, MFIs operate with minimal oversight, allowing predatory lending practices to flourish. The absence of effective consumer protection mechanisms leaves borrowers exposed to exploitation by unscrupulous lenders who prioritize profit over social responsibility.
While microfinance was envisioned as a tool for economic empowerment and poverty alleviation, its implementation has often resulted in adverse outcomes for the poor. The combination of high-interest rates, aggressive lending practices, and inadequate regulatory frameworks has transformed what should be a lifeline into a source of suffering for many. As stakeholders reflect on the future of microfinance, it is imperative to prioritize ethical lending practices and ensure that the needs of borrowers are at the forefront of financial services designed for low-income populations. Without significant reform and a renewed commitment to social objectives, microfinance risks perpetuating a cycle of poverty rather than alleviating it.
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