Debt for Development? Understanding the effects of credit as a development intervention

By Prashanthi Jayasekara

On 19 April 2015

By Prashanthi Jayasekara

In the intellectual battlefield of development, access to credit is repeatedly touted as a panacea to end poverty and transform societies. The 52nd Open Forum of the Centre for Poverty Analysis (CEPA) took a closer look at whether access to microcredit for the poor actually fulfills these promises. In an environment where donors have enthusiastically jumped on the bandwagon and microcredit institutions have mushroomed after the 2004 tsunami and the end of the civil war in 2009, the forum provided a much needed space to discuss the effects of access to finance on development.

Vijay Nagaraj, a Senior Research Professional at CEPA who moderated the discussion, said the concept is seen both as an aid and a curse. The shine on microcredit has faded and it is under growing scrutiny for adding/increasing indebtedness to people’s lives rather than providing liberation from poverty.

Speaking at the event, Dulan De Silva (Chairman, Berendina Sri Lanka) said that people are no longer ’credit shy.’ Rather, many are succumbing to the tendency to borrow multiple times.  Dr. Ganga Tilakeratne (Research Fellow, Institute of Policy Studies) presented evidence confirming a steep trend in multiple burrowing. According to her study, between 2006/07 and 2009/10, borrowings have doubled and the debt to income ratio has increased.

Dr. Vagisha Gunasekera (a Senior Research Professional at CEPA) confirmed that debt as a proportion of income has increased, especially in war-affected areas. She traced this to post-war capitalist penetration of the North and East and the resultant increase in banking density there.

Talking about owner driven housing assistance (ODHA) in the North, Dr. Gunasekera said the assumption that access to legitimate credit options would allow housing beneficiaries to borrow and finance their share of the housing project was built into the ODHA intervention. This contributed to high levels of debt in the communities. With regard to livelihoods assistance, Dr. Gunasekera asserted that the nexus between livelihoods interventions, access to credit and consumerism in play is a potential recipe for disaster in war- and disaster-affected areas. She added that the notion of access to credit for the impoverished, the democratisation of capital, provides financial inclusion but on inherently unequal terms, such as insufficient credit (which may lead to multiple borrowing), high interest rates and patriarchal forms of discipline enacted by microfinance and other financial institutions on their borrowers.

‘War is something that makes a person fall into a situation of debt through no fault of theirs,’ said a member of the audience. ‘Their homes should not have been destroyed in the first place  and now they are getting into debt to rebuild. Isn’t there some responsibility for the State? And doesn’t it say something about how we define development?’

Dr. Gunasekera concurred that indebtedness stemming as a result of people trying to recover and rebuild after the war is a question of transitional justice. It compounds the original human rights abuses of the war. She emphasised that the current indebtedness of people in conflict-affected areas should be factored into the material elements of any reparations package. ‘However, indebtedness is not brought into transitional justice conversations. I think it is a move to depoliticize development,’ she said.

Samadanie Kiriwandeniya (Chairperson, SANASA Development Bank) highlighted the importance of context and the type of microcredit model: the right kind of model applied within the correct setting can in fact help alleviate poverty. Financial capital can open doors and create opportunities,’ observed Kiriwandeniya, ‘but structural changes are needed to make a real change.’

In an age of gush-up capitalism, indebtedness is related to a larger macroeconomic shift where consumption is at the centre. Within that context, Nagaraj put the question to the audience whether we should be investing in financial literacy? Should we be training people to become better members of the system of financialisation or should we be developing a critique of financialisation itself?

These questions are of considerable urgency for the poor. Financialisation of development presents the opportunity for financial inclusion. But the question is on what terms? At the risk and consequences of overindebtedness? Financialisation acts on the single assumption that poverty is the lack of access to credit and capital. It elides the fact that poverty is in fact structural exclusion from power (Ananya Roy, 2011). There is still tremendous inequality, exorbitant interest rates on shady terms and exploitation perpetrated by existing vehicles of microcredit.

Thus, the relationship between microcredit and pro-poor development needs to be interrogated for creating dependency on predatory lending and for building up development bureaucracies (Ananya Roy, 2011). It leads to mission drift, worsening vulnerabilities of the poor. With women being popularly linked as the targeted financial subjects, microcredit interventions also raise questions whether access to credit is founded on legitimising patriarchal notions of risk and security.

Due to these reasons, microcredit remains mired in controversy.

Reference

Roy, A. 2010. Poverty Capital: Microfinance and the Making of Development. Routledge