A Conflict of Interest
The first-person experiences described in this essay are drawn from Maryann Bylander’s life and research. The essay was collaboratively written with Eula Biss, who contributed to her thinking.
I was once told that if I wanted to make a good investment, I should put my money into Cambodian microcredit. The man who told me this had all of his savings in microcredit. At the time, VisionFund, a large microcredit provider in rural Cambodia, was advertising “Social Investor” deposit accounts, which promised annual interest rates of up to 12 percent. These accounts were for people who were “passionate in helping the poor.”
What does it mean to invest? The first sense of the word is tied to monetary profit. But the second sense involves something other than money—time or effort—put to a good purpose. The rhetoric of microcredit collapses these two senses. One can make money, conveniently, while doing good in the world.
But then there is the archaic use of invest, “to surround a place with the purpose of besieging it.” Cambodia has been invested in the archaic sense. Half of all households in Cambodia are in debt to microlenders. The “micro” of microfinance disguises the size of the industry, and the loans themselves are not microscopic—the average loan in Cambodia exceeds the annual income of all but the wealthiest Cambodians. The collateral for these loans is often the title to the debtor’s land.
Is it really “helping the poor” to offer them loans worth everything they own, at high interest rates, with tight repayment schedules? Setting aside that question for the moment, if my money is being lent to poor people, whose interest payments earn me 12 percent returns, the fact is that I am profiting off the poor. Helpful or not, those returns come out of their pockets. Microcredit uses the poor as an investment.
“Would you like to keep your bag credit or donate it?” the cashier asks every time I shop at Whole Foods. For every ten-cent bag credit donated, customers can select the Whole Planet Foundation as the recipient, which invests that money in microcredit. “Through microcredit,” the foundation promises, “Whole Planet Foundation seeks to unleash the energy and creativity of every human being they work with in order to create wealth and prosperity in emerging economies.” On their website, under “Our Impact,” they report that they’ve disbursed $73 million through microfinance institutions and that the repayment rate has been 97 percent. Our impact, in other words, has involved collecting back $71 million of that $72 million, along with interest.
The annual reports of microfinance institutions (MFIs) advertise the accomplishments of poor borrowers, most of them women. VisionFund Cambodia’s annual reports have featured photos of women weaving, harvesting watermelons, planting rice, tending small shops, and raising goats. MFIs describe their work with the vague platitudes of socially conscious capitalism: they want to “help large numbers of poor people” and “contribute to the social and economic development of communities” and “empower the entrepreneurial poor” and “empower women and their families” and “unlock the potential for communities to thrive.”
Less publicly celebrated are the annual profits that accrue to MFI shareholders and investors. In 2015, the Phnom Penh Post reported that the average return on shareholder investment for the top eight performing MFIs in Cambodia was 26 percent. Little surprise, then, that Cambodia is one of the top destinations for microfinance investment. Only India, a country with a population over eighty times greater than Cambodia, attracts more investment.
Microloans are often described as having “relatively low interest rates,” which is “relatively” true depending on what you compare them with. Until recently, interest rates for microloans in Cambodia were commonly two to four percent per month. Translated into annual rates, that means borrowers were paying 24 to 48 percent per year—rates that are extremely high by American standards. The promise of a 12 to 26 percent annual return on investment is also high by our standards, and this is what has made Cambodian microcredit such an appealing investment for people with capital.
Is it really “helping the poor” to offer them loans worth everything they own, at high interest rates, with tight repayment schedules?
In 2017, VisionFund lowered the return advertised for their social investor accounts in Cambodia, a change that coincided with a new government regulation that set an annual interest rate ceiling of 18 percent for all microfinance loans. The regulation was a pre-election move—one of many efforts the Cambodian government has made to distance itself from the growing problems of rural overindebtedness. In the year leading up to the 2018 general election, they required MFIs to post signs stating that they are not part of the government and demanded that some credit providers change their logos to look less like national symbols. For good measure, they sent an alert to cell phones nationwide; for just under a month, every phone call in Cambodia began with a recorded notice that microfinance institutions are private businesses, and not part of the government.
Opponents of the cap on interest rates say that it will cut off access to credit for many poor people. They argue that charging 18 percent interest will not cover the high costs of administering loans in rural areas, where loan officers must make regular visits to remote villages to collect payments from borrowers. High interest rates, they argue, also ensure “sustainability”—a word they use to mean enough profit to attract investors. It is high profits, not high interest rates per se, which ensure “sustainability.” So, in the days following the cap announcement, MFIs adopted new loan fees for borrowers to compensate for the lower interest rate.
Last year, my Aunt’s birthday present from her husband was the gift of a $25 Kiva loan made on her behalf to a Kenyan farmer named Joshua. Kiva, a prominent “peer-to-peer” lending platform for microcredit, tells us that “by lending as little as $25 on Kiva, anyone can help a borrower start or grow a business, go to school, access clean energy, or realize their potential.”
Once a Kiva donor has gone to the website, selected an entrepreneur and transferred their $25, they can ask for it to be returned, or they can allow it to stay in the pool of money to be continually re-lent. People like my Aunt receive no interest on the funds they loan out. And my Aunt’s gift did not go directly to Joshua; Kiva doesn’t lend to individuals outside of the United States. Rather, the money lent through Kiva goes directly to microfinance institutions or other organizations, which Kiva calls “Field Partners,” who then disburse the money to loan applicants. Joshua’s loan was part of a pool of money transferred to VisionFund Kenya. And in this case, Joshua had begun repaying his Kiva loan more than a month before my Aunt’s donation was made.
Not only is this lending not “peer to peer” (unless the peer of the American lender is the microcredit provider), but it ultimately benefits the microfinance institution and its shareholders, not the borrower. Joshua makes regular interest payments on his loan, my Aunt receives no interest back on her gift, and VisionFund keeps a greater share of its profits.
Lending money for interest is cleansed of its long-time stigma when we call it social investing. What Whole Foods does for grocery shopping, casting conspicuous consumption as wholesome and even ethical, social investing does for moneylending. This might be why Kiva doesn’t allow its “peer to peer” lenders to profit off their loans, despite the fact that someone else does. This wouldn’t make lenders feel good about their investment.
Still, my friends working in social investment defend VisionFund as one of the most responsible microfinance providers. It retains a social mission, it works in underserved areas, and its loan sizes are far smaller than commercial credit providers. My friends say that we should want VisionFund to keep a greater share of its profits so that it can extend credit to more people, in more remote places. But that isn’t necessarily what it will choose to do with its profits. In June 2018, one of the largest commercial banks in Korea bought VisionFund Cambodia, reportedly with the goal of transitioning it to a commercial bank. After the sale, Kiva ended its partnership with the MFI, but Kiva continues to fund other Cambodian MFIs that are mostly or fully owned by commercial banks. Several other “socially-minded” MFIs in Cambodia have recently sold major shares to corporate investors. These MFIs clearly look like a good investment.
What of the investments being made by the borrowing poor? Data provided by MFIs in Cambodia has suggested that nearly all of their loans are for agricultural microenterprises like pig farming and vegetable stalls, or other small businesses. Lenders claim that Cambodian borrowers are using their loans to build profitable, sustainable livelihoods.
But no other data source seems to agree. An annual survey conducted by the Cambodian government suggests that loans are more likely to be taken out for consumption, crisis, and the repayment of other debts than for microenterprise. In Cambodia, I’ve seen loans taken for weddings, engagements, new motorbikes, tile roofs, ceramic toilets, and the costs of high school. I have also seen loans taken to cope with the consequences of a flooded home, an unexpected illness, the death of a family member, or a failed rice crop. And I have seen loans taken to repay other loans. Debt begets debt. These are microcredit’s investments.
Lending money for interest is cleansed of its long-time stigma when we call it social investing.
A Cambodian woman I’ll call Hanty is the kind of borrower MFIs like to feature in their annual reports: female, poor, smiling, entrepreneurial, and talented. She is skilled as a seamstress, owns a sewing machine, plants a vegetable garden, and could be aptly labeled a self-employed entrepreneur. She has been the main wage earner in her household since her husband became disabled during the Khmer Rouge. She and her family are land-poor, and they rely on income from Hanty’s work to support their basic household needs. She is a former refugee, repatriated from Thailand in the 1990s, and by government designation her family has been deemed officially “poor,” which can expedite access to World Food Programme provisions and subsidized health care.
Hanty is also an enthusiastic advocate for microcredit; she refers to MFIs using the same word Cambodians use to describe charities. But Hanty tells me that she wouldn’t dare take a loan to expand or build a business. She doesn’t think there is any business she could “invest in” that would be profitable enough to ensure monthly repayment. Instead, Hanty takes loans for the things her family needs—food, household items, housing repairs—and repays these loans with money her children earn in Thailand. Her most recent microfinance loan was for $500. To repay it, her youngest son dropped out of eighth grade, crossed the border without documents, and began working in Thailand.
Twenty years of research now suggests that microcredit does not, in fact, alleviate poverty in most contexts, nor does it reliably produce profitable enterprise. What it does generally produce is repayment. Microcredit repayment rates are upwards of 95 percent for most microfinance institutions in Cambodia, where the primary concern of loan officers is whether repayment will be possible. Most credit providers require collateral, typically a land title, as part of a loan application. The loan officers I spoke with assured me that they would never lend to someone without ensuring that they could repay a loan, even if a business venture failed. In conversations with loan officers, MFI managers, and microfinance investors, a common refrain I heard was: it doesn’t matter how the money comes back; what matters is that it does.
In 2014, a woman I’ll call Srey worked with me as a research assistant collecting data on migration in rural Siem Reap Province. As we discussed stories of distress migration caused by debt in the community, Srey shared the story of her neighbor, a woman who had taken out a microcredit loan which she expected would be repaid through her son’s labor in Thailand. Srey didn’t quite know what happened to him—only that he hadn’t been able to earn enough, regularly enough, to help his mother repay the loan. The MFI held the family’s land title as collateral for the loan and threatened to sell the land if they didn’t receive payment. Rather than be dispossessed by the MFI, the woman sold her land herself to repay the loan. Such losses are not recorded in official reports of repayment rates.
A 2013 study of microfinance saturated areas in Cambodia found that more than half of all surveyed borrowers reported sometimes or always struggling to repay loans. To cope, they reduced the quality of their meals, took out new loans, postponed medical care, and sold or pawned belongings. Borrowers also sent family members away to work. The fact that microdebt causes distress migration is a conflict with the mission statements of microfinance institutions—and they are not unaware of this conflict. Data collected by the microfinance sector itself suggests that borrowers are typically unable to repay their loans with profits from “microenterprises.” In places with higher levels of microfinance saturation, the majority of loans are repaid through wage labor and remittances, money sent home from family members working abroad.
Michel Foucault once said, “My point is not that everything is bad, but that everything is dangerous.” In the United States, we tend to recognize that too much credit can be dangerous, particularly when it is paired with high interest rates. Planet Rating, a rating agency specializing in microfinance, notes that “unlike other development interventions, too much credit can be a bad thing.” Even microcredit providers agree that an overheated market is dangerous. But, like the critics of Cambodia’s interest cap, they broadly oppose government regulation. The micro-credit industry has historically been largely self-regulated, which is to say largely unregulated, though that is beginning to change. On the Whole Planet Foundation website, the answer to “What happens when governments ban microloans to the poor or heavily regulate interest rates?” is, in part, “this only deprives the poor of access to capital.”
The idea that microcredit will be a panacea for the problem of poverty has already been revealed as fantasy.
The payday loan industry in the United States makes the same argument—that increased regulation would deprive the poor of access to capital. But most of us favor protection over access. In 2013, a Pew survey found that three quarters of Americans (and a similar percentage of payday loan borrowers) wanted payday loans to be more regulated. Sixty-eight percent of those surveyed favored additional consumer protections for high interest loans even if it meant that some lenders went out of business. In 2016, Google announced it would ban advertisements for payday loans because they consider them harmful. The ban applies to any loan that carries an annual interest rate of 36 percent or higher—rates that are easily within the range of those offered by MFIs globally.
The Consumer Financial Protection Bureau in the United States has recommended a safety measure for payday and other small loans in which monthly loan payments cannot be more than 5 percent of the borrower’s expected income. In Cambodia, where there are few consumer protection regulations, the microfinance sector has its own measure of overindebtedness: when monthly loan payments are more than 100 percent of a borrower’s monthly net income. A recent study of microfinance-saturated communities found that even by this extreme definition, nearly a quarter of Cambodian borrowers were overindebted.
Development projects haven’t always trafficked in risk. We used to “unlock the potential of communities to thrive” through charity, until the idea of giving things away became passé. Now we loan things we used to give. There’s a moral stricture around loans, an idea that debt is good for people, that it builds responsible citizens.
An employee of an NGO once told me about an animal husbandry project he worked on in rural Cambodia. The organization wanted to move beyond traditional “giving” models to ensure that their beneficiaries were invested in the project. Female pigs were “lent” to families who were meant to breed them, keep the offspring, and return the mother pig to the organization. Borrowers had contracts, stipulating the need for repayment should anything happen to the pig. When several families in the animal husbandry project saw their pigs die, they responded by migrating without documents to neighboring Thailand to earn money at construction sites, on fishing boats, and at pineapple farms. Investing in a pig that might die was a much riskier proposition for those families than it was for the NGO.
The fantasy of microlending is that people who are relatively rich might share some of their capital with people who are relatively poor and thereby improve their lives. It’s a version of the fantasy behind the term “sharing economy,” which emerged in the first hopeful days of Uber and Airbnb. But this new sharing economy is really the same old taking economy. “Sharing is a form of social exchange that takes place among people known to each other, without any profit,” Giana Eckhardt and Fleura Bardhi wrote in a 2015 article for the Harvard Business Review. “When ‘sharing’ is market-mediated—when a company is an intermediary between consumers who don’t know each other—it is no longer sharing at all. Rather, consumers are paying to access someone else’s goods or services for a particular period of time.” This, they suggest, is an “access economy.”
Access to capital is the primary service of microlending. It, too, is an access economy. A feature of the access economy, in both the U.S. and Cambodia, is its ability to divorce risk from profit. And those who profit the most bear the least risk.
Amartya Sen famously defined development as “a process of expanding the real freedoms that people enjoy.” The original idea behind microlending was that the poor needed to be freed from menial wage work and usurious moneylenders. When the microcredit pioneer Muhammad Yunus founded the Grameen Bank in Bangladesh, self-employment was a cornerstone of the project. His loans were intended to help the poor devise a way to employ themselves—to take control of their lives. Early loans did not carry collateral. They were designed to be low risk for the borrower, which also made them high risk for lenders.
As microlending has evolved into an investment strategy, it has become less viable as a development strategy. In many places, microcredit is now a low-risk, high-return investment for lenders. During my most recent trip to Cambodia, several hundred families were evicted from Phnom Penh’s iconic White Building. Local papers used euphemisms to describe the evictions: families had been “cleared” or had “vacated”; the “holdouts” had finally been “convinced” to accept “compensation packages.” As the families moved out, MFI loan officers waited outside the building to offer them loans.
Anthropologist Parker Shipton calls the concept of “credit for development” a triangle of usury, charity, and fantasy. The idea that microcredit will be a panacea for the problem of poverty has already been revealed as fantasy. The question that remains is where profit becomes usury, and where the pretense of charity masks an investment in poverty.