Thursday, August 13, 2009

Microcredit and usury

Today's Wall Street Journal online has an interesting article about a microloan credit bubble. Is this not the very definition of usury:


Here in Ramanagaram, a silk-making city in southern India, Zahreen Taj noticed the change. Suddenly, in the shantytown where she lives, lots of people wanted to loan her money. She borrowed $125 to invest in her husband's vegetable cart. Then she borrowed more.

"I took from one bank to pay the previous one. And I did it again," says Ms. Taj, 46 years old. In four years, she took a total of four loans from two microlenders in progressively larger amounts -- two for $209, another for $293, and then $356.

At the height of her borrowing binge, she says, she bought a television set. The arrival of microfinance "increased our desires for things we didn't have," Ms. Taj says. "We all have dreams."

Today her house is bare except for a floor mat and a pile of kitchen utensils. By selling her TV, appliances and jewelry, she cut her debt to $94. That's equal to about a fourth of her annual income.

As with every other type of credit, when it can be extended for profit, the incentive to overfinancialize can be impossible to overcome. I have made the argument more than once, in part based on works in classical Islamic jurisprudence and legal theory, that profiting from the act of credit extension is the essence of forbidden usury/riba. The approach through non-profit mutuals, credit-union style, is vastly superior, and agrees with the spirit of early experiments in Islamic finance in Egypt and the Subcontinent.

Unfortunately, people's good intentions have been subverted in Islamic finance toward serving the interest of profit-maximizing multinational banks that have, de facto, rewritten modern Islamic jurisprudence to maximize their profitable arbitrage opportunities. Likewise, this article shows how the very essence of microfinance has been subverted by rent seekers to enrich themselves at the expense of the poor debtors (who may benefit briefly, but will ultimately suffer when the bubble bursts).

8 Comments:

Blogger Muhammad Saeed Babar said...

The danger in Microcredit even although Islamic is "The arrival of microfinance "increased our desires for things we didn't have,". Easy money goes down the drain.

8:05 AM  
Blogger Shared Folders said...

As far as I know microfinance is concerned about the perspective of using business credits for consumption. The majority of microfinance institutions are closely monitoring how provided funds are used. Considering this, how can the lenders increase the consumption with micro loans?

12:34 PM  
Blogger _ruler_ said...

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gREAT sHARE

1:51 PM  
Blogger _ruler_ said...

GREAT ISLAMIC SITE

JAZZAK ALLAH...
VERY INFORMATIVE :)

1:52 PM  
Blogger Liaquat Ali said...

Riba will devour any system however honorable. MF's interest rates are way too high. The only MF which will eventually work is that of mutual nature. Like JAK

http://www.anielski.com/Documents/The%20JAK%20Bank%20Report.pdf

Infusion of Zakah funds may be needed to remove all the semblance of Riba.

10:45 PM  
Blogger assakinah muamalah said...

we are women organization that develop syariah microfinance....want to get free short course in your country, will you give me information for it, thanks.
www.assakinahmualah.blogspot.com

12:13 AM  
Blogger Islamic Microcredit said...

One Thing is very noteworthy. She borroweed fromn two microlenders. This may become a beginning of debt trap, Loan adjustments and the ultimate default. I dont see any problem with her dreams but dreams may shatter if are fulfilled by credit money and before she got rid of credit. In this part of world most of the people Just tend to borrow and seek longer repayment times. This is very dangerous

Azhar
http://islamicmicrofinance.info

1:09 AM  
Blogger Roney Wilson said...

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5:20 AM  

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