Previously viewed as a catalyst that helped impoverished communities in developing countries open small businesses and generate income, recent crises in India and other countries have shown another side of microcredit. Families are accumulating debt that they cannot pay back and some governments have even called for a halt of reimbursement of these loans.

Jean Michel-Servet, Professor of Development Studies at the Institute, has carried out a great deal of research, written extensively and has been cited and interviewed on microcredit in academic journals and the international press on the subject.

In an exclusive interview in French by Institute alumna and former BBC correspondent Katy Anderson, Professor Servet discusses microcredit and why the issue has been shrouded in illusion. The interview opens by focusing on the causes behind the crisis which arose in Andra Pradesh in India where microcredit loan repayments dropped drastically and the government called for the suspension of repayments until it could address allegations of harassment by collection agents. Professor Servet points out that this type of crisis has occurred elsewhere in India as well as in Bosnia-Herzegovinia, Morocco, Nicaragua and Pakistan.

According to Professor Servet, the main threads weaving through these crises are an excess of debt and insufficient income due to a range of factors including decreased income resulting from loss of subventions, natural disasters and many other causes.

Shattering the myth that microcredit finances new businesses, Professor Servet discusses how in general in developing countries microcredit loans are spent on expenses such as health, travel, clothing and education and do not increase business capital.

Professor Servet compares microcredit and different interest rates in several countries such as Bangladesh, India, Mexico and others. Surprisingly, he explains how in some cases interest rates as high as 100% are considered to be sustainable while in other cases rates of 20% are not. Making a distinction between private lenders and public institutions, he says the two can be complementary and some borrowers use private loans to pay off the public ones triggering a dependency on borrowing and further increasing their debt.

A conclusion to be drawn from recent crises is the need to make a distinction between profit-making microcredit targeted at people who have the means to pay with sustainable interest rates, and microfinance for people who cannot cover costs, Professor Servet says.

While public opinion is turning against microcredit, the core issues are being neglected, according to Professor Servet. Microcredit should be thought of in terms of financial inclusion and not poverty reduction. Microfinance needs to incorporate social responsibility and should not have requirements for high returns on investment, he adds.

For Professor Servet however, microcredit is just one element in a larger dysfunctional global economic system. “Globalisation means that everyone wants to consume everything that is on offer in the global supermarket. To satisfy their needs they go into debt”, he says in closing.

An English translation of the interview is available here.

Jean-Michel Servet is a specialist in the areas of economics and finance of development, social and solidarity based economics, the history of economic, financial, and monetary theory as well as financial exclusion and socio-economic crises.

More articles by and interviews of Professor Servet are listed on the Rural and Microfinance Project website.