An Argument Against Debt: Learning to Loan (Part 1)

Debt.

The word has a negative connotation in our culture.

Debt as opposed to ‘loan,’ which sounds like a package of productive stuff.

The bedrock of microfinance are small loans, which sounds good: tiny investments in tiny businesses. Some call it the “trickle up” effect,[1]and many decades of capital have gone to good use. I don’t want to trivialize that by any means.

But we know that microfinance can be used to ill effect and a loan is really just another word for debt.

Honduras is familiar with the downsides of debt on a national level.

The World Bank recently botched a 30 million dollar loan to Dinant, a palm oil company that assassinated over 100 labor leaders.[2] Twenty-seven large MFIs in Honduras report to Mix-market and dozens more operate locally.[3] Many of them, in my experience, aren’t always helpful. That’s not what I want to talk about, though, in this particular blog.

I want to talk about the effect of debt on an individual level: face-to-face with clients.

Every day I run into people who are late on their loan or who defaulted and never paid us back.

I know it, and they know it.

Most of these clients feel guilty.

As a representative of La Ceiba MFI, I don’t push them to repay. “Responsible MFIs don’t press their clients to sell [assets]…” says Daniel Rozas, “the key is to find the middle path – maintain pressure to repay, but not so high that the client is pushed into destitution.”[4]

Instead, I say hi.

We catch up.

We have a conversation.

And in the end we get past it, but the feeling lingers. The traces remain between the creases in their face and around their eyes; the foreshadowing of a larger issue.

Debt isn’t just monetary, it’s psychological.

It’s a burden.

Like a deadline at work, except you already reaped the benefits and now just owe.

All of us are under some sort of pressure from debt – whether it’s credit card debt, a mortgage, or a black hole of student debt – and like most things we use for leisure, it has a tendency to shorten our lifespan.

Debt correlates with anxiety, depression, anger, denial, regret, shame, fear, stress, frustration, embarrassment, a low work ethic, and a ton of failed marriages, where the coping mechanism is to fight.[5]

So, when I meet a client’s gaze and see the bad emotional remnants of our loan programs, I can’t shake the feeling that I should do something about it.

What can La Ceiba do to fight the negative effects of debt?

Well, there seems to be three philosophies of debt management:

The first says that all debt is bad.

This goes all the way back to Deuteronomy 23:20, “Thou shalt not lend upon interest to thy brother.”[6]

Dave Ramsey has championed this idea in the economic community[7] and it sounds nice: imagine an utopia where no one owes anyone and something like interest doesn’t exist for the poor client to fund the already wealthy.

However, I have seen ‘good’ come of credit here in Honduras.

The second philosophy says debt is the best leverage to get ahead, bar none. It commands: ‘get a credit score and make a profit.’ But after navigating debt with people less fortunate than me, I don’t believe that for a second.

The third philosophy is somewhere in the middle.

It states that only high interest rates are bad.[8] La Ceiba MFI adheres to this creed, charging interest rates so low it makes us unsustainable and literally laughable to other lenders (trust me, I know). We hold strongly to a client-centered methodology and are willing to change everything if we believe it’s hurting the client.

I encourage this third philosophy in every loan I approve.

But is that enough?

If over a third of our loans are for consumption purposes, rarely to be repaid, and all of them carry the negative effects of debt, what am I really approving of? Is there fear and anxiety in every package of productive stuff I send out?

Am I making people feel bad, without making progress?

Think about it: a small loan may last for a sac of flour, but guilt and discomfort will last for years.

The argument against debt says low interest rates aren’t enough. It says there have to be alternative financial services that don’t carry the negative correlates of debt. Such an argument promotes things like savings, where I’m not expecting money from client’s, rather they’re expecting their own money! Such an argument promotes things like financial education, where learning about money can make it flow efficiently and effectively through the household.

I can’t follow Dave Ramsey – since I’ve witnessed the positive effects of credit – but I can state the following:

There is something inherently wrong with our primary instrument of aid.

Maybe microfinance and La Ceiba itself, should be searching for a better way to service loans and clients respectively. Maybe we need to relearn what a loan really is, and then take a second look at what we’re doing.

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[1] Farnsworth, Clyde. “Micro-loans to the World’s Poorest.” Nytimes.com. 21 Feb. 1988. Web.

[2] Lakhani, Nina. “World Bank’s Ethics under Scrutiny after Honduras Loan Investigation.”Theguardian.com. 13 Jan. 2013. Web.

[3] “Honduras Market Profile – Overview.” Mixmarket.org. Web.

[4] Rozas, Daniel. “Debt, Greece, and Microfinance.” E-mfp.eu/. European Microfinance Platform, 5 Apr. 2015. Web.

[5] Kuchar, Kristen. “The Emotional Effects of Debt.” Thesimpledollar.com. 25 Nov. 2014. Web.

[6] “Deuteronomy 23 / Hebrew – English Bible.” Mechon-mamre.org. Web.

[7] Clements, Nick. “Dave Ramsey Was Right: Psychology Matters More Than Math In Paying Off Credit Card Debt.” Forbes.com. 25 Aug. 2015. Web.

[8] Hamm, Trent. “Student Loan Debt: The Philosophy of Debt.”Thesimpledollar.com. 11 Sept. 2014. Web.

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