The Prevention of Debt Bondage with Microfinance-led Services

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This paper, from the Social Finance Programme of the International Labour Organisation, discusses the early findings of an initiative by the ILO to look into the problem of debt bondage in South Asia, in which millions of the poorest and most vulnerable workers are bonded to their employers as they strive, often in vain, to repay loans. The root causes of this bondage include interlinked and monopolistic labour and credit markets, deeply entrenched social exclusion, and workers’ lack of information particularly regarding their legal rights.

The paper begins with a section detailing the definition, causes, and manifestations of debt-bonded labour in South Asia (Bangladesh, India, Nepal, and Pakistan). Such bondage is the combination of a credit and a labour contract in which the value of labour services as reasonably assessed is not applied toward the liquidation of the debt (only interest is repaid by the labour, not the principal), or involves work activities that are neither defined nor limited. Debt bondage is caused in many cases by loans taken in response to an emergency, such as paying medical bills, buying food, or burying a family member. In South Asia these loans can lead to debt bondage due to special conditions. For instance, families who experience social exclusion because of religion, ethnicity, or caste are significantly more vulnerable to labour exploitation and debt bondage than other economically poor families. Illiteracy helps to withhold information about workers’ rights. Moreover, labour bondage often takes place where the loan giver is also the only local employer: this monopoly means the worker can often receive very disadvantageous terms for a loan. The employer/loan giver is also, often a person of local importance, sometimes with a role in the political, judicial, or police system, which also impedes the worker from finding and exercising his rights. Often the employer/loan giver offers remuneration in in-kind payments of food, shelter, etc., which promotes dependency. Microfinance institutions (MFIs) are generally not set up to release labourers in debt bondage, because such bondage is illegal and an MFI loan might serve to prop up the quasi-feudal system of debt bondage that it would be intending to eliminate. However, as many MFIs are not always aware of the true condition of indebtedness of clients, loans may in practice be being provided to help the poorest escape such bondage.

The second section looks at methods of preventing debt bondage. The ILO has joined with multipurpose non-governmental organisations (NGOs) to develop and deliver a package of services designed to prevent debt bondage. The project employs a microfinance-led approach addressing the causes of bonded labour. Since an interlinkage between credit and labour markets is a primary cause of debt bondage, the project seeks to provide access to appropriate financial services as a prevention strategy. Microfinance alone is not sufficient to protect the poorest, but the project also encourages a group-based savings and credit delivery mechanism which aids social and economic empowerment. As well as providing these services, the project seeks to improve education and literacy, skill training, and health.

The third section looks at the results of this project after two years of full operation. In general it has proven more difficult to rehabilitate workers emerging from debt bondage than to work with families vulnerable to debt bondage but not yet trapped in it. Those who emerge from debt bondage have little initiative, more dependence, less self-confidence, and a difficulty trusting outsiders. The project has focused on identifying families vulnerable to debt bondage, using a survey index assessing families’ basic literacy and poverty levels, health expenses and vulnerability to economic shocks, and other factors, and targets its efforts on the families rated most vulnerable. Such families are encouraged to form savings and credit groups which will help to stabilise members’ economic and social standing, providing education and legal information to which they would not otherwise have easy access. The project has also, in some cases, begun a dialogue with potentially abusive employers, reasoning that this tactic would likely be more productive and generally beneficial than applying punitive legal measures.

The fourth and final section looks at lessons that the project can teach about microfinance. One such lesson is that microfinance is not the unique solution to debt bondage, and indeed cannot succeed in freeing the bonded for long without social structures in place to support the freed workers. Four core financial services should be offered: income-generating loans, emergency loans, contractual savings (in which clients are required to make a certain deposit amount in a given period), and liquid savings, though this latter may be problematic in a savings and credit group formed of the poorest members of society, all of whom may be anxious not to let others know how much money they have, or that their savings might all be lost in an unpaid loan. Clients abused by debt bondage may require more sensitivity in the area of debt collection, and the authors encourage the use of incentives like cash-back programmes as a reward for prompt repayment. Financial services should emphasise savings over credit.

The most innovative suggestions come on pp 27-29, where the authors discuss the special ways of dealing with debt repayment for rehabilitated former sufferers of debt bondage, but this whole paper advocates a humane and thoughtful method of assisting these vulnerable people out of an intolerable condition.

Document Information

Document Type Paper
Autor Daru, P; Churchill, C.; Beemsterboer, E.
Year of Publication 2003
Editor ILO
Número de Páginas 32 pp.
Región / País Global /
Idioma Principal Inglés (en)
Palabras clave Trabajo Forzoso, Microfinanzas Agrícola
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