Using microfinance to prevent debt bondage

Bonded labour is a major human rights challenge in South-East Asia. Millions of poor people are forced to work for little or no wage, as they struggle in vain to repay loans from their employers. The provision of microfinance is emerging as a key strategy, given that bondage generally results from the need for credit.

Since 1998, the International Labour Organization (ILO) has established technical co-operation projects to help member states to prevent forced labour and to rehabilitate labourers from bondage. A new report from the Social Finance Programme of the ILO draws lessons from one pilot scheme – the Dutch-funded ‘South Asian Project against Debt Bondage’ – which uses microfinance-led strategies to address the causes of bondage in India, Pakistan, Nepal and Bangladesh.

The scheme focuses on economic bondage, which generally occurs when workers need access to credit to pay for emergency expenses (often for medical bills, food or burials), for social expenses (such as religious ceremonies and dowries), household investments and leisure (such as drinking and gambling).

The report describes several specific factors in South Asia that increase the vulnerability of workers to bondage. These include social exclusion (by religion, ethnicity and caste), illiteracy (allowing employers to manipulate credit and wage accounts with an intricate system of advances, payments in-kind and hidden interest rates), financial and labour market monopolies (where workers can access credit only from their employers), and the multiple social and political roles of employers.

As bonded labour results primarily from the links between credit and labour markets, access to appropriate financial services is seen as a fundamental prevention strategy. Microfinance alone is not sufficient to prevent bondage however, and this pilot scheme integrates five key components:

• Microfinance services for extremely poor people by creating savings and credit groups.
• Social empowerment through awareness raising about human and labour rights, health care, how to reduce unsustainable expenses and access government schemes.
• Education centres for children aged between nine and 14 who missed school whilst repaying parents’ debts.
• Skills training for adults and adolescents.
• Health services because health expenses are one of the main debt triggers.

Evidence from the first two years of the pilot scheme highlights the need to focus on both prevention of debt bondage and rehabilitation of workers. Bonded labourers that have been freed from bondage in Nepal and Pakistan to date have needed urgent aid - in the form of food and temporary shelter. As a part of the scheme it was also necessary to create a survey tool to identify and target vulnerable persons.

Some useful general lessons have emerged for the implementation of microfinance-led schemes to combat bondage:

• Severe and mild forms of bondage must be distinguished as they require different interventions.
• Employers can be valuable allies, as liberation cannot be very helpful if labourers cannot access alternative employment.
• An integrated approach that combines microfinance with social empowerment and vocational training is necessary for interventions to be sustainable.
• Financial services have both a productive and a protective role. A choice of financial services is needed that caters to the specific characteristics of vulnerable persons and emphasises the importance of savings.
• A new approach to repayment culture in microfinance is needed, which relies more on incentives than penalties.

Source(s):
‘The Prevention of Debt Bondage with Microfinance-led Services’, The European Journal of Development Research, Vol. 17, No. 1, pages 132–154, by Patrick Daru, Craig Churchill and Erik Beemsterboer, 2005 Full document.

Funded by: International Labour Organization (ILO)

id21 Research Highlight: 9 October 2006

Further Information:
Craig Churchill
Social Finance Programme
International Labour Organization
4, Route des Morillons CH-1211 Geneva 22
Switzerland

Tel: +41 22 799 6242
Contact the contributor: Churchill@ilo.org

International Labour Organization

Other related links:
'Measuring microfinance’s impact on poverty in Peru'

'Turning indignation into action: can child labour be wiped out?'

'Tackling the poverty-trafficking link: can the sexual abuse of children be ended?'

'Realising the potential of microfinance, insights, Issue #51, December 2004'

Wikipedia's guide on debt bondage

Resources on labour, finance and social dynamics, from the French Insitute of Pondichery