Prevention and elimination of bonded labour: the potential and limits of microfinance-led approaches

This paper, authored by S. Premchander V. Prameela and M. Chidambaranathan of the Indian NGO SAMPARK, documents the learning processes of the NGOs and microfinance organizations that experimented with different approaches to microfinance and bonded labour. It highlights the importance of adopting a holistic and integrated approach, including social, economic, political and judicial interventions at individual, household, community and higher levels. In making the paper available to a wider audience, we hope to stimulate broader debate and experimentation on how microfinance can most effectively contribute to ending bonded labour.

Millions of South Asian women, men and children are bonded to their employers, working for little or no wages because their earnings are retained in part or full to repay an outstanding loan. The victims of bonded labour tend to be drawn from the poorest and least educated segments of the population, from low castes and religious minorities. Bondage often begins when a worker takes a loan or salary advance from his or her employer to pay for a large expense or from a labour contractor who finds employment for migrant workers in distant areas. Then the debtor, and frequently other family members, is obliged to work for the employer or contractor for reduced wages until the debt is repaid. Additional loans are taken out to meet essential needs and the debt mounts, creating a perpetual cycle of over‐indebtedness and exploitation. Ever larger debts strengthen the employer’s control to the point where basic freedoms are denied to the whole household; the debt can even be passed down to the next generation.

Since bonded labour results primarily from the inter‐linkage of credit and labour markets, access for the ultra‐poor to appropriate financial services is an important starting point, but it alone is certainly not a sufficient response. Experience shows that savings and credit groups used to deliver microfinance can be a useful platform for providing other essential economic and social services to poor households, strengthening their capacity to generate a livelihood and reducing dependence on their employer. It is perhaps counter‐intuitive to think that financial services can help bonded workers who are already highly indebted, especially if loans are considered to be the main type of service available. However, the organizations that participated in these projects took a broader view, emphasizing individual, household or group savings in the first place, but also insurance, leasing and financial education, in addition to small loans for income generating activities.