The Microfinance Fallacy

The impending collapse of the microcredit sector in India, in the context of lender and farmer suicides, makes it imperative to review the critiques of the model.

Thanks to J. Martin Pedersen for the suggestions.

1. Hans Schuhmacher:

“Microfinance attracted considerable attention in recent years, not least due to the conferment of the Nobel Prize to Muhammad Yunus, the founder of the Grameen Bank. Its subsidiary, Grameen Shakti, utilises microcredit for the implementation of solar modules on houses in Bangladesh for years. Meanwhile, a multitude of MFIs throng in the market. The strength of microcredit is its ability to reach those who are classified as unbankable and do not have access to credit under reasonable conditions. The volume of a single microcredit ranges from 1 EUR and 10.000 EUR. MFIs can be specialised finance institutions, but also NGOs.

Interest rates typically range between 15% and 40%, run durations are short. Payback and monitoring are usually organised by groups of borrowers. The Grameen Bank, like many other MFIs, grants new credits when the old ones are repaid. This brings about tight social control which, in turn, results in very few dead losses. Activities financed by means of microcredit are usually labour-intensive and require minor material expenditure.

Microcredit, however, cannot bring about sustainable economic development on its own when infrastructure, healtcare and access to education, training and qualification are deficient or not present at all.6 There is also the problem of, in places, extremely high interest rates (in some cases up to 70%) which are accounted for inflation, high administrative costs and the difficulties involved with aquiring capital by the MFIs in question.

Disproportionate interest rates can affect the application potential of mcrocredit for technology cooperation negatively. Success of technology cooperation also depends on mid-term and longterm solvency of local partner entrepreneurs and companies and on their capability to prosper.

Therefore. technology companies wishing to employ microcredit in technology cooperation projects should choose with care a MFI and collaborate with it. The interest rates of this MFI should be oriented towards sustainability. This applies both to financing of economic activities that are part of the project and to credits in the project’s environment. It is advisable to take into account the national or regional rate of inflation when evaluating interest rates, the „real“ interest rate may in fact be lower than the figures indicate. It should be possible that microcredit debtors obtain positive accounts in credit in the long run in order to strengthen local purchasing power. Furthermore, microinsurance for loan loss should be available under advantageous conditions.

In case there is no suitable MFI present in the region, institutional investors may play this role or found special MFIs, so lang as the asset managers of institutional investors are increasingly bound to invest in sustainable projects..

Another possibility would be the founding of special MFIs by already existing MFIs or joint ventures in developing countries. Appropriate education and training of students and interns from developing countries may bring about functioning banking systems in regions where there is a lack of them, led by executives who understand local environments.”

2. The danger of Grameenism, October 2010, excerpted from Patrick Bond

Far from being a panacea for fighting rural poverty, microcredit can impose additional burdens on the rural poor, without markedly improving their socio-economic condition:

“Grameen’s origins are sourced to a discussion Yunus had with Sufiya Begum, a young mother who, he recalled, ‘was making a stool made of bamboo. She gets five taka from a business person to buy the bamboo and sells to him for five and a half taka, earning half a taka as her income for the day. She will never own five taka herself and her life will always be steeped into poverty. How about giving her a credit for five taka that she uses to buy the bamboo, sell her product in free market, earn a better profit and slowly pay back the loan?’ Describing Begum and the first 42 borrowers in Jobra village in Bangladesh, Yunus waxed eloquent: ‘Even those who seemingly have no conceptual thought, no ability to think of yesterday or tomorrow, are in fact quite intelligent and expert at the art of survival. Credit is the key that unlocks their humanity.’

But what is the current situation in Jobra? Says Bateman, ‘It’s still trapped in deep poverty, and now debt. And what is the response from Grameen Bank? All research in the village is now banned!’ As for Begum, says Bateman, ‘she actually died in abject poverty in 1998 after all her many tiny income-generating projects came to nothing.’ The reason, Bateman argues, is simple: ‘It turns out that as more and more ‘poverty-push’ micro-enterprises were crowded into the same local economic space, the returns on each micro-enterprise began to fall dramatically. Starting a new trading business or a basket-making operation or driving a rickshaw required few skills and only a tiny amount of capital, but such a project generated very little income indeed because everyone else was pretty much already doing exactly the same things in order to survive.’

Contrary to the carefully cultivated media image, Yunus is not contributing to peace or social justice. In fact, he is an extreme neoliberal ideologue. To quote his philosophy, as expressed in his 1998 autobiography, Banker to the Poor,

I believe that ‘government’, as we know it today, should pull out of most things except for law enforcement and justice, national defense and foreign policy, and let the private sector, a ‘Grameenized private sector’, a social-consciousness-driven private sector, take over their other functions.

Yunus has long argued that ‘credit is a fundamental human right’, not just a privilege for those with access to bank accounts and formal employment. But reflect on this matter and you quickly realise how inappropriate it is to compare bank debt – a liability that can be crushing to so many who do not survive the rigours of neoliberal markets – with crucial political and civil liberties, health care, water, nutrition, education, environment, housing and the other rights guaranteed in the constitutions of countries around the world.

Microcredit mantras By early 2009, as the financial crisis tightened its grip on the world, Yunus had apparently backed away from his long-held posture. At that time, he told India’s MicroFinance Focus magazine the very opposite of what he had been saying: ‘If somebody wants to do microcredit – fine. I wouldn’t say this is something everybody should have’ (emphasis added). Indeed, the predatory way that credit was introduced to vulnerable US communities in recent years means that Yunus must now distinguish his Grameen Bank’s strategy of ‘real’ microcredit from microcredit ‘which has a different motivation’. As Yunus told MicroFinance Focus, ‘Whenever something gets popular, there are people who take advantage of that and misuse it.’

To be sure, Yunus also unveiled a more radical edge in that interview, interpreting the crisis in the following terms. ‘The root causes are the wrong structure, the capitalism structure that we have,’ he said. ‘We have to redesign the structure we are operating in. Wrong, unsustainable lifestyle.’ Fair enough. But in the next breath, Yunus was back to neoliberalism, arguing that state microfinance regulation ‘should be promotional, a cheerleader.’

For Yunus, regulators are apparently anathema, especially if they clamp down on what are, quite frankly, high-risk banking practices, such as hiding bad debts. As the Wall Street Journal conceded in late 2001, a fifth of the Grameen Bank’s loans were more than a year past their due date: ‘Grameen would be showing steep losses if the bank followed the accounting practices recommended by institutions that help finance microlenders through low-interest loans and private investments.’ A typical financial sleight-of-hand resorted to by Grameen is to reschedule short-term loans that are unpaid after as long as two years; thus, instead of writing them off, it lets borrowers accumulate interest through new loans simply to keep alive the fiction of repayments on the old loans. Not even extreme pressure techniques – such as removing tin roofs from delinquent women’s houses, according to the Journal report – improved repayment rates in the most crucial areas, where Grameen had earlier won its global reputation among neoliberals who consider credit and entrepreneurship as central prerequisites for development.

By the early 2000s, even the huckster-rich microfinance industry had felt betrayed by Yunus’ tricks. ‘Grameen Bank had been at best lax, and more likely at worst, deceptive in reporting its financial performance,’ wrote leading microfinance promoter J D Von Pischke of the World Bank in reaction to the Journal’s revelations. ‘Most of us in the trade probably had long suspected that something was fishy.’ Agreed Ross Croulet of the African Development Bank, ‘I myself have been suspicious for a long time about the true situation of Grameen so often disguised by Dr Yunus’s global stellar status.’ Several years earlier, Yunus was weaned off the bulk of his international donor support, reportedly USD 5 million a year, which until then had reduced the interest rate he needed to charge borrowers and still make a profit. Grameen had allegedly become ‘sustainable’ and self-financing, with costs to be fully borne by borrowers.

To his credit, Yunus had also battled backward patriarchal and religious attitudes in Bangladesh, and his hard work extended credit to millions of people. Today there are around 20,000 Grameen staffers servicing 6.6 million borrowers in 45,000 Bangladeshi villages, lending an average of USD 160 per borrower (about USD 100 million/month in new credits), without collateral, an impressive accomplishment by any standards. The secret to such high turnover was that poor women were typically arranged in groups of five: two got the first tranche of credit, leaving the other three as ‘chasers’ to pressure repayment, so that they could in turn get the next loans.

At a time of new competitors, adverse weather conditions (especially the 1998 floods) and a backlash by borrowers who used the collective power of non-payment, Grameen imposed dramatic increases in the price of repaying loans. That Grameen was gaining leverage over women – instead of giving them economic liberation – is a familiar accusation. In 1995, New Internationalist magazine probed Yunus about the 16 ‘resolutions’ he required his borrowers to accept, including ‘smaller families’. When New Internationalist suggested this ‘smacked of population control’, Yunus replied, ‘No, it is very easy to convince people to have fewer children. Now that the women are earners, having more children means losing money.’ The long history of forced sterilisation in the Third World is often justified in such narrow economic terms.

In the same spirit of commodifying everything, Yunus set up a relationship with the biotechnology giant Monsanto to promote biotech and agrochemical products in 1998, which, New Internationalist reported, ‘was cancelled due to public pressure.’

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