||Founder's Career Ends in Disgrace
A Run on Grameen Bank's Integrity
Patrick Bond (Counter Punch) 28 April 2011
Bangladesh’s once-legendary banking environment is now fatally polluted. The rot is spreading so fast and far that the entire global microfinance industry is threatened. Controversy ranges far beyond poisonous local politics, the factor most often cited by those despondent about Grameen Bank’s worsening crisis.
True, at first glance we see an oppressive state’s persecution of a courageous academic-turned-entrepreneur and 2006 Nobel Peace Prize laureate, a man passionate about uplifting poor women’s socio-economic status through unsecured credit and group borrowing: Muhammad Yunus. On April 5, the Bangladeshi Supreme Court confirmed that notwithstanding huge aid inflows he catalysed for one of Asia’s poorest countries – based on Bangladesh’s world-leading 25% microfinance market penetration rate – Yunus must be ousted from Grameen Bank’s leadership.
At second glance, observe that the notorious corporation Burson-Marsteller (B-M) is spin-doctoring for Yunus, and as MSNBC television social critic Rachel Maddow has observed, “When Evil needs public relations, Evil has Burson-Marsteller on speed-dial.” B-M did PR for Three Mile Island’s nuclear operator after its meltdown, the US tobacco industry (to organize the ‘National Smoker’s Alliance’), the Argentine military dictatorship which killed 35,000, the Indonesian regime which committed massacres in East Timor, Nigeria’s military, Union Carbide against residents of Bhopal, the late Romanian president Nicolae Ceausescu and the Saudi royal family.
In February, Mary Robinson, Ireland’s first woman president and the main public face of Friends of Grameen, began helping B-M defend Yunus. It didn’t work: in early March, Yunus was fired by the government of Sheikh Hasina Wazed, whose Awami League party won the 2008 election by a landslide.
The current power struggle between state and bank began, according to Hasina’s son, Sajeeb Wazed, when “massive financial improprieties at Grameen” were revealed by a documentary on Norwegian state television late last year. The film, Caught in Micro Debt, showed how fifteen years ago, $100 million in aid was irregularly moved from the (non-profit) bank to one of dozens of lucrative private firms controlled by Yunus, Grameen Kalyan.
Norwegian aid bureaucrats were furious and demanded that $30 million be returned. Yunus’ own personal correspondence about the matter is embarrassing, even damning. “In several cases,” Wazed charges, his behavior “was completely illegal and constitutes embezzlement.”
Wazed also alleges usury: “Grameen Bank charges up to 30 percent in interest rate on loans and up to an additional 10 percent in ‘forced savings’ to the poorest sections of society. Their collection methods are draconian and collection officers who fail to collect payment have the uncollected amounts deducted from their pay. There are many documented cases which constitute abuse and the criminal offence of ‘molestation’ under Bangladesh law.”
The country’s central bank and courts have ruled that Yunus must immediately leave Grameen, on an absurdly ageist technicality: he is older than 60, hence disqualified to run a bank (a matter ignored the previous 11 years). More seriously, on April 25, the 90-page report of the state’s formal committee of inquiry found that “in all the activities [researched]… there has been a tendency to violate laws and rules in Grameen Bank. In fact, the organisation did not follow rules and laws, rather grew completely dependent on one individual.”
Years back at a World Bank conference, Hasina had firmly endorsed Grameen’s work, but in the meantime, Yunus attacked the existing political class in a short-lived 2007 attempt to start his own party. Last December, Hasina labeled Yunus a “bloodsucker of the poor.”
The roles of Robinson, her Friends of Grameen co-chair James Wolfensohn (World Bank president during its most protest-ridden decade, from 1995-2005), B-M, the US State Department, and the Bangladeshi government are emblematic of the messiness of state, capital and civil society working at cross-purposes.
To illustrate, Wolfensohn visited Hasina in March. After his demands were apparently rejected, suddenly the Bank and International Monetary Fund cut $500 million in loans Hasina was expecting. Another factor in that decision was the $756 million Hasina was charging Grameenphone for a 15-year license, similar to other cellphone providers pro-rated by marketshare. As New Age newspaper reported, the World Bank considered this fee “far too high” – yet another case of that institution’s pro-corporate, fiscal-shrinkage bias?
Hasina was also prime minister from 1996-2001, when Transparency International considered Bangladesh the world’s most corrupt country. In 1975, the army had assassinated her father, considered the local equivalent of Nelson Mandela, and her mother and three brothers. Hasina and senior Awami League leaders have since been attacked – and several killed – on other occasions.
Another woman’s political icon, Hillary Clinton, has entered the fray, demanding that Hasina halt the attack, even though her Bangladeshi “Hillary Village” is considered a prime case of microfinance failure. Last month, US Assistant Secretary of State Robert Blake threatened that US-Bangladeshi bilateral relations would be ‘impacted’ if Yunus was fired.
WikiLeaks recently disclosed that under George W. Bush, the State Department had an overtly political agenda four years earlier, as Yunus “could offer a possible out from the present Hasina-Zia zero-sum game that cripples Bangladesh's democratic process.” The same leaked cable revealed Yunus’ desire to have Grameen finance a Bangladeshi “megaport” to promote regional trade, including with Burma. Yet like Robinson, Yunus is joined on Mandela’s “Elders” group of notables by Burmese democracy activist (and fellow Nobel laureate) Aung San Suu Kyi, who has been a strong advocate of sanctions.
To assess genuine feminist perspectives on Yunus’ financing legacy, beyond the maneuvers of politicos Robinson, Hasina and Clinton, consider an important new scholarly work on Grameen by University of Oregon anthropologist Lamia Karim: Microfinance and Its Discontents: Women in Debt in Bangladesh.
In a recent interview with my colleague Khadija Sharife, Karim pointed out, “Bangladeshi women give the loans to their husbands. Women are the conduits for the circulation of capital in rural society. This has resulted in increased domination and violence for indivdual women both at the household and community levels.” As a result, she argues, women have become “custodians of honor and shame in rural society. By instrumentalizing these codes, NGOs shame rural women to recover their defaulted sums of money.”
The crisis is of world importance because it reflects the limits of microfinance, and comes on the heels of suicidally-high interest rates (literally) charged by lenders elsewhere in South Asia. As London’s Guardian reported last month, 30 million Indian households had borrowed more than $3 billion in microcredit since the mid-1990s. “In recent months, the industry has been thrown into crisis as it has become clear that a significant number of borrowers – between a tenth and a third, depending on the estimate – cannot afford to repay their loans.”
This predatory lending parallels the 2007-09 ‘sub-primate mortgage’ crisis in the US. According to the Guardian: “The past five years have seen the aggressive selling of loans to often illiterate villagers, followed by equally aggressive debt collection.” As a result, the past decade witnessed more than 200,000 farm suicides in India. Reports India’s leading rural journalist, The Hindu’s P. Sainath: “Those who have taken their lives were deep in debt.”
Another major Bangladeshi NGO operator, BRAC, engaged in “loan pushing,” its microfinance programme head Shameran Abed concedes. This was due to excess liquidity and “lack of communication between lenders,” and as a result, In the mid 2000s, the microfinancing industry grew too fast.”
As Karim describes even the main Bangladeshi microcredit NGOs, “Many of these organizations operate like loan sharks! The idea that the poor are bankable and they pay back their loans at 98% is like music to the ears of donors and large corporations. Grameen Bank exemplifies neoliberal ideas of development: individual entrepreneurship and competition.”
Karim concludes, “Let’s replace the word credit with debt. Debt as a human right? How does that sound? Debt is a relationship of power and inequality between the loan institution and the borrower.”
Milford Bateman of the Overseas Development Institute criticizes Yunus and Hernando de Soto, the Peruvian economist who authored The Mystery of Capital: “The microfinance industry makes a fatal mistake in believing that sustainable poverty reduction and 'bottom-up' development actually lie within the gift of the informal microenterprise sector.”
The filmmaker behind the Norwegian documentary, Tom Heinemann, makes similar arguments against microcredit evangelism. Heinemann was named the leading Danish investigative journalist in 2007 and 2009, and his earlier work won prizes at the Prix Italia, Aljazeera Documentary Film Festival, GZ Docs in China, and Envirofilm festivals.
He is preparing a follow-up, because rebuttals from Friends of Grameen have focused on the film’s misnaming of Grameen’s first borrower (done originally by Yunus), comparative interest rates, and the Norwegian government’s continued support to Yunus. Yet this latter defense says a great deal more about Norway’s internationally-ambitious Minister of Environment and International Development, Erik Solheim, who broke his party’s 2006 “Soria Moria” pledge to defund the World Bank, than it does about the merits of Grameen’s case.
For Solheim, Clinton, Wolfensohn and Robinson, it may seem appropriate, even urgent, to defend Grameen. But looking more closely, it would be better to move on, towards post-microfinance strategies that genuinely reduce poverty and empower women. These strategies typically are strongest when grounded in collective action usually associated with social movements and organized labour.
In the last decade, one of the best examples is access to AIDS medicines, won in Brazil, Thailand, India and especially South Africa, against the US State Department’s self-described “full court press”, under Bill Clinton, to prevent Mandela’s government from providing generic medicines using US-copyrighted drugs. The secret to the victory was not entrepreneurialism but instead popular mass activism, democratic organization and a vigorous critique of the post-Mandela South African government’s AIDS denialism, intellectual property rights and medical monopolies, the World Trade Organisation’s Trade Related Intellectual Property Rights system, Washington’s WTO representative Robert Zoellick (now World Bank president) and Big Pharmaceutical corporate profiteering.
The impressive results: Mandela’s successor Thabo Mbeki was fired by his own party, TRIPS now has an exemption to allow local production of medicines (and the US government is helping fund these), and for those who need the AIDS treatment, whereas once it cost above $10,000/year, today the medicine is free. In contrast, South Africa has a notoriously bankrupt microfinance sector.
Given the usury accusations and suicide wave, the industry’s reputation is so tainted that in a recent New Age interview, Yunus publicly backtracked: “Unfortunately, not everyone who uses the word ‘microcredit’ is dedicated to serving the needs of the poor. This is not the microcredit I had in mind.”
As Cambridge University economist Ha-Joon Chang confirmed to Heinemann, “They will never get out of poverty because when you have to pay between 30-40-50, sometimes 100% interest rate. What business makes that kind of profit?”
But Washington-based Grameen Foundation chief executive Alex Counts defends his Nigerian affiliate, LAPO, for its 100% rate: “Well – as it happens – many Nigerian banks that operate in the rural areas charge twice as much as LAPO… What microfinance is trying to do, with very little subsidy from the philanthropic sector is trying to provide a service – on a commercial basis on a business basis to give them a better deal.”
Yet profit-seeking through microfinance represents, even Yunus concedes, “a terrible wrong turn.” Still, Yunus defended his own role to the last, saying of the Norwegian documentary’s allegations, “These attacks have no basis in reality.” Claiming that Grameen interest rates – over 30% including fees, according to Bangladeshi economist Q.K. Ahmad – are reasonable, he continued to insist, “Access to affordable credit is a human right.”
Still, it is difficult to ignore overwhelming evidence that not only for-profit lenders but also non-profit NGOs pushing microfinance as a silver-bullet fix to women’s poverty often do more harm than good. In league with the State Department, the World Bank and Burson-Marsteller, even those like Mary Robinson who strive to raise women’s standing, are actually stumbling straight into the path of both the collapsing Grameen founder and microcredit’s fast-decaying reputation.
Grameen Bank and microcredit: The `wonderful story' that never happened
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, write Patrick Bond and Khorshed Alam.
October 21, 2010 -- Pambazuka News -- For years, the example of microcredit in Bangladesh has been touted as a model of how the rural poor can lift themselves out of poverty. This widely held perception was boosted in 2006 when Mohammad Yunus and Grameen Bank, the microfinance institution he set up, jointly received the Nobel Peace Prize. In South Asia in particular, and the world in general, microcredit has become a gospel of sorts, with Yunus as its prophet.
Consider this outlandish claim, made by Yunus as he got started in the late 1970s: Poverty will be eradicated in a generation. Our children will have to go to a `poverty museum' to see what all the fuss was about.
According to Milford Bateman, a senior research fellow at the Overseas Development Institute (ODI) in London, who is one of the world’s experts on Grameen and microcredit, the reason this rhetoric resonated with international donors during the era of neoliberal globalisation, was that they love the non-state, self-help, fiscally responsible and individual entrepreneurship angles.
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. At the time as he wrote those words, governments across the world, especially in the United States, were pulling back from regulating financial markets. In 1999, for example, Larry Summers (then US Treasury secretary and now President Barack Obama’s overall economics tsar) set the stage for the crash of financial-market instruments known as derivatives, by refusing to regulate them as he had been advised.
The resulting financial crisis, peaking in 2008, should have changed Yunus’s tune. After all, the catalysing event in 2007 was the rising default rate on a rash of subprime mortgage loans given to low-income US borrowers. These are the equivalent of Grameen’s loans to very poor Bangladeshis, except that Yunus did not go so far as the US lenders in allowing them to be securitised with overvalued real estate.
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.
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 Wall Street 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 Wall Street 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 US$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 US$160 per borrower (about US$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. As Sarah Blackstock reported in the same magazine the following year: Away from their homes, husbands and the NGOs that disburse credit to them, the women feel safe to say the unmentionable in Bangladesh – microcredit isn’t all it’s cracked up to be … What has really sold microcredit is Yunus’s seductive oratorical skill. But that skill, Blackstock explains, allows Yunus and leading imitators to ascribe poverty to a lack of inspiration and depoliticise it by refusing to look at its causes. Microcredit propagators are always the first to advocate that poor people need to be able to help themselves. The kind of microcredit they promote isn’t really about gaining control, but ensuring the key beneficiaries of global capitalism aren’t forced to take any responsibility for poverty.
The big lie
Microfinance gimmickry has done huge damage in countries across the globe. In South Africa in 1998, for instance, when the emerging-markets crisis raised interest rates across the developing world, an increase of 7 per cent, imposed over two weeks as the local currency crashed, drove many South African borrowers and their microlenders into bankruptcy. Ugandan political economist Dani Nabudere has also rebutted the argument which holds that the rural poor need credit which will enable them to improve their productivity and modernise production. For Nabudere, this has to be repudiated for what it is – a big lie.
Inside even the most neoliberal financing agency (and Grameen sponsor), the World Bank, these lessons were by obvious by the early 1990s. Sababathy Thillairajah, an economist, had reviewed the bank’s African peasant credit programs in 1993, and advised colleagues: Leave the people alone. When someone comes and asks you for money, the best favour you can give them is to say `no'… We are all learning at the Bank. Earlier we thought that by bringing in money, financial infrastructure and institutions would be built up – which did not occur quickly.
But not long afterwards, Yunus stepped in to help the World Bank with ideological support. When I met Yunus in Johannesburg, not long before South Africa’s April 1994 liberation, he vowed he wouldn’t take World Bank funds. Yet in August 1995, Yunus endorsed the bank’s US$200 million global line of credit aimed at microfinance for poor women. However, according to ODI’s Bateman, the World Bank insisted on a few changes: the mantra of ‘full cost recovery’, the hard-line belief that the poor must pay the full costs of any programme ostensibly designed to help them, and the key methodology is to impose high interest rates and to reward employees as Wall Street-style motivation.
Bateman also remarks on the damage caused to Bangladesh itself by subscribing to the microcredit gospel: Bangladesh was left behind by neighbouring Asian countries, who all choose to deploy a radically different ‘development-driven’ local financial model: Taiwan, South Korea, Thailand, China, Vietnam. And the countries that were more reliant on neoliberal microfinance soon hit, Bateman insists, saturation, with the result of over-indebtedness, ‘microcredit bubbles’, and small business collapse. Just as dangerous, Yunus’s model actually destroys social capital and solidarity, says Bateman. It is used up when repayment is prioritised over development. No technical support is provided, threats are used, assets are seized. And governments use microfinance to cut public spending on the poor and women, who are left to access expensive services from the private sector.
The Yunus phenomenon is, in short, a more pernicious contribution to capitalism than ordinary loan-sharking, because it has been bestowed with such legitimacy.
Bateman records extremely high microfinance interest rates everywhere. In Bangladesh, for instance, these are around 30 to 40 per cent; in Mexico, they go up as high as 80 per cent. No wonder that in the most recent formal academic review of microfinance, by economist Dean Karlan of Yale University, There might be little pockets here and there of people who are made better off, but the average effect is weak, if not nonexistent.
As the Wall Street Journal put it in 2001, To many, Grameen proves that capitalism can work for the poor as well as the rich. And yet the record should prove otherwise, just as the subprime financial meltdown has shown the mirage of finance during periods of capitalist crisis.
Reputation and reality
The latest figures suggest that nearly 70 million people (out of 150 million total) in Bangladesh are still living below the poverty line; of those, about 30 million are considered to live in chronic poverty. Grameen Bank now has around 7 million borrowers in Bangladesh, 97 per cent of whom are women. Yet after decades of poverty-alleviation programs what effect has Grameen had in its home country? The microcredit initiatives inspired by Mohammad Yunus’s vision and implemented by Grameen Bank and other NGOs have not gone nearly as well in Bangladesh as has been publicised worldwide.
To start with, the terms of microcredit in Bangladesh are inflexible and generally far too restrictive – by way of weekly repayment and savings commitments – to allow the borrowers to utilise the newfound credit freely. After all, with a first repayment scheduled for a week after the credit is given, what are the options but petty trading? The effective interest rate stands at 30 to 40 per cent, while some suggest it goes upwards of 60 per cent in certain situations. Defaulters, therefore, are on the rise, with many being compelled to take out new loans from other sources at even higher interest rates.
Worryingly, in the families of some 82 per cent of female borrowers, exchange of dowry has increased since their enrolment with Grameen Bank – it seems that micro-borrowing is seen as enabling the families to pay more dowry than otherwise.
Only five to 10 per cent of Grameen borrowers have showed improvement of their quality of life with the help of microcredit, and those who have done well tend to have other sources of income as well. Fully half of the borrowers who could not improve were able to retain their positions by taking out loans from multiple sources; about 45 per cent could not do so at all, and their position deteriorated. Many are thus forced to flee the village and try to find work in an urban area or abroad. It has now become clear that most Grameen borrowers spend their newfound credit for their daily livelihood expenditure, rather than on income-generating initiatives.
The main difference between microcredit lenders and feudal moneylenders was that the latter needed collateral. It is true that microcredit has created money flows in rural areas, but also that it created a process through which small-scale landowners can quickly become landless – if one cannot pay back the money at high interest rates, many are forced to sell their land. In cases of failure of timely repayment, instances of seizure by Grameen of tin roofs, pots and pans, and other household goods do take place – amounting to implicit collateral.
This does not mean that credit is not useful to the poor and powerless. The problem lies in the approach taken. Poverty is conceptualised extremely narrowly, only in terms of cash income; when in fact it has to do with all aspects of life, involving both basic material needs such as food, clothing and housing; and basic human needs such as human dignity and rights, education, health and equity. It is true that the rural economy today has received some momentum from microcredit. But the questions remain: Why has this link failed to make any significant impact on poverty? Why, despite the purported success of microcredit, do people in distress keep migrating to urban centres? Why does a famine-like situation persists in large parts of Bangladesh, particularly in the north? Moreover, why does the number of people under the poverty line keep rising – alongside the rising microcredit?
In fact, poverty has its roots and causes, and expanding the credit net without addressing these will never improve any poverty situation. Experience shows that if countries such as Bangladesh rely heavily on microcredit for alleviating poverty, poverty will remain – to keep the microcredit venture alive. Grameen Bank’s wonderful story of prosperity, solidarity and empowerment has only one problem: It never happened.
[From Pambazuka News. This article was first published in Himal magazine, October 2010.
A Nobel loan shark?
4 November 2006
What sort of dogmatic free-market ideologue would use poor people's (often socially constructed) desire for credit to justify shrinking the already beleaguered welfare policies of wretched Third World states?
Consider this outlandish claim: I believe that 'government', as we know it today, should pull out of most things except for law enforcement and justice, national defence and foreign policy, and let the private sector, a 'Grameenised private sector', a social-consciousness-driven private sector, take over their other functions.
Grameen is Bangladesh's barefoot bank specialising in group loans to low-income women. And the Vanderbilt University-trained economist who made that statement, Muhammad Yunus (in his autobiography Banker to the Poor), won the 2006 Nobel Peace Prize.
Yunus has a grand self-image, telling an October 13 Dhaka press conference: Now the war against poverty will be further intensified across the world. It will consolidate the struggle against poverty through microcredit in most of the countries.
Yet this seemingly benign, three-decade-old attempt to foster entrepreneurship amongst impoverished women has attracted intense grassroots — and also professional — criticism.
Or did you miss the critiques? Not surprisingly, the establishment press loves Yunus, nearly as much as do Bill and Hillary Clinton. The Financial Times made this outlandish claim, backed by no evident research: Microfinance has played a central part in Bangladesh's success in reducing poverty by almost 10 percentage points over the past five years, to 40%, a rate that puts Bangladesh on track to meet its Millennium Development Goal of halving poverty by 2015. Moreover, Grameen's business model is in rude health.
The Wall Street Journal profiled Yunus on its front page five years ago: To many, Grameen proves that capitalism can work for the poor as well as the rich, having helped inspire an estimated 7,000 so-called microlenders with 25 million poor clients worldwide.
Yet looking more closely, the Journal's reporters conceded the prevalence of Enron-style accounting. A fifth of the bank's loans in late 2001 were more than a year past-due: 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 Grameen gimmick is to reschedule short-term loans that are unpaid after as long as two years, instead of writing them off, letting borrowers accumulate interest through new loans simply to keep alive the fiction of repayments on the old loans.
(A Bostonian called Ponzi made this reverse pyramid technique infamous amongst bankers many years ago, and the Bretton Woods institutions updated the practice during the 1980s during the Third World debt crisis, and continues to lend often simply to permit payments to be made on old debt in arrears.)
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 central prerequisites for development.
By then, even the huckster-filled micro-finance industry felt betrayed: 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 WSJ 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 $5 million a year, which had until then reduced the interest rate he needed to charge borrowers and still make a profit. Grameen had become sustainable, self-financing, with costs to be fully borne by borrowers.
Yunus had also battled backward patriarchal and religious attitudes in Bangladesh, and his hard work extended credit to millions of people. The secret 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.
But at a time of new competitors, adverse weather conditions (especially the 1998 floods) and a backlash by borrowers who used the collective power of nonpayment, Grameen imposed dramatic increases in the price of repaying loans. And it is here that Grameen Bank's main philosophical position — We consider credit as a human right — was reduced merely to an argument for access, not affordability.
In that regard, Yunus is entirely different from all the rights-based social movements that have demanded rights in terms of free lifeline access to health care, education, housing, land, water, electricity and the like.
Although criticism of Grameen is still a minority view and Yunus performed miracles in rolling out credit to the masses, according to Munir Quddus, who chairs the Department of Economics and Finance at the University of Southern Indiana, the hype needs more investigation than apparently was given by the Nobel committee: The very nature of setting up groups leaves out the very poor who would be perceived by fellow members to have no ability to generate income and therefore high risk.
Quddus continues: Others have pointed out that micro-credit simply deepens the exploitation of the women since the rates of interest charged by the bank in real [after inflation] terms are quite high; consequently, credit often worsens the debt situation and gives the husbands even more leverage.
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.
In the same spirit of commodifying everything, Yunus set up a relationship with Monsanto to promote biotech and agrochemical products in 1998, which, New Internationalist reported, was cancelled due to public pressure.
As Sarah Blackstock reported in the same magazine the following year: Away from their homes, husbands and the NGOs that disburse credit to them, the women feel safe to say the unmentionable in Bangladesh — micro-credit isn't all it's cracked up to be ... What has really sold micro-credit is Yunus's seductive oratorical skill.
But that skill, Blackstock explained, allows Yunus and leading imitators to ascribe poverty to a lack of inspiration and depoliticize it by refusing to look at its causes. Micro-credit propagators are always the first to advocate that poor people need to be able to help themselves. The kind of micro-credit they promote isn't really about gaining control, but ensuring the key beneficiaries of global capitalism aren't forced to take any responsibility for poverty.
Though I have never been to Bangladesh and have only discussed these problems with Yunus once (more than a decade ago when he visited Johannesburg), micro-finance gimmickry certainly did damage in southern Africa.
For example, in 1998, when the emerging markets crisis raised interest rates across the Third World, a 7% increase imposed over two weeks as the local currency crashed drove many South African borrowers and their micro-lenders into bankruptcy.
Next door in Zimbabwe, a US$66 million flood of World Bank financing during the 1980s (in lieu of land reform) revitalised a rural micro-finance sector initiated under late-1940s racist Rhodesian rule. The bank's program ultimately reached 94,000 households. But within a decade, the result was a peasant default rate of 80% in the impoverished Communal Areas (equivalent to apartheid Bantustans).
Repayment affordability was a huge factor, since a typical lender's overhead and collection costs represent 15-22% of the amount of a small loan, including incorporation of a 4% default rate. In Zimbabwe, servicing loans of even just a few hundred US dollars represented enormous burdens when, according to one agriculture ministry survey in 1989, the average net crop profit per hour of labour was just $0.15.
Michael Drinkwater's detailed study of central Zimbabwe showed that improving farmers' access to credit has placed many of them in serious difficulties compounded by an overzealous launching of a group credit scheme and the doubtful viability of high cost fertiliser packages inappropriate for the erratic climate. The increase in credit use means farmers have to market more to stay solvent ... At the household level it is commonly debts not profits that are on the rise.
To address the crisis, in 1991 the World Bank unsuccessfully promoted even more Grameen-style group credit, albeit with the caveat that Zimbabwe's experience to date with group lending has not been favourable. The organisation of groups is initially expensive and time-intensive, and major problems have become apparent.
Not far away, in Lesotho, anthropologist James Ferguson studied a 1975 World Bank report that guided the country's development strategy: In a 'Less Developed Country', where the cash economy is on such a precarious basis, there must be [according to the bank] 'a conspicuous lack of credit for the purchase of farm inputs', and it is obvious that 'credit will play a critical role in all future major agricultural projects.'
Rebutted Ferguson, It is never explained exactly why the need for credit is so critical. It is true that most Basotho invest very little in agriculture probably due to their intelligent appreciation of the low potential and high risks of capital intensive farming in Lesotho but this is usually not a matter of being unable to obtain the cash to make such an investment. Most families have access to wage-earnings or remittances, and this money most commonly comes in large lumps which could easily be used for agricultural inputs, but for the most part is not. Yet in the 'development' picture, the need for credit is almost an axiom.
Ugandan political economist Dani Nabudere has also debunked The argument which holds that the rural poor need credit which will enable them to improve their productivity and modernise production. For Nabudere, this has to be repudiated for what it is — a big lie.
Even from inside the World Bank these lessons were by then obvious. Sababathy Thillairajah reviewed the bank's African peasant credit programs in 1993 and advised colleagues: Leave the people alone. When someone comes and asks you for money, the best favour you can give them is to say 'no' ... We are all learning at the Bank. Earlier we thought that by bringing in money, financial infrastructure and institutions would be built up ... which did not occur quickly.
But not long afterwards, Yunus stepped in to help the bank with ideological support, as it rejuvenated micro-finance with a $200 million global line of credit aimed at poor women in August 1995, just prior to the Beijing gender conference.
The global justice movement's ATTAC group has an excellent Oslo branch. Its members pointed out to me that Yunus was strongly supported by his friends in the Norwegian ruling class, including a former top finance ministry bureaucrat and leading officials of Telenor, Norway's phone company. Telenor owns 62% of GrameenPhone, which controls 60% of Bangladesh's cellphone market.
At a time when the centre-left Norwegian government has a high profile for partially cancelling illegitimate Third World debt and threatening to defund the World Bank, both of which are applauded by local activists, the people who make these decisions were conscious of how important it is for Norway to project the possibility of capitalism with a human face.
The question is whether they looked hard enough at conflicts generated by credit, at the risk of putting this Nobel in the same category as Peace Prizes granted to Shimon Peres, F.W. deKlerk and Henry Kissinger.
As Yunus falls, women’s microcredit hopes sink
Khadija Sharife (Eye on Civil Society column) 12 April 2011
One of civil society’s great hopes, that women’s access to microcredit would help eradicate poverty, has been dashed – both top-down with a fallen guru, and bottom-up with unaffordable interest rates in a context of patriarchy.
Last week, the Bangladeshi Supreme Court confirmed government firing of the founder of the Grameen Bank and the most important spokesman for microcredit, 2006 Nobel Peace Prize laureate Muhammad Yunus. The court called Yunus “a squatter or a trespasser or a usurper” and bluntly denied his appeal, on grounds that at 70, he was ten years over the limit for managing a Bangladeshi bank.
But after mass Indian suicides by small borrowers, Yunus was already on the defensive about the direction microcredit had taken. The industry’s drive for profit-seeking was, he admitted toNew Age newspaper last week, “a terrible wrong turn.”
In South Africa the same disillusionment is setting in: although ABSA claims to have ‘impacted’ 30 000 small-scale borrowers with no previous credit history, its current microfinance clientele is just 4000. The main problem, it appears, is that the average cost to ABSA of debt collection from defaulting clients is R6000, but according to Bongiwe Tindleni, the head of ABSA’s microfinance division, “The loans range from R1000 to R15,000.”
As a result, private sector profitability and the state regulatory infrastructure are not yet aligned to local needs, Tindleni says. “The environment in which we operate talks to the formalised financial services sector and does not necessarily work in the lower end of the spectrum. I don’t believe we have found the right model yet.”
One problem is ABSA’s high interest rate, at more than 30% per year, in the same range as Grameen. The local Womens Development Banking (WDB) chapter, founded by Zanele Mbeki, charges an effective annual interest rate of more than 50%, once fees are included.
According to the WDB, one of the bank’s success stories, a mother and spaza shop owner, received a R3000 loan at the beginning of the year, and pays back R932 monthly. As of March 31, she had repaid R2796.00 but still owes another R932 to clear the debt. A WDB official appeared to admit that she remains trapped below the poverty line: “She makes an income of R600.00 in some months. The income varies depending on her business profit for each month.”
It’s a common scenario, according to new book by University of Oregon anthropologist Lamia Karim, Microfinance and Its Discontents: Women in Debt in Bangladesh. Her work demonstrates “how NGOs use social codes of honour and shame to shape the conduct of women.”
Karim charges that “these unwritten policies subordinate poor women to multiple levels of debt that often lead to increased violence at the household and community levels, thereby weakening women’s ability to resist the onslaught of market forces.”
In a recent interview, she explained her passion for looking beyond the trendy: “I am a native of Bangladesh. I studied the microfinance practices of the Grameen Bank and three of the largest NGOs in the country.”
Karim points to three main findings: “First, women give the loans to their husbands. Women are the conduits for the circulation of capital in rural society. This has resulted in increased domination and violence for indivdual women both at the household and community levels.”
“Second, women operate as the custodians of honor and shame in rural society. By instrumentalizing these codes, NGO shame rural women to recover their defaulted sums of money.”
“Third, money is transferred from poor borrowers to the rural middle-class thru proxy membership, moneylending, and by NGO officers allowing richer clients who they consider to be more credit-worthy.”
Karim is fed up with the big money-lending NGOs: “Many of these organizations operate like loan sharks! The idea that the poor are bankable and they pay back their loans at 98% is like music to the ears of donors and large corporations. Grameen Bank exemplifies neoliberal ideas of development: individual entrepreneurship and competition.”
But, I asked, aren’t Grameen’s women borrowers said to be amongst the world’s most successful microentreneurs?
“No”, she replied. “Please remember that stories of success largely come from their sponsored research, and by individual researchers in Bangladesh who largely work as highly paid consultants for these NGOs. People don’t bite the hand that feeds them.”
My attempts to get deep-rooted details from WDB were also foiled, leading me to doubt that the successes are genuine. As Karim continued, “In the majority of cases, poor borrowers are paying interest rates or service charges for loans. These charges pay for overhead costs of running NGOs and paying the salaries of their workers. Who is going to complain?”
Here in South Africa, almost 40% of microloans are used by adults simply to buy food. As Karim confirms, “Once they have the money, people will use the loans for things they consider to be vital for their existence. I found that people used the loans primary in three categories: repayment of old loans; consumption; and then in their businesses that are run by husbands.”
So when some in civil society follow Yunus in arguing that “credit is a human right”, Karim replies, “Let’s replace the word credit with debt. Debt as a human right? How does that sound? Debt is a relationship of power and inequality between the loan institution and the borrower.”
All fads come to an end, and for those women at the losing end of power and inequality, the questioning of the microdebt craze is long overdue.
(Khadija Sharife is a visiting scholar at the University of KwaZulu-Natal Centre for Civil Society.)
More articles on Microcrocredit from the CCS Library
A run on Grameen Bank’s integrity (Older version of this article) - Patrick Bond
The danger of Grameenism - Patrick Bond with Khorshed Alam
MICRO CREDIT SNAKES AND LADDERS BETWEEN SOUTH AFRICA’S ‘TWO ECONOMIES - Patrick Bond