Put the micro back in microfinance
Late last week Muhammad Yunus stepped down as managing director of Grameen Bank, 28 years after its founding. His departure ended a nearly six-month saga that began when the Bangladeshi government took advantage of a Norwegian investigation into the Bank’s wrongdoing, to launch a political offensive against Yunus. Setting aside Yunus’ protracted legal battle with the Bangladeshi authorities, the dramatic departure of Yunus – a 2006 Nobel peace prize winner jointly with Grameen, the microcredit bank he founded – offers an opportunity to examine the arena of microfinance, which is credited with having lifted millions of people out of poverty, especially women.
The following essay will only touch the surface of the growing debate on the effectiveness of microfinance, raising some of the key concerns within this dialogue. In many ways, the failings of microfinance are unsurprising given its origins of bringing together the twin goals of poverty reduction and neoliberal globalization. As Ha-Joon Chang and Milford Bateman assert in The Microfinance Illusion, “the Grameen Bank represented something of a revelation. Here…was a radically new way of dealing with poverty and under-development, while very much accepting neoliberalism’s determined focus on the unquestioned application of market forces and private individual entrepreneurship.”
It is this “unquestioned application of market forces” which has been the most problematic aspect of microfinance. The profit motive of the vast majority of microfinance institutions across the world has not succeeded in genuinely turning the tide for the world’s poor, as Chang and Bateman’s research shows. Yet, it is exactly the open acceptance of financial institutions into the lives of the world’s most impoverished women that spurred the US Agency for International Development (USAID), the World Bank, the International Monetary Fund (IMF) and others to become proponents of microfinance, taking Yunus’ concept far beyond Bangladesh.
And what about Bangladesh? In Norwegian filmmaker Tom Heinemann’s documentary Caught in Micro Debt released last December, Heinemann interviews microcredit borrowers from Bangladesh, India and Mexico who tell their personal stories of struggling to repay loans, harsh loan officers, extreme social pressures to make weekly payments and the push to take out new loans to cover the original ones. The film highlights the research and advocacy of economists and NGO staff who provide evidence of microfinance’s shortcomings including the very high interest rates which borrowers face. Heinemann’s documentary accused Grameen Bank in particular of having misused Norwegian government aid, shifting funds away from Grameen Bank toward other Grameen-controlled business ventures. The film prompted an investigation by the Norwegian government which ultimately cleared Yunus of any wrongdoing.
In neighboring India, microfinance has also received bad press of late. Borrowers in Andhra Pradesh – some profiled in Caught in Microdebt – found themselves locked into a cycle of debt, beginning with a small initial loan from local microfinance lenders, leading to another loan when unable to repay the first. To complicate matters, the second or third loans were sometimes taken from commercial institutions.
But commercial banks were not the only problem. Since about 2005, the majority of Andhra Pradesh’s 150 microfinance institutions have been comprised of banks lending on a for-profit model, a shift away from previous heavy NGO involvement in the sector. These for-profit lenders were attracted by guaranteed returns and in particular guaranteed repayment, which has always been touted as a key factor in microfinance’s success. But aggressive debt collectors combined with mounting debts have resulted in a rash of suicides in Andhra Pradesh, largely by impoverished women.
Venkat Narayana, a professor at a university in the state has explained, “Many [banks] are motivated simply by money. The capital is coming from overseas Indians, the internet boom, corrupt politicians. They are seeking profit among the poorest of the poor.” Even Vijay Mahajan, founder of Basix, a major microfinance lender with 500,000 customers and spokesman for the industry in India, has acknowledged that many microfinance institutions have been “reckless” in their lending, charging high interest rates and paying their directors with million-dollar salaries from resulting profits. To understand the scale of that profit, consider this: SKS Microfinance in Andhra Pradesh went public last year, generating $350 million on the Indian stock exchange.
The aforementioned case should not be seen as damning proof that microfinance does not work. Instead, deeper questions must be raised about who is doing the lending, whether microfinance institutions are effectively regulated and who is being targeted for borrowing. The troubled experience of microfinance in India – where impoverished women borrowers are organized in the form of self-help groups – led more than 200 women’s groups across the country to put out “The Charter for Self-Help Groups” on International Women’s Day, March 8, 2009.
The charter laid out a vision of what feminist and pro-poor microfinance should and could look like. The charter asserted that genuinely effective microfinance must consider household-level “equity issues such as those related to control over resources, bodily integrity, including violence against women and the burden of savings and repayment. Promoting agencies will ensure that poor women are not cutting down on their basic needs in order to save or repay.” Nirantar, a center for gender and education, helped pull together the charter, informed in part by the group’s village-level quantitative and qualitative research which found that microfinance lending often served to replicate existing power relationships within the community, reinforcing the marginalization of lower caste, Muslim and adivasi (or indigenous) borrowers.
Looking beyond Grameen Bank and Muhammad Yunus, the vision of microfinance as a vehicle for small-scale localized development can still hold true, but not within the limitations set by Grameen and the international financial institutions who have more often than not prioritized market forces above impoverished women’s well-being and livelihoods. True microfinance must begin in or partner directly with local communities, holding lending institutions accountable, with loans and borrower group formations designed with, by and for impoverished women and other community members. It may be time to put the micro back in microfinance.
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