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Grameen Bank and `microcredit': The `wonderful story' that never happened

Mohammad Yunus accepts the 2006 Nobel Peace Prize.

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.

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 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

By Khorshed Alam

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. Patrick Bond is a senior professor at the University of KwaZulu-Natal School of Development Studies Centre for Civil Society in Durban, South Africa. Khorshed Alam is executive director of the Alternative Movement for Resources and Freedom Society, based in Dhaka.]

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Comments

Thai Village Loan Funds

In Thailand ex PM Thaksin introduced Village Loan Funds which some have called "microcredit".

However, the Village Loan Funds were quite different, funded by the central government with an initial $50k, regulated low interest, administered by a committee of locals in each village.

With some failures most villages purchased improved stock and equipment and maintain and slowly grow their capital base. The state receives its return on investment through increased overall productivity and tax revenues.

From this article it seems Yunus fell into the private enterprise trap where as usual market objectives do not align with the objectives of the consumers.

The killing ways of micro-finance

When a few months back the NDTV showed a news clipping of the cremation of a farmer who committed suicide unable to stand the continuous harassment at the hands of micro-finance goons, the nation refused to take notice. The NDTV had carried a Bhubaneshwar dateline story on March 19, 2010: "Orissa: Loan driving farmers to suicides."

The report stated: "In 2009, 43 farmers in Orissa committed suicide. It was a year that saw a massive farm loan waiver by the UPA government and also a record investment of over Rs 1400 crore in farm credit by the state government. But they were all small farmers who couldn't access institutional loan and had to borrow from microfinance NGOs at an exorbitant rate of interest. Many, even the state government, suspect it's this exploitative loan network that may have driven loan farmers to commit suicide.

A farmer in Sambalpur, didn't get water for his fields, subsidies, or insurance cover. What he got readily was a loan from a local microfinance NGO, at an incredibly high 24 per cent interest. The fear that he would never be able to pay back, drove him to suicide."

This was not an isolated event.

In a New Delhi-dateline report Law to rein in micro-finance bodies’ bullying (http://bit.ly/cxMIHp), The Hindustan Times (Oct 12, 2010) states: With the rise in suicides in Andhra Pradesh following harassment at the hands of micro-finance institutions (MFIs), the state is now planning a legislation to control the lending rates and curb the often abusive approach used by MFIs during recollection. In the last few days, on an average 2 to 3 suicides — most of them by women — have been reported, a result of harassment they face from MFIs.

Two to three suicides a day, I don't think can be taken as isolated events.

What kind of harassment are we talking about? In April 2010, The Hindu reported from Hyderabad in Andhra Pradesh: "Some Collectors sent reports about the harassment of borrowers, intimidation, manhandling, abusing and outraging the modesty of women and extreme punishment like making defaulters stand in the hot sun, tying them to trees and making them run in open grounds."

The news report further said: The 40 MFIs operating in the State with total finance portfolio of Rs. 3,000 crore are accused of forcibly enrolling poor women in the rural areas even though a majority of them are already part of the carefully nurtured Self Help Groups (SHGs) under the banner of Indira Kranti Patham.

This kind of barbaric acts of forcing enrollment and recovering money is not only confined to Andhra Pradesh. Across developing countries all over the world, such bullying tactics are being employed by the micro-finance institutions (MFIs). Because of the vested interest, and the general feeling that micro-finance is a pious initiative, the dark underbelly of the organised money-lending often goes unreported. What makes it still worse is the refusal of the international donors and aid agencies to acknowledge the crime that perpetuates in the name of tiny loans.

Sometimes back, the New York Times (April 14, 2010) had in a detailed analysis 'Banks Making Big Profits from Tiny Loans' reported:

-- Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the field, with some charging interest rates of 100 percent or more.

-- Te Creemos, a Mexican lender has some of the highest interest rates and fees in the world of microfinance, analysts say, a whopping 125 percent average annual rate. The average in Mexico itself is around 70 percent, compared with a global average of about 37 percent in interest and fees, analysts say.

-- Compartamos, a Mexican firm that began life as a tiny nonprofit organization, generated $458 million through a public stock sale in 2007, that investors fully recognized the potential for a windfall, experts said. Compartamos charges an average of nearly 82 percent in interest and fees.

I had quoted these examples in an earlier blog post (Banks make big money from the poorest http://devinder-sharma.blogspot.com/2010/04/banks-make-big-money-from-po...) but feel like sharing these once again knowing that public memory is too short. And I am sure like me you too must be wondering how can the poorest of the poor be made to cough out @ an interest rate of 125 per cent. Isn't this a crime?

Even the economic crime is ignored by the regulatory bodies. In the past few days, the capital market regulator in India -- Securities and Exchange Board of India (SEBI) -- has asked SKS Microfinance to cite the reasons that led to the sacking of its CEO. Newspapers are full of reports about the SKS imbroglio, but no one is questioning the role of MFIs in the bigger crime. Reserve Bank of India (RBI) and the Finance Ministry too are turning a blind eye to the barbaric games being played by the MFIs.

Local news channels in Andhra Pradesh have been showing for the past two days or so reports of small borrowers being harassed by the MFIs. A women from Karimnagar is on one of the shows is telling how an MFI was forcing her to sell her house for a paltry loan of Rs 4000 that she had taken.

Ever since I took up the issue to expose the darker side of the microfinance business, I have been flooded with support (of course I have also got my share of hate mails) and suggestions on how to improve the delivery of microfinance. You would have probably read about the zero-interest rate microfinance institute in Pakistan, which figured on this blog sometimes back, but in addition I have the following suggestions:

1. Borrowers of tiny loans should simply stop repayments.

Now before you get angry, let me explain. This is the only way to draw the attention of the policy makers and the decision-makers to the criminal ways of the MFIs.

2. All middlemen in microfinance who act as MFIs should be asked to close shop.

They are the root of the problem. They get credit from the banks/donors at about 12 per cent rate of interest, and further add 12 per cent as their margin thereby fleecing the small borrowers. At weekly repayment plans, the rate of interest effectively comes to 36 per cent.

3. Microfinance needs a model that is being followed by the Society for Elimination of Poverty (SERP) in Andhra Pradesh. The SERP has floated hundreds of SHGs, which get micro-finance @ 3 per cent interest. It draws loans collectively from the nationalised banks, and makes it available to the poorest of the poor at 3 per cent rate of interest. The State government writes-off the remaining component of bank interest (or in other words subsidises the bank interest).

4. At a time when small borrowers are committing suicide or defaulting, SHGs operating under SERP in Andhra Pradesh have created a corpus of Rs 5,000 crores.

The sooner MFIs are seen as profit enterprises, the better. The

When we started out in development a couple of decades ago, we instinctively targeted to reduce the influence of money lenders, if not eliminate them completely. Why? They were the traditional oppressors and exploiters in society. Micro-savings and revolving loans worked very well until the most fancied MFIs burst into the scene. MFIs operate under these two beliefs: “Having access to expensive credit is better than no credit” and “the observed rate is where demand equals supply”. These two beliefs were ironically the very same fulcrum the traditional money-lenders operate with.

The result is an “Animal Farm” situation where we are now not able to distinguish between “pigs” and “humans” and vice versa. In fact, money-lenders have got a make-over by packaging themselves as MFIs. A good example is Mohd Yunis of Grameen Bank comes from a traditional money-lending caste. And of course, he got the Nobel Prize and so did Al Gore & Pachauri. Thank God the Nobel Committee did not confer Gandhiji the same distinction, by clubbing him with these scamsters.

The IPO of SKS, one of the largest MFIs in India, saw it over-subscribed by 15 times; their Ten-Rupee share was priced at a premium of Rs 985 - showing how much the market had confidence on their profitability while “banking with the poor”. MFIs argue that they have to charge high rates to maintain profitability. Profitability, which even private banks couldn’t match! Profitability that permits SKS to pay Rs 1 crore as bonus to their just fired CEO!

And how do they attain profitability?

A month ago, SKS in the state of Andhra Pradesh was accused of a series of farmer suicides that prompted the state government to introduce new restrictions on the microfinance industry by seeking to cap lending rates and end coercive means of recovery. Last week alone, Andhra Pradesh police arrested three loan agents of SKS Microfinance and Spandana Sphoorty Financial Ltd. after borrowers complain that they were illegally pressured by the agents to repay their small loans around $1,300. For those of us in the field, this conduct of MFIs is no surprise.

MFI research puts irinterest rates between 25-30%. But my experience (and this is my 30 years in the field) put this figure several times higher. Even if we take this range which you described as the lowest in the world, the only benefit of such loans is for working capital and not capital formation. What is the kind of subsidies Rata Tata gets to produce a one lakh car? We all are aware that a mere 0.5% rise in banking rates can crash the stock market, so sensitive is their profitability linked to interest rates. Compare this with those the poor is asked to bear.

AP’s share of outstanding microfinance loans represents nearly 40% of the sector’s total portfolio, according to CRISIL. Now if MFI is all about access to the poor, we can ask the question, why the clamour to be concentrated in a state which belong to top-five in development in the country? We would have thought they would have gone to the five lying at the bottom rung of the country. But no, they avoid it like plague. It is easy to see they do this on repayment potential of states. The interests MFIs pursue are interests of self sustenance and their own growth. The poor is hardly in the radar except for rhetoric. In fact, it is on the blood and coercion of the poor, MFIs like SKS can giveaway Rs 1 crore as bonus to the CEO.

The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector that gave birth to a Frankenstein. Rather than regulate MFIs, I for one will welcome the day of their demise.

Grameen Bank and `microcredit': The `wonderful story' that never

Rural people of Bangladesh began to wonder whether the MC is curse in their life!For the poor people the temptation to accept MC is irresistible. In fact situation becomes so that they had no option left other than taking it and after face the consequence. What are the consequence? I like to quote form a comment...

"Some Collectors sent reports about the harassment of borrowers, intimidation, manhandling, abusing and outraging the modesty of women and extreme punishment like making defaulters stand in the hot sun, tying them to trees and making them run in open grounds."-The killing ways of micro-finance.

Exactly same happens in Bangladesh. This is a general scene regarding MC. Grameen Bank project of DR. Yunos is no exception. In fact a leading one in terms of recovery harassment. The interest of MC is so high in these area that it is almost impossible to become benefited by it. I wonder why human right organizations didn't raise the issue before DR.Yunos was given Noble for peace! Noble for Peace! To a loan shirker! What a joke! This must be a joke of the millennium!

Microcredit doesn’t work – it’s now official

http://opinion.bdnews24.com/2011/09/20/microcredit-doesn’t-work-–-it’s-now-official

Milford Bateman
Microcredit doesn’t work – it’s now official
September 20, 2011

The concept of microcredit — tiny microloans used to help establish or expand income-generating informal microenterprises — was for most of the last 30 years seen by the international development community to be the perfect self-help answer to poverty, unemployment and under-development. Thanks to the passion and practical work of Bangladeshi economist, Dr Muhammad Yunus, Bangladesh effectively became the global ‘test-bed’ for the microcredit concept. Great things were promised.

Muhammad Yunus famously announced that poverty would be eradicated in a generation, and the very notion of poverty itself would soon be ‘consigned to a museum’ to which our children would have to go on study tours to see what all the fuss was about. With such hugely seductive and supposedly successful forms of ‘capitalism by and for the poor’ on offer, the key international development institutions, and the US government and World Bank in particular, fell over themselves to finance the idea of microcredit. The global microcredit movement was up and running very fast indeed.

Unfortunately, after nearly 30 years of global experience in the field, it is now quite clear that Dr Yunus has turned out to be spectacularly wrong. A growing number of independent analysts and institutions, and even long-standing supporters of microcredit, now accept that this is indeed the case.

(http://www.booksforchange.info/Pop-Why%20Doesnt%20Microfinance.html)

Consider the latest ‘microfinance meltdown’ that recently took place in neighbouring India, in the state of Andhra Pradesh. Extensive deregulation, combined with the manifest greed and aggressive ‘get rich quick’ attitudes of the key individuals running the main microcredit institutions, unleashed a Wall Street/sub-prime-style trajectory that in less than a decade drove the microfinance industry into the wall. Some individuals, like Vikram Akula, became spectacularly rich thanks to their attachment to the microcredit industry; but for the poor, especially those now massively over-indebted, it has largely been a case of ‘all pain, and no gain’.

http://indian-microfinance-future.com/

So why is it that the microcredit industry, from the Grameen Bank onwards, has not generated a positive long-run local economic development impact? History pretty conclusively shows that successful local economic development is actually most likely built upon an expanding base of scaled-up growth-oriented small and medium enterprises (SMEs) that, among other things, can adopt and develop important technologies, innovations and organisational routines, and which together can productively interact with other enterprises and organisations through vertical subcontracting and horizontal networking and clustering arrangements.

http://www.amazon.com/Things-They-Dont-About-Capitalism/dp/1608191664

However, those communities in developing countries that pursued and then achieved the ‘holy grail’ of the microcredit movement – every poor individual can very easily access a microloan if they want one – have encountered a quite different history. Rather than experiencing local economic success, they were condemned instead to a wasteful and unproductive process of microenterprise entry and exit, an increasingly embedded informalisation dynamic, hyper-competition and self-exploitation (especially involving women in poverty) leading to progressively lower volumes, margins, wages and incomes in the microenterprise sector, rising personal over-indebtedness, and a dangerously mushrooming culture of violence within the growing community of micro-entrepreneurs all made increasingly desperate for clients in order to survive. Put simply, it is in underpinning these mutually destructive local development trajectories that (more) microcredit actually frustrates the attempt to construct a successful local economy over the longer term.

For perhaps the saddest reflection of this adverse microcredit-driven process at work in Asia, we need look no further than to Bangladesh itself, and especially to the iconic village of Jobra near Chittagong. Jobra is, of course, the location for Muhammad Yunus’ pioneering Grameen Bank, and so the effective starting point for the global microcredit movement. But in spite of an unparalleled availability of microcredit since the late 1970s, Jobra and its neighbouring villages very much remain mired in deep poverty, unemployment and underdevelopment. The tiny informal microenterprises that have been helped into operation simply cannot expand or innovate, nor can they productively interact to form a local economy with the potential to sustainably grow. Instead, the informal microenterprises established are all far too tiny and too weak, and faced with far too much competition from other microenterprises operated by others equally poor, to do anything other than barely survive.

Most informal microenterprises simply collapse after a few months or years. Importantly, failure often means the hapless micro-entrepreneur loses his/her savings, household equipment, land and other assets in the process of failing (or being forced to repay a microloan with no income). An unwise step into microenterprise activities thus all too often strips a poor family of its accumulated financial, physical and social assets, leaving them in a situation of irretrievable and dire poverty. Moreover, a new social problem haunts Jobra and its surrounding villages thanks to the ubiquity of microcredit – growing levels of personal over-indebtedness.

It is also a long-running tragedy that SMEs in Bangladesh have largely failed to get any support from the local financial system. Locally mobilised funds are increasingly channelled into informal and largely unproductive local microenterprises and self-employment. More recently, and even worse, these funds are going into consumption spending as well, an end use that has even less impact on the local economy than informal business activities and has also resulted in the recent over-indebtedness phenomenon in Bangladesh. The inexorable expansion of microcredit and informal microenterprises in Bangladesh, just as we recently confirmed in the Western Balkans,

(http://www.kpbooks.com/Books/BookDetail.aspx?productID=236319) inevitably absorbs the financial resources and policymaker attention that might otherwise have been directed towards supporting the crucial SME sector.

Importantly, effective confirmation that microcredit has had no visible positive impact this last 30 years came last month, in the form of a UK government funded systematic review of microfinance – ‘What is the Evidence of the Impact of Microfinance on the Well-being of Poor People?’ This document provides the most comprehensive refutation to date of the many heady claims made on behalf of the microcredit model by its international development community supporters, and by Muhammad Yunus. The conclusion reached by the review team is an explosive one – ‘(the) current enthusiasm (for microfinance) is built on (..) foundations of sand’ (page 75). After 30 years since the microcredit movement was founded, the review team essentially found NO concrete evidence to confirm that microcredit has had an overall positive impact.

(Microcredit is a mirage, says UK study, http://bdnews24.com/details.php?id=203518&cid=2)

So, while perhaps well-meaning, it is now perfectly clear that Muhammad Yunus and his band of international development community supporters got it all wrong. The sour reality is that sustainable local economic development trajectories have everywhere been undermined thanks to the expansion of microcredit. In place of failed Yunus-style microcredit and informal microenterprise myths, we now urgently need to rediscover and revalidate the role of the SME sector.

To do this we need to underpin the various forms of community-owned and controlled financial institutions that we know from recent history can best support SMEs, notably financial cooperatives, credit unions, building societies, social venture capital funds and local/regional development banks. Making these changes will inevitably prove to be a difficult task everywhere, and it will require much more soul-searching, foot-dragging, reluctant career-changes, and additional financial resources too.

But the alternative of dogmatically continuing forward with the failed Grameen Bank-style microcredit model is surely now, more than ever, no longer a realistic option.

[Dr Milford Bateman is a freelance consultant, Professor of Economics and the author of ‘Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism.]

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