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

28 October 2010 by Patrick Bond , Khorshed Alam


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 Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. 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 Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. 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 Market activities
trading
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.
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 Derivatives A family of financial products that includes mainly options, futures, swaps and their combinations, all related to other assets (shares, bonds, raw materials and commodities, interest rates, indices, etc.) from which they are by nature inseparable—options on shares, futures contracts on an index, etc. Their value depends on and is derived from (thus the name) that of these other assets. There are derivatives involving a firm commitment (currency futures, interest-rate or exchange swaps) and derivatives involving a conditional commitment (options, warrants, etc.). , 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 Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
” 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 Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. 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 World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

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 Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. , 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 Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. 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 Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
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 Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. . 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.]



Patrick Bond

Patrick Bond is professor of political economy at the Wits University School of Governance in Johannesburg and co-editor of BRICS: An anti-capitalist critique (published by Haymarket, Pluto, Jacana and Aakar).

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