The unfulfilled promises of microcredit: some new evidence

31 January 2012 by Stéphanie Jacquemont

Muhammad Yunus, 2006 Nobel Peace Prize laureate and founder of the Grameen Bank, made the promise of a world without poverty thanks to the magic of microfinance and social business [1]. Since the main problem of poor people was, he said, that they are denied access to capital and markets, the way to release them from the grip of poverty was to lend them small amounts of money. The micro-borrowers would then become competitive micro-entrepreneurs in ultimately rewarding markets. Furthermore, the micro-loans, mostly granted to women, would serve as a springboard towards greater financial autonomy and influence in decision-making. A tailor-made programme, we could say, for the so-called “community of donors” (the UN, World Bank, development agencies in rich countries), for whom women’s empowerment and poverty reduction are officially among the top financing objectives. Microfinance on the Yunus pattern, which now embraces a wide range of activities (from other financial services, such as pension schemes and insurance, to the sale of yogurt [2] and mobile phones), is all the more attractive to official development aid players and private investors since it dismisses out of hand the option of reinforcing the social State, considered as inefficient, corrupt and keeping the poor in a state of dependency.

Money has thus flowed in for NGOs and other institutions engaged in microcredit, and many studies, often biased because funded by donors or microfinance players themselves, have praised the results of microcredit - a business considered both useful for borrowers and profitable for lenders.

 Scratching the surface of the rosy images

Yet this glowing picture of microfinance has been seriously damaged. First there were the scandals around the Grameen: in March 2011, Muhammad Yunus was dismissed by the Bangladeshi government from the chair of this bank after a Norwegian documentary (“Caught in Micro Debt” by Tom Heinemann) [3] showed evidence of embezzlement. Since then, the bank has launched a propaganda campaign to restore its tarnished reputation. But there are even more serious charges against microfinance, such as the wave of suicides among female micro-borrowers in the Indian state of Andhra Pradesh since late 2010. These are sufficient reasons in themselves to doubt the alleged benefits of microfinance. 

For several years, in-depth independent studies have questioned the model of these “banks for the poor”. One such study has been made by Lamia Karim, an anthropologist, who last year published Microfinance and its Discontents: Women in Debt in Bangladesh (Minneapolis: University of Minnesota Press, 2011) [4] This ethnological study, carried out in 1998 and 1999 and supplemented by a follow-up study in 2007, demolishes the main claims of microcredit NGOs in Bangladesh - namely that they have given the most destitute people the means to pull themselves out of poverty, curtailed the business of moneylenders and empowered women. The findings of the study have severely ruffled the pages of official microfinance literature and its happy endings.

Lamia Karim has been able to bring facts into the open which are usually unknown or hushed up for various reasons. First, the fact that her study is independent allowed her to make an objective assessment of the situation; secondly, her knowledge of Bangla and of the prevailing social codes of Bangladeshi society opened doors that would have otherwise remained closed (most researchers on the subject who do not know Bangla depend on guides – hopefully honest ones - to carry out their research); finally, she chose to situate her area of research off the beaten track, far from the districts close to the capital where locals are used to the presence of foreigners and tend to sell the information they have, and where carefully selected NGO members perform “scripted shows of development” to show how successful microcredit is. [5]

 “The economy of shame”, or how women’s weakness is instrumentalized

Lamia Karim carried out her ethnographic study in a rural area of Bangladesh where NGOs are ubiquitous and therefore should not be considered as non-State players, according to herself and other researchers who worked on the subject. The 23,000-odd registered NGOs have nearly 20 million rural women members, and in a context where there are very few State representatives, they have gained power over the population as the main providers of basic services (healthcare, education, credit, etc.) and employment. Lamia Karim refers to them as “a shadow State”. 

She studied four microcredit NGOs (Grameen Bank [6], Building Resources Across Communities-BRAC, Proshika, and the Association for Rural Advancement-ASA), during the boom period of microfinance in neo-liberal Bangladesh - a period when the number of players involved in microfinance multiplied and when funds flowed in to promote the sector. 

The four organizations studied followed the same microcredit model, with some variations. This model is based on the creation of groups of borrowers, collectively responsible for the payment of each individual loan granted to their members, and subject to a strict repayment schedule. Repayments are collected on a weekly, fortnightly or monthly basis. The vast majority of borrowers are women, which does not mean that they are the ones who benefit from the money and have control over its use - far from it. Indeed, most of the time, the money is given to their husbands or other male family members [7], but the women remain responsible for repaying the loan. This increases the pressure on these women who, in traditional Bangladeshi society, are the guarantors of their families’ honor. For these women, defaulting on a loan amounts to losing face and bringing dishonor on their entire family, as well as on their group of borrowers. The study shows how NGOs have instrumentalized women’s “positional vulnerability” [8], how they “manipulate existing kin and social relations to regulate the financial behavior of individual borrowers to create wealth for the NGOs [9]. Earlier studies had already pointed out that, contrary to NGO assertions that they do not ask for any guarantee, the group of borrowers is used as collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. since the group is held responsible for each individual loan granted to its members. Lamia Karim goes further by showing how women’s honor is used to facilitate repayments. A phenomenon she describes in detail and which she calls “the economy of shame”.

 Multiple lending and usury: when microcredit leads to over-indebtedness

Under pressure from their family, from other borrowers and from NGO employees, these women have to do whatever is needed to repay their debt, no matter what the cost. 

One of the problems inherent to the microcredit model on the Yunus pattern is that it makes it difficult for borrowers to invest the money they receive since repayments start just after the loan is disbursed (in Yunus’s opinion, this allows NGOs to detect possible problems immediately and make the borrowers responsible) and the repayment period does not exceed one year [10]. Only women who have some sort of regular income, for instance thanks to their husbands’ wages, can actually afford to invest in activities which do not generate profits immediately, for example agriculture. For those who do not have such luck, one of the common ways to make timely repayments is to borrow from other NGOs. Most of the women Lamia Karim met had borrowed from 5 or 6 NGOs - the loan contracted with one of them being used to repay the debt with another one, and so on. This is quite similar to what happens to over-indebted households in the North, who have no choice but to resort to multiple borrowing to make ends meet. Applying for loans from several lenders is facilitated by the fact that competing NGOs do not check on their clients’ solvency. The managers of their various local branches are under pressure from their superiors to show higher and higher loan disbursements. 

Another way for these women to cope with repayments is to invest the money they get in moneylending. One of the stated goals of microfinance players is to free the poor from the moneylenders’ grip by offering them small amounts and lower 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.
(though still at about 20 % in the late 1990s) than those charged by traditional moneylenders, who usually demand a 120 % 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. rate. Nevertheless, far from the fairytales depicted in the promotional campaigns of microcredit NGOs, Lamia Karim observed that women sometimes have no option but to invest in moneylending, giving loans to traders, farmers, or other NGO borrowers unable to repay their debt. Therefore, instead of reducing the power of moneylenders over rural people, “microcredit operations had effectively widened the net of moneylending” [11]. The traditional moneylenders also benefit from it: indeed, the few assets that the families purchase thanks to microcredit make them appear as less risky customers and more worthy of interest – in both senses of the term. For example, a moneylender might station himself just a few metres from the NGO centre and lend to women who are short of money to repay their installment; or another moneylender might attend the Grameen meetings and be asked by the Grameen employee to lend money to cover defaults. 

 Twisting the principles

With their wholehearted involvement in microfinance, these NGOs have alienated themselves from the principles they once defended, and have fully embraced the neo-liberal agenda. The activities of BRAC, whose chairman, Fazel Abed, was once inspired by the work of Paulo Freire, or of Proshika, which in the 1970s organized the peasants in their struggle against the landowning elite, could hardly be called subversive as they exist today. Such organizations have gradually turned away from their awareness-raising and educational missions, and have neglected other social issues to develop their microfinance activity. Most of the working hours of managers of local branches and field-workers are devoted to the management of loans, accountancy and debt collection. A trend illustrated by the example of an NGO worker who had only talked twice in five years about education and empowerment: once during his training period and once when interviewed by a researcher. [12]

Another gap between words and actions is to be found in the increased targeting of the middle classes by NGOs, which are nonetheless quite ready to present themselves as allies of the very poorest. Competition and the search for profitability have led them to deal increasingly with more credit-worthy customers. A further factor, identified by Lamia Karim in her study, intensifies this trend: some middle-class women, after being refused loans due to their more comfortable financial situation, pay poor women to act as proxy members and take loans for them. Sometimes the social status and the relative power of these middle-class women in the villages are enough to force NGOs to grant them loans. 

Another phenomenon was observed by Lamia Karim and other researchers before her: loans being granted for the dowries of brides. Although these NGOs claim they work for women’s empowerment, they in fact help reinforce this patriarchal practice [13]. Sometimes, the dowry no longer consists of goods, but rather in the bride’s capacity for getting loans from several NGOs. As pointed out by the researcher, “given the preferential treatment of women as key access to capital for rural households, it should not be surprising that loans acted as a form of dowry for women” [14]. While in a 1994 study Grameen reported 30,000 marriages without dowry among its members, Lamia Karim and Aminur Rahman did not come across a single case of marriage without dowry in their respective research. 

Last but not least, to maintain repayment rates close to 98 %, these NGOs rival each other in creativity and immorality in the matter of debt collection. The women borrowers interviewed during the survey mentioned that NGO workers regularly resort to verbal threats, physical or psychological violence (harassment, holding, humiliations...), even to house-breaking: when a borrower is unable to repay, other members of her group or NGO workers handling her loans sometimes get repayments by wrecking her house and selling what can be sold! Moreover, during the follow-up study in 2007, Lamia Karim noted that NGOs resorted more and more frequently to the police and/or courts to settle their disputes with defaulting members.

This incredible violence exerted by the workers of microcredit organizations can be explained by the pressure put upon them by their superiors. Profitability being the key word, in case of borrower default, managers go so far as to withhold the corresponding amount from the worker’s paycheck as an incentive to be inflexible. Lamia Karim noted that the women who work for microcredit organizations are usually harsher in collecting repayments, since the risk of their being fired if the number of defaults increases is higher than for their male counterparts. 

The NGOs keep up the pressure even for victims of natural disasters. For instance in 2007, the victims of the cyclone Sidr were asked to repay right after the cyclone struck! And this happened even though the caretaker government at the time called on NGOs to introduce a 6-month moratorium for cyclone victims. In this respect, Muhammad Yunus’s position is stunning. In his autobiographical (and self-indulgent) book entitled Banker to the Poor: Micro-Lending and the Battle against World Poverty, he blithely explains: “But no matter what cataclysm, weather disaster or personal tragedy befalls a borrower, our philosophy is always to get that person to pay back his or her loan, even if it is only at the rate of half a penny a week. […]. If a flood or a famine decimates a village and kills borrowers’ crops or animals, we immediately lend them new money to start up again. We never wipe out old loans, but convert them into very long term loans and try to get the borrower to pay them off […] It can happen that our borrowers are victims of disasters three or four times in one year. But no matter. The Grameen employees step in to offer them new emergency loans to allow them to start over a fifth time [15]. It seems that for Yunus, every cloud has a silver lining... and that he was inspired by the policies of Northern countries and international financial institutions which rush to give their “aid”, in the form of repayable loans, to countries hit by disaster.

To conclude, this valuable study brings additional arguments to those who oppose the kind of microcredit practised by the large organizations internationally lauded by the donor community. By analyzing credit not as a matter of trust but merely as a debt, Lamia Karim shows how “beyond its hagiographic transcripts, microfinance is fundamentally a relationship of inequality between the creditor and the debtor [16]. Far from enabling changes in social structures, the kind of microfinance she analyzed increases the pressure put on rural women, even though it has undeniably enhanced their visibility in public areas. On the one hand, the relationship of domination and subordination created by credit is intensified in the rural society of Bangladesh, where everyone knows everyone and where being unable to repay means losing face. On the other hand, women are caught in a dense web of kinship and social obligations, which constrains their behaviour and which is used by microcredit organizations to guarantee timely repayments. Moreover, success stories are very rare since the loans granted to poor women cannot be invested and since credits increasingly go to middle-class households. In 1997, Muhammad Yunus was celebrating the innate capacity for survival in all human beings [17]. When he received the Nobel Peace Prize in 2006, he was encouraging big companies to consider the poor as a huge market waiting to be conquered [18]. So why on earth would we want to release them from poverty?

Translated by Stéphanie Jacquemont in collaboration with Judith Harris


[1See in French Denise Commane’s article ’Yunus : Prix Nobel de l’ambiguïté ou du cynisme ?’,

[2Result of a collaboration between Grameen and the food industry giant Danone.

[3More than an anti-corruption move, this decision of the government of Bangladesh should be interpreted as a power struggle between political rivals. On this subject, see Patrick Bond’s article ’A run on Grameen’s bank integrity, as founder’s career ends in disgrace’

[4Unless otherwise specified, all quotes come from this book.

[5Lamia Karim writes: “I learnt that BRAC had a model village in Mymensingh, where their training center (TARC) was located. They said that BRAC also had a traveling group of villagers who would go to different places to perform for foreign guests. Foreign dignitaries and Western donors were taken to these specific locations for their official visits to witness these scripted shows of development.” (p. 46)

[6The Grameen Bank is not officially registered as an NGO; the State holds part of its capital and it operates legally as a bank. Nonetheless, the author chose to consider it as an NGO for several reasons she sets out p. 212 (note 11).

[7The data collected by Lamia Karim show that 95% of the female borrowers she met were in that situation.

[8Phrase coined by Aminur Rahman in his study Women and Microcredit in Rural Bangladesh : An Anthropological Study of the Rhetoric and Realities of Grameen Bank Lending (Boulder, Colo. : Westview Press, 1999).

[9p. xvi-xvii.

[10The author says that between the beginning of her research in the late 1990s and her follow-up study in 2007, the NGOs she analyzed had shortened the repayment schedule from 52 weeks down to 44-46 weeks, which resulted in higher installments and increased pressure on the borrowers.


[12Example from Jude Fernando’s study. “Microcredit and the Empowerment of Women: Blurring the Boundaries between Development and Capitalism” in Microfinance: Perils and Prospects, ed. Jude Fernando (New York: Routledge, 2007)

[13It is worth noting that the “Sixteen Decisions” designed as guidelines for Grameen borrowers forbid them from accepting or giving dowries for the marriage of their daughters. See the Sixteen Decisions on the Grameen website (NB: Lamia Karim observed that, while formally existing, these sixteen decisions were no longer in practice in her research terrain).

[14p. 83

[15In Muhammad Yunus, Banker to the Poor: Micro-Lending and the Battle against World Poverty, Public Affairs, 2003. The last sentence is a translation from the French edition, Vers un monde sans pauvreté, Paris : Jean-Claude Lattès, 1997, p.229

[16p. xxxii.

[17I firmly believe that all human beings have an innate skill. I call it the survival skill. The fact that the poor are alive is clear proof of their ability. They do not need us to teach them how to survive”, in Muhammad Yunus, Banker to the Poor: Micro-Lending and the Battle against World Poverty, Public Affairs, 2003.

[18In his Nobel Speech, Professor Yunus called upon global corporations to look upon the poor as an unrealized market for their goods” (p. 195).

Other articles in English by Stéphanie Jacquemont (8)




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