Update, 3/9: Check out Madeleine Bunting's recent article in the Guardian's Poverty Matters blog about Bateman and Ha-Joon-Chang's paper, The Microfinance Illusion.
By Milford Bateman
Microfinance has been described as the one international development policy that the average person in the street knows a little about and fully supports. Most average people today, however, are probably becoming aware of the fact that there is a growing crisis in the previously saintly world of microfinance. Indeed, many ordinary people will have been horrified to read that the patron saint of microfinance – Bangladeshi economist and 2006 Nobel Peace Prize winner, Muhammad Yunus – was recently fired from his job at the Grameen Bank, the bank he founded in 1983 to provide microloans to the poor. Wider still, there is the unmistakable feeling that the microfinance concept itself is also under real threat. This is a development that probably makes no sense to the average person, who for many years has been regaled with positive media images, heart-warming individual stories, a steady stream of feel-good documentaries and films, and numerous high-profile celebrity endorsements (Bill Clinton, Bono, Jeffrey Sachs) all testifying to its hugely positive impact on the poor. So what is going on here?
Microcredit is the provision of tiny loans to the poor that enable them to open or expand an income-generating activity, and thus supposedly begin their escape from poverty. The microfinance concept is most widely associated with Muhammad Yunus, who quickly attracted international support for his efforts back in the 1980s by claiming boldly that microfinance would ‘eradicate poverty in a generation’, and that future generations would have to go to a ‘poverty museum’ to see what all the fuss was about. On March 2nd the Bangladesh government, which owns 25% of Grameen Bank, made world headlines by firing Yunus from his long-standing position at the helm of Grameen. The ostensible reason for this move was his age – 70 – which apparently contravened Bangladesh law on the age of retirement (it should be 60). However, everyone in the world of microfinance and beyond understood right away that this was merely the pretext for Yunus’s dismissal, and not the real reason.
It still remains to be seen precisely why the Bangladesh government has decided to move against Yunus right at this moment. However, I understand that one central reason for the current events is that in almost every respect the Grameen Bank has failed to live up to the expectations that it would meaningfully improve the lives of the poor in Bangladesh. The Bangladesh government now, albeit belatedly, feels that it has been sold a lemon.
Indeed, it is now becoming very widely understood, and not just in Bangladesh, that the microfinance model has been quite unable to produce any convincing evidence to confirm it has been making real and sustainable progress anywhere in reducing poverty and promoting ‘bottom-up’ economic and social development. On the contrary, wherever microfinance has made the most inroads into a local community – that is, wherever it has achieved ‘saturation’ - the longer-term result has been to undermine, if not to destroy almost completely, the needed impetus for sustainable ‘bottom-up’ development and equitable growth. My own view on this issue, formed as a result of more than 20 years of research and consulting in local economic development, is summarized in my 2010 book Why Doesn’t Microfinance Work?. Many other analysts have been coming out with similarly pessimistic assessments of late, notably Malcolm Harper, Tom Dichter, Ananya Roy and Lamia Karim. Put simply, one need only look to Jobra, the village where it all started for the Grameen Bank in the late 1970s, to find the key elements of the problem here: Jobra is a village still mired in deep poverty, deprivation, industrial primitivization and disempowerment. Worse, it has begun to experience a quite new structural problem – a growing number of its poor inhabitants have racked up crippling levels of microdebt to local microfinance institutions, including to the Grameen Bank. Unfortunately, as they too have approached to microfinance ‘saturation’, many other countries/regions have seen almost exactly the same ‘Jobra-style’ debilitating dynamics emerge, predictably in the Andhra Pradesh state of India, Bolivia, Bosnia, Mexico, Nicaragua, Montenegro, Cambodia and Mongolia.
Another fundamental problem with the microfinance model is that, under pressure in the late 1980s and early 90s from right-wing economic and political philosophies, the original and unproblematic subsidy element involved in supporting microfinance (the Grameen Bank was very heavily subsidized right from the start) had to be brought to an end: in the future the poor would have to pay the full cost of making their own supposed way out of poverty. In microfinance practice, this meant market-based (i.e., high) interest rates and other commercializing measures had to be introduced. The new ‘best practice’ was to structure all microfinance institutions as private profit-driven financial institutions driven by Wall Street-style incentive structures, such as high salaries, bonuses, share options and the possibility of management buy-outs. The expected outcome was for the volume of microfinance available to rise massively. The managers of the main microfinance institutions would very likely be very generously rewarded for achieving this, but these rewards would be justified because the result, it was believed, would be massive reductions in poverty, deprivation, insecurity and suffering in the poorest communities right across the globe.
Unfortunately, the commercialization and Wall Street-ization of microfinance has only served to destroy what precious few measurable benefits were being registered by old-style Grameen Bank microfinance. Starting with Bolivia in 1999, one by one the most aggressively commercialized microfinance sectors entered a ‘boom-to-bust’ trajectory. Next in line were Morocco, Bosnia, Nicaragua and Pakistan. 2010 then saw the worst ‘boom-to-bust’ disaster to date, in the Andhra Pradesh state of India where the microfinance sector plunged into a non-repayment crisis that saw repayment rates fall from 98% down to as little as 20%. The cause of all this economic and social destruction in India was the intense competition between the top handful of microfinance institutions, each wishing to get as large as possible, as profitable as possible and as soon as possible. The underlying driving force was the prospect of huge personal financial windfalls arising from higher salaries and bonuses, as well as the possibility that a manager’s own shares in their microfinance institution could eventually make them spectacularly rich when publicly floated (via an IPO). Similar destabilizing and unethical dynamics have been playing out in Bangladesh, Peru and Colombia of late, and many observers are now watching these and other countries for similar signs of tipping over the edge into a full-blown over-indebtedness crisis.
And in all this mayhem, we need to remind ourselves that there are still no definitive signs whatsoever of any real sustainable economic or social advancement by the poor: we find only advancement (in fact, stratospheric advancement, with tens of millions of dollars made a number of the most savvy managers) by those actually providing the new form of commercialized microcredit, not those using it. Bravely, it must be said, even Yunus has recognized the damage being inflicted by the growing commercialization of microfinance, controversially attacking for-profit microfinance providers in an Op-Ed in the New York Times earlier this year.
So, finally, to the calls for Yunus to retire. What factors might lie behind this? Some say it is a fear that Yunus may try to enter politics once more (he tried to form a political party a few years back, but found no public support and quickly abandoned the idea), or that Bangladesh’s current Prime Minister, Sheikh Hasina, is jealous over the Nobel Peace Prize that was awarded in 2006 to Yunus and not to herself. Others point to the fact that Yunus and the Grameen Bank have perhaps unjustifiably sucked up a vast amount of the international donor funding meant for the entire Bangladeshi people, but over which the Bangladeshi people (through their elected government) actually had very little say in how it was spent. Still others resent the self-interested way that Yunus appears to have managed the Grameen Bank. Despite recent PR attempts to portray the Grameen Bank as some sort of quasi-cooperative owned and controlled by its savers, it is no secret that Yunus has run the Grameen Bank as his own personal fiefdom right from its foundation. Notable in this context is Grameen Bank’s very unorthodox long-standing commercial relationship with Packages Corporation, a company owned by Muhammad Yunus’s own family. In virtually any other institution such an arrangement would be seen as an appalling breach of legal, ethical and corporate procedures, but strangely not with regard to Grameen. Yunus has also recently claimed that he needs to remain at Grameen Bank because ‘there is no obvious successor’, and that his departure might precipitate a run on the bank. Given that it was Yunus himself who for many years has continually dismissed all potential successors, this is a somewhat strange excuse to rely upon. The latest dismissal took place in early 2010 when Dipal Barua, the Deputy Managing Director and Yunus’s obvious successor, was abruptly ‘invited to resign’ after nearly 30 years of apparently distinguished service to the Grameen Bank.
Moreover, in building up an ‘Empire’ around the Grameen Bank quite unlike anything else in the world of microfinance, and particularly in making links with multinational companies, Yunus has inevitably laid himself open to charges of having completely lost sight of the original anti-poverty mission of the Grameen Bank. Just take one example, that of the GrameenPhone ‘social enterprise’. Originally trailed as being a project ‘all about helping women to escape poverty’, on this criterion at least the project was a complete failure. There is today no real evidence that any of the so-called ‘telephone ladies’ contracted to sell mobile phone time managed to permanently escape their poverty. This is largely because so many women were signed up to participate that the competition among them meant hardly any of them could individually amass enough regular clients to survive, still less to do well. Of course, the competition among the ‘telephone ladies’ need not have been quite so fierce had some fairly standard operating territory limitations been put in place, just as in most western countries with regard to sales territories. However, a ‘saturation’ tactic was preferred because it meant that the actual volume of calls was maximized at little additional cost, which in turn was the best way to maximize profits. It was therefore no coincidence that those running and owning the various enterprises involved in the GrameenPhone venture, notably the Norwegian company Telenor, ended up making quite staggering profits, while the large numbers of ‘telephone ladies’ all pretty much struggled right from the start. These and other anti-social developments in other Grameen Bank ‘social enterprise’ projects thus show to many that the Grameen Bank is no longer an institution that primarily focuses upon the poor, so much as an institution narrowly focused upon building the Grameen Bank’s ‘Empire’ and mainly advancing the commercial and pseudo-philanthropic interests of its wealthy business associates.
Consider also one of the issues raised recently in the media by award-winning Danish documentary film maker, Tom Heinemann, that of NORAD grant funding given to the Grameen Bank. Leaked documents clearly show that in 1996 around $100 million grant funding was given to Grameen for housing loans, but legal ownership of this grant was quickly transferred to another unit of the Grameen network – Grameen Kalyan – which then instantly transferred legal ownership of most of this sum back to Grameen in the form of a loan. The poor women shareholders of Grameen Bank were thus given a generous windfall by the Norwegian government, which vastly increased the value of their shares in Grameen bank, but then Yunus immediately wired this cash on to Grameen Kalyan, and the poor women ended up with a $100mn liability instead! To their enormous embarrassment, NORAD officials only got wind of this transfer a few years later, and instantly demanded it be returned to the Grameen Bank. After some negotiation, it seems that Grameen Kalyan did indeed return most of the original grant to the Grameen Bank. Nonetheless, the fact that the original transfer had to be reversed two years later is enough to confirm that this was something very serious indeed, not a routine mix-up or simple disagreement. The entire episode never hit the headlines at the time, however, for reasons that are very well known to everyone working in the microfinance industry – the fear of tarnishing the idea of microfinance. For sure, NORAD had very little incentive to appear to expose either the wrongdoings of an individual (Yunus) or an institution (Grameen Bank) because this would inevitably call into serious question the efficacy of microfinance as a global development policy (indeed, as it is today). Also why flag up to the Norwegian public that it took two years for NORAD to even become aware that their $100 million grant had not been used as per the agreement signed with Grameen? Thus both NORAD and the Grameen Bank had very strong motives to want to avoid any public scrutiny of this unsatisfactory episode, which is why, of course, they secretly agreed to bury the matter.
So, my opinion is that specific recent events sparked off the current moves against Yunus, but that the essential underlying factor that accounts for the growing problems at Grameen Bank actually relate to the sheer lack of evidence of poverty impact. I understand that it is this ‘lack of impact’ factor that has finally begun to anger many in the Bangladesh government and policy-making elite, who now see themselves (along with very many others, it has to be said) as having been ‘fooled’ by Yunus into believing the hype that he and others built up around microfinance and the Grameen Bank. It is perhaps not surprising, therefore, that the Bangladesh government now wants to know a lot more about the Grameen Bank, that it wants to find out where all the huge international grants made to the Grameen Bank actually went to, and – most important of all – it needs concrete proof as to whether or not microfinance has actually been impacting positively upon the poor in Bangladesh. That the Bangladesh government is undertaking this exercise now, rather than much earlier, can justifiably be criticized in terms of bureaucratic slowness and political opportunism: but that this re-evaluation of Grameen Bank and microfinance needed to be done at some stage surely cannot be denied by anyone.
Dr. Milford Bateman is Research Fellow in the Private Sector and Markets Programme at the Overseas Development Institute, London, and, since 2005, Visiting Professor of Economics at the University of Juraj Dobrila Pula, Pula, Croatia. He is the editor of the forthcoming Kumarian Press book, Confronting Microfinance: Undermining Sustainable Development which mainly focuses on the experience of microfinance in South East Europe.