Beyond microcredit evangelism

Muhammad Yunus is the founder of Grameen Bank which has promoted microcredit for millions, loans to women too poor to qualify for traditional bank loans. He is the 2006 Nobel Peace Prize for “…efforts to create economic and social development from below.” But there is more hype than substance, says Patrick Bond, behind the claim that micro-credit schemes have been effective in poverty alleviation. There is ample evidence to challenge the claims for the alleged benefits of micro-credit programmes.

What sort of dogmatic free-market ideologue would use poor people’s (often socially-constructed) desire for credit to justify shrinking the already beleaguered welfare policies of wretched Third World states?

Consider this outlandish claim: ‘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.’

Grameen is Bangladesh’s ‘barefoot bank’ specializing in group loans to low-income women. And the Vanderbilt University-trained economist who made that statement, Muhammad Yunus (in his autobiography Banker to the Poor), just won the Nobel Peace Prize.

Yunus immediately announced to a Dhaka press conference: ‘Now the war against poverty will be further intensified across the world. It will consolidate the struggle against poverty through microcredit in most of the countries.’

Yet this seemingly benign, three-decade old attempt to foster entrepreneurship amongst impoverished women has attracted intense grassroots – and also professional – criticism.

Not surprisingly, the establishment press loves Yunus, nearly as much as do Bill and Hillary Clinton. The Financial Times made this argument, backed by no evident research: ‘Microfinance has played a central part in Bangladesh's success in reducing poverty by almost 10 percentage points over the past five years, to 40%, a rate that puts Bangladesh on track to meet its Millennium Development Goal of halving poverty by 2015.’ Moreover, ‘Grameen's business model is in rude health.’

The Wall Street Journal profiled Yunus on its front page five years ago: ‘To many, Grameen proves that capitalism can work for the poor as well as the rich,’ having ‘helped inspire an estimated 7,000 so-called microlenders with 25 million poor clients worldwide.’

Yet looking more closely, the Journal’s reporters - including the late Daniel Pearl (senselessly beheaded by Islamic extremists) - conceded the prevalence of Enron-style accounting. A fifth of the bank’s loans in late 2001 were more than a year past-due: ‘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 Grameen gimmick is to reschedule short-term loans that are unpaid after as long as two years, instead of writing them off, letting 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 Journal report - improved repayment rates in the most crucial areas, where Grameen had earlier won its global reputation amongst neoliberals who consider credit and entrepreneurship as prerequisites for development.

By then, even the huckster-filled microfinance industry felt betrayed: ‘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 WSJ 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 $5 million a year, which had until then reduced the interest rate he needed to charge borrowers and still make a profit. Grameen had become ‘sustainable,’ self-financing, with costs to be fully borne by borrowers.

He had also battled backward patriarchal and religious attitudes in Bangladesh, and his hard work extended credit to millions of people. The secret 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.

But at a time of new competitors, adverse weather conditions (especially the 1998 floods) and a backlash by borrowers who used collective power of nonpayment, Grameen imposed dramatic increases in the price of repaying loans. And it is here that Grameen Bank’s main philosophical position – ‘We consider credit as a human right’ – was reduced merely to an argument for access, not affordability.

In that regard, Yunus is entirely different from all the rights-based social movements which have demanded ‘rights’ in terms of free lifeline access to healthcare, education, housing, land, water, electricity and the like.

‘Microcredit is an almost perfect case of a phenomenon that has come to characterise much of development assistance - a widening gap between reality and propaganda,’ argued microfinance consultant Thomas Dichter in a SA Institute for International Affairs publication, ‘Hype and Hope: The Worrisome State of the Microcredit Movement’: ‘Much of Africa offers an infertile context for borrowing as the only customers available to the poorest are other very poor people. In such infertile economic contexts, the people at the bottom are by definition the ones who “need” credit the most, but can do the least with it.’

Dichter continued, ‘In part because of what has been aptly called “microfinance evangelism”, the prospect of significant returns from microcredit made available to solid enterprises has become less likely. This is because those who can really leverage a small loan are not the poorest or the most destitute… An additional limitation is that many microcredit clients are reduced to “copycat” behaviour, everyone selling the same thing, and more sellers saturating the market as more microcredit is made available. In this sense, expanding microcredit can actually lower incomes.’

What about the impact Yunus has made on his home turf? In Bangladesh, according to Dichter, ‘Microcredit is such a common development intervention that many people borrow from one project to repay another. In that context, even if a woman borrower increases her volume of sales by 100% say from 10 bunches of bananas to 20, she is still limited by her inability to add any value to what she sells, limited by her low skills, and the copycat pattern that almost always prevails at the low end of the informal sector.’

Although criticism of Grameen ‘is still a minority view’ and Yunus performed ‘miracles’ in rolling out credit to the masses, according to Munir Quddus, who chairs the Department of Economics and Finance at the University of Southern Indiana, the hype needs more investigation than apparently was given by the Nobel committee: ‘The very nature of setting up groups leaves out the very poor who would be perceived by fellow members to have no ability to generate income and therefore high risk.’

Quddus continues: ‘Others have pointed out that micro-credit simply deepens the exploitation of the women since the rates of interest charged by the bank in real [after inflation] terms are quite high; consequently, credit often worsens the debt situation and gives the husbands even more leverage.’

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.’

In the same spirit of commodifying everything, Yunus set up a relationship with 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 – micro-credit isn’t all it’s cracked up to be… What has really sold micro-credit 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 depoliticize it by refusing to look at its causes. Micro-credit propagators are always the first to advocate that poor people need to be able to help themselves. The kind of micro-credit 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.’

Though I have never been to Bangladesh and have only discussed these problems with Yunus once (more than a decade ago when he visited Johannesburg), microfinance gimmickry certainly did damage in Southern Africa.

For example, in 1998, when the emerging markets crisis raised interest rates across the Third World, a 7% increase imposed over two weeks as the local currency crashed drove many South African borrowers and their microlenders into bankruptcy.

The highest-profile local proponent of microcredit is First Lady Zanele Mbeki. But her Womens Development Banking project has not only financed rural women, according to the oil company BP, a supporter. It has also made ‘investments in high-growth businesses’ such as Ceasars Gauteng and ‘Siza Water Company, the first privatised water company’ in KwaZulu-Natal – both of which, arguably, are counter-examples of poverty eradication.

Next door in Zimbabwe, a $66 million flood of World Bank financing during the 1980s (in lieu of land reform) revitalised a rural microfinance sector initiated under late 1940s racist Rhodesian rule. The Bank program ultimately reached 94,000 households. But within a decade, the result was a peasant default rate of 80% in the impoverished ‘Communal Areas’ (equivalent to apartheid Bantustans).

Repayment affordability was a huge factor, since a typical lender’s overhead and collection costs represent 15-22% of the amount of a small loan, including incorporation of a 4% default rate. In Zimbabwe, servicing loans of even just a few hundred US dollars represented enormous burdens when, according to one Agriculture Ministry survey in 1989, the average net crop profit per hour of labour was just $0.15.

Michael Drinkwater’s detailed study of central Zimbabwe showed that ‘improving farmers’ access to credit has placed many of them in serious difficulties’ compounded by ‘an overzealous launching of a group credit scheme’ and the ‘doubtful viability of high cost fertiliser packages’ inappropriate for the erratic climate. ‘The increase in credit use means farmers have to market more to stay solvent... At the household level it is commonly debts not profits that are on the rise.’

To address the crisis, in 1991 the World Bank unsuccessfully promoted even more Grameen-style group credit, albeit with the caveat that ‘Zimbabwe’s experience to date with group lending has not been favourable. The organisation of groups is initially expensive and time-intensive’, and ‘major problems have become apparent.’

Not far away, in Lesotho, anthropologist James Ferguson studied a 1975 World Bank report that guided the country’s development strategy: ‘In a “Less Developed Country”, where the cash economy is on such a precarious basis, there must be [according to the Bank] “a conspicuous lack of credit for the purchase of farm inputs,” and it is obvious that “credit will play a critical role in all future major agricultural projects.”’

Rebutted Ferguson, ‘It is never explained exactly why the need for credit is so critical. It is true that most Basotho invest very little in agriculture probably due to their intelligent appreciation of the low potential and high risks of capital intensive farming in Lesotho but this is usually not a matter of being unable to obtain the cash to make such an investment. Most families have access to wage-earnings or remittances, and this money most commonly comes in large lumps which could easily be used for agricultural inputs, but for the most part is not. Yet in the “development” picture, the need for credit is almost an axiom.’

Ugandan political economist Dani Nabudere has also debunked ‘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.’

Even from inside the World Bank these lessons were by then obvious. Sababathy Thillairajah reviewed the Bank’s African peasant credit programmes 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 Bank with ideological support, as it rejuvenated microfinance with a $200 million global line of credit aimed at poor women in August 1995, just prior to the Beijing gender conference.

The global justice movement’s Attac group has an excellent Oslo branch, which last week published a new book, Economic Apartheid. Its members pointed out to me that that Yunus was strongly supported by his friends in the Norwegian ruling class, including a former top finance ministry bureaucrat and leading officials of Telenor, Norway’s phone company. Telenor owns 62% of GrameenPhone, which controls 60% of Bangladesh’s cellphone market.

At a time when the centre-left Norwegian government has a high profile for partially cancelling illegitimate Third World debt and threatening to defund the World Bank, both of which are applauded by local activists, the people who make these decisions were conscious of how important it is for Norway to project the possibility of capitalism with a human face.

The question is whether they looked hard enough at conflicts generated by credit, thus negating the meaning of the Nobel Peace Prize – and not for the first time.

• Patrick Bond is director of the Centre for Civil Society at the University of KwaZulu-Natal. His most recent book is Looting Africa: The Economics of Exploitation, available from Zed Books and UKZN Press.)
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