An Exclusive interview with Dr. Muhammad Yunus Microfinance Focus
Dr. Yunus gave an exclusive interview to the “MICRO FINANCE FOCUS – a global magazine on micro finance and sustainable development” at the Reception Dinner on 30th March 2009 on the eve of the Sa-Dhan’s National Micro finance Conference 2009 being organized at New Delhi.
Here are the excerpts from the interview:
MF FOCUS: Microfinance is an established and recognised instrument for fighting poverty today. Many people are confident and it gives hope, poverty can be eliminated. Isn’t it too simple just to rely on microfinance?
Dr. Yunus: You don’t have to. Nobody is forcing you to do that. If somebody wants to do Microcredit – fine. I wouldn’t say this is something everybody should have. Nobody says it is the only solution. Human beings are very multidimensional. Microfinance is one of the many, many things.
MF FOCUS: Social business is an additional way. Do you identify enough potential for social business to make a real difference, globally?
Dr. Yunus: Yes of course. Definitely it is a global and not a local issue. There are two kind of businesses: One is business to make money, the other business is to change the world. The one with the intention of changing the world and not to have any personal gain from that. It is all dedicated to make a difference. It is addressing a social issue. Resolve it, you can do that.
MF FOCUS: What are all the factors making social businesses successful?
Dr. Yunus: A good business plan, good ideas and use the creativity in the most creative way.
MF FOCUS: Microfinance as well as Social businesses have to be highly efficient. How is it possible to maintain or re-introduce the social mission back into microfinance?
Dr. Yunus: Whenever something gets popular, actually catches attention, there are people who take advantage of that and misuse it. It happens in everything. When Big brands are popular, it gets imitated by fake ones. Same thing happens with microcredit: People name it microcredit but in fact it is not microcredit. It is something completely different. People have to be made aware of what is microcredit and why it is important to stick to the real microcredit and not one which has a different motivation. But while you are looking at the microcredit itself, even good people may have wrong ideas, which makes them shift away from the whole idea, the mission. You have to be very carefully remind ourselves, what is our mission. That is why we have meetings like this, to rediscover your mission and then re-adjust your work to the mission.
MF FOCUS: To build an enabling environment for social entrepreneurs, what governments should do and what regulations do you count as important?
Dr. Yunus: It is very important. Very Importnt!! Regulation is very important but at the same time regulation can be stifling, destroy the whole business by overregulating and make it impossible to function. It is like a mother and a child. You know how you have to change your child to do the right things. At the same time you should not control your children so that it loses all its initative. It is like becoming a prisoner in the hands of the mother. Regulation should be promotional, a Cheerleader. At the same time making sure you do the right thing, that you don’t drift away from the real principles. It is a tough job in the sense you have to balance both: How to encourage, and at the same time how to restrain.
MF FOCUS: Due to the financial and economic crisis development funds were cut by the north. Where do you see the responsibilty of rich countries in fighting poverty? Where should they act?
Dr. Yunus: See…The southern countries didn’t create the crisis, they are the victims of the crisis.It is only one country which created the crisis and it spread all over. Those who were involved in creating this crisis also have a moral responsibility to make sure that the victims are supported . There are lot of people suffering, that has to be taken care of. Now they are busy of making bailout packages and all the support. And i am saying …At least 10 % of all bailout packages every where should be earmarkerd for victims in the third world. Those things have to be built in the system.
MF FOCUS: Apart from poverty there are many topics, which can be solved or bargained only on an international level: Climate Change for example. Nicholas Stern is convinced, we have to solve both topics together: Poverty and Climate Change.
Dr. Yunus: Well, financial crisis is the latest crisis. 2008 had the food crisis, which is still here. Simply front pages have been taken over by financial crisis and has pushed away all discussion about the food crisis. 2008 was also the year of energy crisis – the oil prices shot up to the sky. It didn’t disappear, it is lying low for a while. And also this is a perpetuating environmental crisis. All these crises have their roots in the same thing. These are not seperate crisis. You have to adjust the root causes than you are adjusting all of them. The root causes are the wrong structure, the capitalism structure we have. We have to redesign the structure we are operating in. Wrong, unsustainable lifestyle. We have to take the hard decision ! We and each one of us must take a decision on this planet. And also we should inculcalte among our children a simple way of living. We should not live in a way, that it harms another person. Once you take this decision, everything will be solved. We have no right to live a life which is harming anybody else. It is like traffic laws: You can’t have a car and knock everybody off the road. There’s a rule you have to drive safely, so that you don’t harm anybody. Same thing is for living on this planet. We are sharing with each other.
MF FOCUS: Grameen Bank has moved to grameen II methodology, still Grameen replicators in India follows the Grameen I model. Do you think they should explore such flexible methodology?
Dr. Yunus: It is upto them, what they like….. I can not advise. We thought we can solve some of the problems. we see the opportunity that we have by relaxing our procedures and rules to make it more friendly.
MF FOCUS: What is the next level for Micro finance and how to take it forward? Dr. Yunus: Next level is to enter into Insurance, pension funds, second generation issues young children coming up…. growing up…………….. to make them into better citizen to deal with life.
MF FOCUS: Savings product is much needed by the poor. Regulation is cautious not to allow collection of savings by certain category of MFIs. What is your opinion? Dr. Yunus: Savings product is very important. Change the law!!! Keep on insisting that the system is right.
MF FOCUS: With Micro finance focus, the monthly magazine, we are working on information exchange and promoting Best practices. How important are projects like Micro finance focus for the sector.
Dr. Yunus: Yeah ! This is a good initiative. Communicate…… I mean….. Let the people know what is happening, what is right, what is wrong, so they can participate in debate, discuss, make more efficient, more cost effective and more friendly to take home.
***
ZNet, 18 October 2006
A Nobel Loan-Shark? by Patrick Bond
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 has a grand self-image, telling a Dhaka press conference last week: '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.
Or did you miss the critiques? 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.
(A Bostonian called Ponzi made this reverse pyramid technique infamous amongst bankers many years ago, and the Bretton Woods Institutions updated the practice during the 1980s during the Third World debt crisis, and continues to lend often simply to permit payments to be made on old debt in arrears.)
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 central 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.
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.
Next door in Zimbabwe, a $66 million flood of World Bank financing during the 1980s (in lieu of land reform) revitalized 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 this 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, at the risk of putting this Nobel in the same category as Peace Prizes granted to Shimon Peres, F.W. deKlerk and Henry Kissinger.
(Patrick Bond's new book, Looting Africa: The Economics of Exploitation, is available from Zed Books.)
***
The Nation October 14, 2006 Microcredit, Macro Issues
Walden Bello
The awarding of the Nobel Peace Prize to Muhammad Yunus, regarded as the father of microcredit, comes at a time when microcredit has become something like a religion to many of the powerful, rich and famous. Hillary Clinton regularly speaks about going to Bangladesh, Yunus's homeland, and being "inspired by the power of these loans to enable even the poorest of women to start businesses, lifting their families--and their communities--out of poverty."
Like the liberal Clinton, the neocon Paul Wolfowitz, now president of the World Bank, has also gotten religion, after a recent trip to the Indian state of Andhra Pradesh. With the fervor of the convert, he talks about the "transforming power" of microfinance: "I thought maybe this was just one successful project in one village, but then I went to the next village and it was the same story. That evening, I met with more than a hundred women leaders from self-help groups, and I realized this program was opening opportunities for poor women and their families in an entire state of 75 million people."
There is no doubt that Yunus, a Bangladeshi economist, came up with a winning idea that has transformed the lives of many millions of poor women, and perhaps for that alone, he deserves the Nobel Prize. But Yunus--at least the young Yunus, who did not have the support of global institutions when he started out--did not see his Grameen Bank as a panacea. Others, like the World Bank and the United Nations, elevated it to that status (and, some say, convinced Yunus it was a panacea), and microcredit is now presented as a relatively painless approach to development. Through its dynamics of collective responsibility for repayment by a group of women borrowers, microcredit has indeed allowed many poor women to roll back pervasive poverty. However, it is mainly the moderately poor rather than the very poor who benefit, and not very many can claim they have permanently left the instability of poverty. Likewise, not many would claim that the degree of self-sufficiency and the ability to send children to school afforded by microcredit are indicators of their graduating to middle-class prosperity. As economic journalist Gina Neff notes, "after 8 years of borrowing, 55% of Grameen households still aren't able to meet their basic nutritional needs--so many women are using their loans to buy food rather than invest in business."
Indeed, one of those who have thoroughly studied the phenomenon, Thomas Dichter, says that the idea that microfinance allows its recipients to graduate from poverty to entrepreneurship is inflated. He sketches out the dynamics of microcredit: "It emerges that the clients with the most experience got started using their own resources, and though they have not progressed very far--they cannot because the market is just too limited--they have enough turnover to keep buying and selling, and probably would have with or without the microcredit. For them the loans are often diverted to consumption since they can use the relatively large lump sum of the loan, a luxury they do not come by in their daily turnover." He concludes: "Definitely, microcredit has not done what the majority of microcredit enthusiasts claim it can do--function as capital aimed at increasing the returns to a business activity."
And so the great microcredit paradox that, as Dichter puts it, "the poorest people can do little productive with the credit, and the ones who can do the most with it are those who don't really need microcredit, but larger amounts with different (often longer) credit terms."
In other words, microcredit is a great tool as a survival strategy, but it is not the key to development, which involves not only massive capital-intensive, state-directed investments to build industries but also an assault on the structures of inequality such as concentrated land ownership that systematically deprive the poor of resources to escape poverty. Microcredit schemes end up coexisting with these entrenched structures, serving as a safety net for people excluded and marginalized by them, but not transforming them. No, Paul Wolfowitz, microcredit is not the key to ending poverty among the 75 million people in Andhra Pradesh. Dream on.
Perhaps one of the reasons there is such enthusiasm for microcredit in establishment circles these days is that it is a market-based mechanism that has enjoyed some success where other market-based programs have crashed. Structural-adjustment programs promoting trade liberalization, deregulation and privatization have brought greater poverty and inequality to most parts of the developing world over the last quarter century, and have made economic stagnation a permanent condition. Many of the same institutions that pushed and are continuing to push these failed macro programs (sometimes under new labels like "Poverty Reduction Strategy Papers"), like the World Bank, are often the same institutions pushing microcredit programs. Viewed broadly, microcredit can be seen as the safety net for millions of people destabilized by the large-scale macro-failures engendered by structural adjustment.
There have been gains in poverty reduction in a few places--like China, where, contrary to the myth, state-directed macro policies, not microcredit, have been central to lifting an estimated 120 million Chinese from poverty.
So probably the best way we can honor Muhammad Yunus is to say, Yes, he deserves the Nobel Prize for helping so many women cope with poverty. His boosters discredit this great honor and engage in hyperbole when they claim he has invented a new compassionate form of capitalism--social capitalism, or "social entrepreneurship"--that will be the magic bullet to end poverty and promote development.
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A microcheer for microcredit
Microcredit is a good thing, but it is nowhere near a panacea for global poverty. Daniel Davies
October 15, 2006 09:47 AM
It is churlish to have a go at someone on the day he wins the Nobel Peace Prize. And Muhammad Yunus is clearly an ornament to the somewhat chequered reputation of that prize rather than a detriment. Even when you strike out some of the genuinely embarrassing winners like Henry Kissinger, Yunus still looks OK - he is not in the league of Mother Theresa when it comes to having a poor ratio of money spent to results achieved for example.
However, have a bit of a go I must, because it would be a much greater shame if the publicity surrounding the Peace Prize award were to have too much influence on foreign aid policy. The fact is that many of the more grandiose claims that Mr Yunus is prone to make for microfinance don't really stand up.
Jonathan Morduch, a Harvard economist who is in general a supporter of microfinance as a part of aid policy, carried out two studies of the costs and benefits of microfinance in 1998 and 1999. Surprisingly few rigorous studies have been made of microfinance, but Morduch surveyed them all and carried out some further empirical work of his own. The results were decidedly more mixed than much of the publicity material that Grameen Bank puts out about itself would suggest.
In so far as I can summarise them, the conclusions of Morduch's work were that microfinance works much better for the "quite poor" than the "very poor", and that the loans made were as often as not used for consumption rather than investment in entrepreneurial businesses. Morduch's work also suggested that microlenders are more or less impossible to run on a self-financing basis if they are to stick to the mission of lending to the poorest, a conclusion which is now accepted across the microfinance industry.
These are not trivial benefits; there is a very big tranche of people in the category who can be helped by microfinance, and the ability to smooth consumption by borrowing is a very important thing indeed - I wouldn't go quite as far as to say that "access to credit is a human right", but Yunus has a real point when he says this. But they do mean that microfinance can't be used as a substitute for an actual development policy. After all, Grameen Bank has been going for 30 years now and Bangladesh is still one of the poorest countries on earth.
It's quite arguable that the real benefit that comes from microcredit is simply the fact that it doesn't give grants. I am in general quite in favour of small user fees for most development aid, based on the principles set out by JK Galbraith in one of his least-known but best books, The Nature Of Mass Poverty. In it, Galbraith argues that poverty is an economic equilibrium and that most very poor populations are "adapted" to it and that most aid will therefore have a temporary effect at best.
He suggests that development aid (as opposed to emergency aid) should instead be concentrated on the "non-adapted minority" of people who aim to leave the poverty equilibrium rather than staying in it. In other words, although I don't think that this specific formulation is in Galbraith's book, the rationing effect of user fees is actually salutary, because it means that the aid will go to people who plan to do something with it. This is in many ways an unfair way to distribute aid, but to be honest we have tried fairness for the last fifty years and the results have been terrible. I suspect that Grameen Bank's successes, where they have occurred, have been a result of selection of this non-adapted minority.
The main effect of the microfinance revolution has been the rebranding of agricultural development banks as "Microlenders". This has happened because although a loan to buy a tractor or provide working capital for a harvest season isn't microcredit, calling it microcredit will bring in a lot more grant money. That's probably good news, because agricultural development banks usually do good work.
So good luck to Muhammad Yunus and I hope he enjoys his prize. But if you work in government or a major aid agency, perhaps take his acceptance speech with a pinch of salt.
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November 27, 2001
Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag
By DANIEL PEARL and MICHAEL M. PHILLIPS Staff Reporters of THE WALL STREET JOURNAL
Microcredit is a great idea with a problem: the bank that made it famous.
Grameen Bank, launched in Bangladesh in 1976 by an economics professor named Muhammad Yunus, popularized the idea of giving poor people tiny loans to launch businesses. The bank has helped inspire an estimated 7,000 so-called microlenders with 25 million poor clients worldwide.
To many, Grameen proves that capitalism can work for the poor as well as the rich. It has become an icon for the drive to give needy entrepreneurs a share in economic development. And that iconic status owes a lot to an almost miraculous loan-repayment rate of "over 95%," as the bank's Web site says. (www.grameen.org)
But Grameen's performance in recent years hasn't lived up to the bank's own hype. In two northern districts of Bangladesh that have been used to highlight Grameen's success, half the loan portfolio is overdue by at least a year, according to monthly figures supplied by Grameen. For the whole bank, 19% of loans are one year overdue. Grameen itself defines a loan as delinquent if it still isn't paid off two years after its due date. Under those terms, 10% of all the bank's loans are overdue, giving it a delinquency rate more than twice the often-cited level of less than 5%.
Some of Grameen's troubles stem from a 1998 flood, and others from the bank's own success. Imitators have brought more competition, making it harder for Grameen to control its borrowers. The bank's loan portfolio grew rapidly in the early 1990s, but it has now shrunk to 1996 levels, at $190 million. Profits have declined about 85%, to the equivalent of $189,950 last year from $1.3 million in 1999. The bank, with 1,170 branches, all in Bangladesh, has high operating costs. 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. And the situation may be worse than it appears; the bank is converting many overdue loans into new "flexible" loans that Grameen reports as up-to-date.
Safeguarding an 'Idea'
Microlenders have been reluctant to call attention to Grameen's troubles. "Grameen's repayment rates have never been as good as they've claimed," says Jonathan J. Morduch, associate professor of economics and public policy at New York University. "Because Grameen has been so well-known, nobody has wanted to risk undermining the reputation of the idea."
Microcredit is getting renewed attention as other poverty-fighting tools come under attack. Left-wing protesters accuse the World Bank of selling out the poor to corporate interests. Right-wing U.S. politicians argue that aid to the Third World has been wasted. U.S. lobbies often try to quash efforts to open American markets to imports from poor countries.
But microcredit is an idea everyone can agree on: It uses private enterprise, can be profitable and gets money straight to the poor. Bridging the gap between rich and poor "will help eliminate conditions of despair and hopelessness that breed violence and extremism,'' declares an e-mail message circulated after Sept. 11 by Bill Clapp, the chairman of Global Partnerships, a microcredit support organization based in Seattle.
Alarmed by Rumors
The microcredit industry knows its reputation rides largely on Grameen's. Damian von Stauffenberg, chairman of a Washington-based microcredit rating agency called Microrate, was alarmed by recent rumors of financial weakness at Grameen, even though the agency doesn't rate the bank. "If it's true, it would be a blow to the rest of us, because of the symbol Grameen is," Mr. von Stauffenberg says. He says he repeatedly asked a Grameen affiliate, Grameen Foundation USA, this summer for detailed information on the bank's loan portfolio, but got only a brochure and a 1998 annual report.
"I didn't hear back from him after that, so I assumed he had the information he wanted," says Alex Counts, president of the foundation, which promotes Grameen in the U.S.
Mr. Yunus, a congenial man of 61, acknowledges that Grameen has had some repayment difficulties in the past five years. He blames political upheavals, the 1998 flood and management errors. Told that the Web site still claimed a 95% recovery rate, Mr. Yunus said it was through "inefficiency" that Grameen hadn't updated some information. Grameen has added a footnote to the Web site saying the information was true as of 1996. But more recent figures still aren't listed.
The repayment troubles are temporary, according to Mr. Yunus. "There is no problem," he said in an August interview in his modest office, which has no air conditioning despite Bangladesh's steamy climate. He says three-fourths of borrowers repay on time every week, and Grameen assumes that the poor will repay even long-delinquent loans. The bank, he says, is stronger than ever.
Mr. Yunus says borrowers have surprised him with their ability to take on new challenges. Borrowers who reach a certain level of savings can buy one share in Grameen, and collectively they own 93%. Mr. Yunus is setting up a mutual fund allowing borrowers to invest in other ventures under the Grameen umbrella: mobile phones, textiles and high-tech office space for rent on the top floors of the Grameen Bank tower.
"We have proved beyond a reasonable doubt that poor people are bankable," Mr. Yunus says. "We are not looking for charity."
Grameen, which means "village" in Bengali, got started after Mr. Yunus visited a village in southern Bangladesh. He met a woman who wove bamboo stools but had to sell them for meager profits to the man providing the materials. As an experiment, Mr. Yunus lent a total of $27 to 42 women in the village. All of them repaid.
When Mr. Yunus approached the Bangladesh government for funds in 1979 to expand his experiment, government bankers were skeptical that poor, landless women would repay. So Mr. Yunus conducted an experiment in Tangail, a fertile district north of Dhaka. His staffers showed up unannounced in villages and recruited groups of women to take loans. Again, all of them repaid.
The '16 Decisions'
The new bank was a kind of small-business lender, with some unusual policies. It took no deposits at first. It lent only to poor women who had no collateral. Borrowers formed groups of five, each member getting loans only as long as everybody made payments. Borrowers recited Mr. Yunus's "16 decisions" -- including enforcing loan "discipline" within the group, keeping families small and not giving a dowry for a daughter's wedding -- a difficult "decision" to follow in this culture.
Grameen, which has provided millions of poor Bangladeshi women with access to credit, became the industry's symbol mostly through Mr. Yunus's personality and proselytizing. He set up the Grameen Trust, which gives loans and holds workshops for start-up lenders who have adopted the Grameen model from Arkansas to Zimbabwe, with mixed results.
Mr. Yunus is also the guiding force behind the industry's main public-relations vehicle, the Microcredit Summit. At the first summit, in Washington in 1997, Mr. Yunus sat at the head table at a private lunch with Queen Sofia of Spain and World Bank President James D. Wolfensohn, who ended the meal by giving Mr. Yunus a big hug. At a regional summit last month, he gave an opening address beside Mexican President Vicente Fox. Friends tout Mr. Yunus for a Nobel Peace Prize.
Mr. Yunus's 1997 autobiography, "Banker to the Poor," gave no hint of doubt in Grameen's future. "All the strength of Grameen comes from its near-perfect recovery performance," he wrote. "It is not merely the money which is reflected through the recovery rate, it is the discipline."
Even then, however, Grameen's recovery rate was slipping. In 1997, 4.6% of Grameen's loans were more than two years overdue, up from 0.7% a couple of years earlier. And Tangail has now become Grameen's worst region, with 32.1% of loans two-years overdue as of August.
One reason is that microlending has lost its novelty. In Tangail, signboards for rival microlenders dot a landscape of gravel roads, jute fields and ponds with simple fishing nets. Shopkeepers playing cards in the village of Bagil Bazar can cite from memory the terms being offered by seven competing microlenders -- a typical repayment plan for a 1,000-taka ($17) loan is 25 taka a week for 46 weeks. At an annualized rate, that works out to 30% in interest. Surveys have estimated that 23% to 40% of families borrowing from microlenders in Tangail borrow from more than one.
Rebellious Borrowers
Borrowers have also become more rebellious. "The experience was good in the beginning," says Munjurani Sharkan, who became leader of a Grameen group in Tangail's Khatuajugnie village in 1986. To put pressure on "lazy" group members who were slow making payments, she says she used to start removing the tin roofs of their homes. But one day, the whole group decided to stop making payments.
They were protesting Grameen's handling of a fund it created for each group, using 5% of each loan and additional mandatory deposits. The "group fund" was meant for emergencies, but many borrowers wanted to withdraw money from the group fund. After a protest movement, complete with placards and amplified speeches, Grameen finally agreed to give borrowers easier access to the fund.
Borrower groups had become lobbying groups, and Mr. Yunus hadn't noticed the change, says Muhammad Yahiyeh, former director of Grameen Trust. "An entire group would say, 'Unless you pay this person 5,000 taka, we will all stop paying,' " says Mr. Yahiyeh, who now runs a small microlender. Mr. Yunus says he still thinks groups are good for loan discipline. Grameen just didn't explain the group fund properly, he says, and politicians stirred up the borrowers.
The typical Grameen success story features a woman who turns a small loan into a successful shop or craft business. But Grameen also has customers such as Belatun Begum, a borrower in Khatuajugnie since the late 1980s. She took one loan in three installments, totaling 30,000 taka (about $525). She says the original loan was to buy a cow, but she actually gave some money to her husband, a well-digger, and used the rest to improve her house. She confesses to borrowing a neighbor's cow to show Grameen at meetings. One recent study found one-fourth of microcredit loan money in Bangladesh is used for household consumption.
Mr. Yunus says that doesn't bother him as long as borrowers repay. Grameen tells women to think of a loan as a mango tree and to eat only the fruits, he says, not the tree itself.
But Grameen introduced so many loan options in the early 1990s -- housing loans, student loans, seasonal loans -- that borrowers were often paying off one with another, says Aminur Rahman, an anthropologist based in Ottawa, Canada, who studied Grameen borrowers in a Tangail village six years ago. Returning earlier this year, he found only six of 120 borrowers were getting income from Grameen-funded investments.
Massive floods in 1998 hit Grameen's borrowers hard. The bank let borrowers skip several payments. Grameen borrowed $80 million from Bangladesh's government banks, with a sovereign guarantee, and used the money to make new loans to borrowers. Informally, it forgave the old loans.
A 'Flexible Loan'
Grameen also bailed out borrowers whose problems had nothing to do with the flood. Ms. Begum, for instance, stopped paying when she had to provide dowries for two daughters. She skipped group meetings, but Grameen workers came to her door asking for her 200-taka weekly payment, she says. "Let us make some income and we'll pay you," she told them.
Earlier this year, Grameen came up with a proposal: pay just 50 taka a week for six months, and then take a new Grameen loan for twice the amount she repaid. Ms. Begum accepted. Grameen calls the program a "flexible loan," and treats the old, delinquent loans as back on schedule, as long as some regular payment is being made.
At a Grameen branch near Khatuajugnie, manager Mohammed Imam Modem shows his computer-printed ledger, full of cross marks to indicate missed payments. The rescheduling program and Grameen's personal visits to husbands as well as wives are improving the picture: The branch had 1,510 defaulters before; now it has 846. Attendance at weekly meetings is up to 66%, from 47% before.
"Grameen Bank's philosophy is not to abandon but to rehabilitate," says Muzzamal Huq, a Grameen general manager.
But Grameen may simply be delaying inevitable defaults and hiding problem loans. One paper produced by the Consultative Group to Assist the Poorest, or CGAP, a donor group that sets industry standards, warns that heavy use of refinancing "can cloud the ability to judge its loan-loss rate." CGAP is a collective of 27 public and private donors, including the World Bank, the U.S. Agency for International Development and several U.N. agencies, that account for the vast majority of aid to microcredit institutions around the world.
CGAP says refinanced loans should at least be listed separately. Grameen doesn't do so. It says refinanced loans are one-fifth of its portfolio.
CGAP recommends that microlenders report as at risk the entire remaining balance of any loan with a payment more than 90 days overdue. The Palli Karma-Sahayak Foundation (PKSF), which Mr. Yunus helped set up in 1991 to distribute foreign funds to other Bangladesh microlenders, requires its microlenders to report as overdue any loan that is one week late. The average overdue rate among the foundation's lenders is 2%. It's impossible to know Grameen's overdue rate by that standard, since it reports only loans that are one year and two years overdue.
PKSF also says it requires borrowers to make a 50% provision against potential loan losses for any loan overdue by a year. Grameen made a 15% provision for such loans in 1999, and none last year. Following PKSF guidelines would have produced a loss of more than $7.5 million for 2000 instead of Grameen's reported profit of less than $200,000.
In early 1998, Grameen approached the International Finance Corp., the business-finance arm of the World Bank, about turning some of Grameen's portfolio into securities. The IFC declined to proceed, in part because Grameen "didn't provide all the account information the IFC requested," an IFC official said. The official requested anonymity because the IFC is reticent about discussing its negotiations with clients.
Mr. Yunus denied the IFC official's claims. He said Grameen is "generously covered" against loan defaults.
Other microlenders have become much more stringent. Accion International, a U.S.-based network of microfinance institutions, requires its affiliates in Africa and Latin America to list as "at risk" any loan overdue by 30 days or more. Asked about Grameen's two-years standard, Accion Chief Executive Maria Otero says, "I don't think any [bank] superintendency in a million years would agree to something like that."
Grameen Bank isn't under any formal supervision. "They are regulated, but they are regulated by themselves," says Akhtaruz Zaman, director of the Financial Institution Department for the Bangladesh Bank, the country's central bank. He means the board of directors, which is led by borrowers. Mr. Zaman says Grameen's deposits are "well-protected " and the bank is "doing fine."
Harder-headed microlenders are stealing the spotlight, though. One rising star is the Association for Social Advancement (ASA), a Bangladesh charity, which boasts 1.5 million borrowers and just 0.7% of loans overdue, even by a week. Dispensing with borrower groups, ASA leans on borrowers' husbands and relatives if payments are missed, says the managing director, Shafiqual Haque Choudhury. To him, Grameen's approach is an ingenious idea that didn't stand the test of time.
"If we manage our operation in the Grameen way," says Mr. Choudhury, "we'll never be able to cover our costs."
Updated November 27, 2001