On 2010/11/18 10:46 PM, Jim Devine wrote:
India Microcredit Faces Collapse From Defaults
By LYDIA POLGREEN and VIKAS BAJAJ
http://www.himalmag.com/The-danger-of-Grameenism_nw4752.html
The danger of Grameenism
By: Patrick
Bond with
Khorshed Alam
Himal magazine, October 2010
Far from being a
panacea for fighting rural poverty,
microcredit can impose additional burdens on the rural poor,
without markedly
improving their socio-economic condition.
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Sworup Nhasiju
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For years,
the example of microcredit in Bangladesh has been touted as a
model of how the
rural poor can lift themselves out of poverty. This widely held
perception was
boosted in 2006, when Mohammad Yunus and Grameen Bank, the
microfinance
institution he set up, jointly received the Nobel Peace Prize.
In Southasia in
particular, and the world in general, microcredit has become a
gospel of sorts,
with Yunus as its prophet.
Consider this
outlandish
claim, made by Yunus as he got started in the late 1970s:
‘Poverty will be
eradicated in a generation. Our children will have to go to a
‘poverty museum’
to see what all the fuss was about.’ According to Milford
Bateman, a senior
research fellow at the Overseas Development Institute (ODI) in
London who is
one of the world’s experts on Grameen and microcredit, the
reason this rhetoric
resonated with international donors during the era of neoliberal
globalisation,
was that ‘they love the non-state, self-help,
fiscally-responsible and
individual entrepreneurship angles.’
Grameen’s origins are sourced to a discussion Yunus had with
Sufiya Begum, a
young mother who, he recalled, ‘was making a stool made of
bamboo. She gets
five taka from a business person to buy the bamboo and sells to
him for five
and a half taka, earning half a taka as her income for the day.
She will never
own five taka herself and her life will always be steeped into
poverty. How
about giving her a credit for five taka that she uses to buy the
bamboo, sell
her product in free market, earn a better profit and slowly pay
back the loan?’
Describing Begum and the first 42 borrowers in Jobra village in
Bangladesh,
Yunus waxed eloquent: ‘Even those who seemingly have no
conceptual thought, no
ability to think of yesterday or tomorrow, are in fact quite
intelligent and
expert at the art of survival. Credit is the key that unlocks
their humanity.’
But what is the
current
situation in Jobra? Says Bateman, ‘It’s still
trapped in deep poverty, and now debt. And what is the response
from Grameen
Bank? All research in the village is now banned!’ As for Begum,
says Bateman,
‘she actually died in abject poverty in 1998 after all her many
tiny
income-generating projects came to nothing.’ The reason, Bateman
argues, is
simple: ‘It turns out that as more and more ‘poverty-push’
micro-enterprises
were crowded into the same local economic space, the returns on
each
micro-enterprise began to fall dramatically. Starting a new
trading business or
a basket-making operation or driving a rickshaw required few
skills and only a
tiny amount of capital, but such a project generated very little
income indeed
because everyone else was pretty much already doing exactly the
same things in
order to survive.’
Contrary to the carefully cultivated media image, Yunus is not
contributing to
peace or social justice. In fact, he is an extreme neoliberal
ideologue. To
quote his philosophy, as expressed in his 1998 autobiography, Banker to the Poor,
I believe
that ‘government’, as we know it today, should pull out of most
things except
for law enforcement and justice, national defense and foreign
policy, and let
the private sector, a ‘Grameenized private sector’, a
social-consciousness-driven private sector, take over their
other functions.
At the time
as he wrote those words, governments across the world,
especially in the United
States, were pulling back from regulating financial markets. In
1999, for
example, Larry Summers (then US Treasury secretary and now
President Barack
Obama’s overall economics tsar) set the stage for the crash of
financial-market
instruments known as derivatives, by refusing to regulate them
as he had been
advised.
The resulting
financial
crisis, peaking in 2008, should have changed Yunus’s tune. After
all, the
catalysing event in 2007 was the rising default rate on a rash
of ‘subprime
mortgage’ loans given to low-income US borrowers. These are the
equivalent of
Grameen’s loans to very poor Bangladeshis, except that Yunus did
not go so far
as the US lenders in allowing them to be securitised with
overvalued real
estate.
Yunus has long
argued that
‘credit is a fundamental human right’, not just a privilege for
those with
access to bank accounts and formal employment. But reflect on
this matter and
you quickly realise how inappropriate it is to compare bank debt
– a liability
that can be crushing to so many who do not survive the rigours
of neoliberal
markets - with crucial political and civil liberties, health
care, water,
nutrition, education, environment, housing and the other rights
guaranteed in
the constitutions of countries around the world.
Microcredit
mantras
By
early 2009, as
the financial crisis tightened its grip on the world, Yunus had
apparently
backed away from his long-held posture. At that time, he told
India’s MicroFinance
Focus magazine the very
opposite of what he had been saying: ‘If somebody wants to do
microcredit –
fine. I wouldn’t say this
is something
everybody should have’ (emphasis added). Indeed,
the predatory way
that credit was introduced to vulnerable US communities in
recent years means
that Yunus must now distinguish his Grameen Bank’s strategy of
‘real’
microcredit from microcredit ‘which has a different motivation’.
As Yunus told MicroFinance
Focus, ‘Whenever something
gets popular, there are people who take advantage of that and
misuse it.’
To be sure,
Yunus also
unveiled a more radical edge in that interview, interpreting the
crisis in the
following terms. ‘The root causes are the wrong structure, the
capitalism
structure that we have,’ he said. ‘We have to redesign the
structure we are operating
in. Wrong, unsustainable lifestyle.’ Fair enough. But in the
next breath, Yunus
was back to neoliberalism, arguing that state microfinance
regulation ‘should
be promotional, a cheerleader.’
For Yunus,
regulators are
apparently anathema, especially if they clamp down on what are,
quite frankly,
high-risk banking practices, such as hiding bad debts. As the Wall Street Journal
conceded in late
2001, a fifth of the Grameen Bank’s loans were more than a year
past their due
date: ‘Grameen would be showing steep losses if the bank
followed the
accounting practices recommended by institutions that help
finance microlenders
through low-interest loans and private investments.’ A typical
financial
sleight-of-hand resorted to by Grameen is to reschedule
short-term loans that
are unpaid after as long as two years; thus, instead of writing
them off, it
lets borrowers accumulate interest through new loans simply to
keep alive the
fiction of repayments on the old loans. Not even extreme
pressure techniques –
such as removing tin roofs from delinquent women’s houses,
according to the Journal
report – improved repayment rates
in the most crucial areas, where Grameen had earlier won its
global reputation
among neoliberals who consider credit and entrepreneurship as
central
prerequisites for development.
By the early
2000s, even the
huckster-rich microfinance industry had felt betrayed by Yunus’
tricks.
‘Grameen Bank had been at best lax, and more likely at worst,
deceptive in
reporting its financial performance,’ wrote leading microfinance
promoter J D
Von Pischke of the World Bank in reaction to the Journal’s
revelations. ‘Most of us in the trade probably had
long suspected that something was fishy.’ Agreed Ross Croulet of
the African
Development Bank, ‘I myself have been suspicious for a long time
about the true
situation of Grameen so often disguised by Dr Yunus’s global
stellar status.’
Several years
earlier, Yunus
was weaned off the bulk of his international donor support,
reportedly USD 5
million a year, which until then had reduced the interest rate
he needed to
charge borrowers and still make a profit. Grameen had allegedly
become
‘sustainable’ and self-financing, with costs to be fully borne
by borrowers.
To his credit,
Yunus had also
battled backward patriarchal and religious attitudes in
Bangladesh, and his
hard work extended credit to millions of people. Today there are
around 20,000
Grameen staffers servicing 6.6 million borrowers in 45,000
Bangladeshi
villages, lending an average of USD 160 per borrower (about USD
100
million/month in new credits), without collateral, an impressive
accomplishment
by any standards. The secret to such high turnover was that poor
women were
typically arranged in groups of five: two got the first tranche
of credit,
leaving the other three as ‘chasers’ to pressure repayment, so
that they could
in turn get the next loans.
At a time of
new competitors,
adverse weather conditions (especially the 1998 floods) and a
backlash by
borrowers who used the collective power of non-payment, Grameen
imposed
dramatic increases in the price of repaying loans. That Grameen
was gaining
leverage over women – instead of giving them economic liberation
– is a
familiar accusation. In 1995, New
Internationalist magazine probed Yunus about the
16 ‘resolutions’
he required his borrowers to accept, including ‘smaller
families’. When New
Internationalist suggested this
‘smacked of population control’, Yunus replied, ‘No, it is very
easy to
convince people to have fewer children. Now that the women are
earners, having
more children means losing money.’ The long history of forced
sterilisation in
the Third World is often justified in such narrow economic
terms.
In the same
spirit of
commodifying everything, Yunus set up a relationship with the
biotechnology giant
Monsanto to promote biotech and agrochemical products in 1998,
which, New
Internationalist reported, ‘was
cancelled due to public pressure.’ As Sarah Blackstock reported
in the same
magazine the following year: ‘Away from their homes, husbands
and the NGOs that
disburse credit to them, the women feel safe to say the
unmentionable in
Bangladesh – microcredit isn’t all it’s cracked up to be … What
has really sold
microcredit is Yunus’s seductive oratorical skill.’ But that
skill, Blackstock
explains, allows Yunus and leading imitators
to ascribe
poverty to a lack of inspiration and depoliticise it by refusing
to look at its
causes. Microcredit propagators are always the first to advocate
that poor
people need to be able to help themselves. The kind of
microcredit they promote
isn’t really about gaining control, but ensuring the key
beneficiaries of
global capitalism aren’t forced to take any responsibility for
poverty.
The
big lie
Microfinance
gimmickry
has done huge damage in countries across the globe. In South
Africa
in 1998, for instance, when the emerging-markets crisis raised
interest rates
across the developing world, an increase of seven percent,
imposed over two
weeks as the local currency crashed, drove many South African
borrowers and
their microlenders into bankruptcy. Ugandan political economist
Dani Nabudere
has also rebutted ‘the argument which holds that the rural poor
need credit
which will enable them to improve their productivity and
modernise production.’
For Nabudere, this ‘has to be repudiated for what it is – a big
lie.’
Inside even the
most
neoliberal financing agency (and Grameen sponsor), the World
Bank, these
lessons were by obvious by the early 1990s. Sababathy
Thillairajah, an
economist, had reviewed the Bank’s African peasant credit
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 World Bank with ideological support. When
I met Yunus in
Johannesburg, not long before South Africa’s April 1994
liberation, he vowed he
wouldn’t take Bank funds. Yet in August 1995, Yunus endorsed the
Bank’s USD 200
million global line of credit aimed at microfinance for poor
women. However,
according to ODI’s Bateman, the World Bank ‘insisted on a few
changes: the mantra
of ‘full cost recovery’, the hard-line belief that the poor must
pay the full
costs of any program ostensibly
designed to help them, and the key methodology is to impose high
interest rates
and to reward employees as Wall Street-style motivation.’
Bateman also
remarks on the
damage caused to Bangladesh itself by subscribing to the
microcredit gospel:
‘Bangladesh was left behind by neighbouring Asian countries, who
all choose to
deploy a radically different ‘development-driven’ local
financial model: Taiwan,
South Korea, Thailand, China, Vietnam.’ And the countries that
were more
reliant on neoliberal microfinance soon hit, Bateman insists,
‘saturation, with
the result of over-indebtedness, ‘microcredit bubbles’, and
small business
collapse.’ Just as dangerous, Yunus’s model actually ‘destroys
social capital
and solidarity,’ says Bateman. It is used up ‘when repayment is
prioritised
over development. No technical support is provided, threats are
used, assets
are seized. And governments use microfinance to cut public
spending on the poor
and women, who are left to access expensive services from the
private sector.’
The Yunus phenomenon is, in short, a more pernicious
contribution to capitalism
than ordinary loan-sharking, because it has been bestowed with
such legitimacy.
Bateman records
extremely high
microfinance interest rates ‘everywhere’. In Bangladesh, for
instance, these
are around 30 to 40 percent; in Mexico, they go up as high as 80
percent. No
wonder that in the most recent formal academic review of
microfinance, by
economist Dean Karlan of Yale University, ‘There might be little
pockets here
and there of people who are made better off, but the average
effect is weak, if
not nonexistent.’
As the Wall Street Journal
put it in 2001, ‘To
many, Grameen proves that capitalism can work for the poor as
well as the
rich.’ And yet the record should prove otherwise, just as the
subprime
financial meltdown has shown the mirage of finance during
periods of capitalist
crisis.
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Reputation and reality
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The latest
figures suggest that nearly 70 million people (out of
150 million total) in Bangladesh are still living below
the poverty line; of those, about 30 million are
considered to live in chronic poverty. Grameen Bank now
has around seven million borrowers in Bangladesh, 97
percent of whom are women. Yet after decades of
poverty-alleviation programmes what effect has Grameen
had in its home country? The microcredit initiatives
inspired by Mohammad Yunus’s vision and implemented by
Grameen Bank and other NGOs have not gone nearly as well
in Bangladesh as has been publicised worldwide.
To start with, the terms of microcredit in Bangladesh
are inflexible and generally far too restrictive – by
way of weekly repayment and savings commitments – to
allow the borrowers to utilise the newfound credit
freely. After all, with a first repayment scheduled for
a week after the credit is given, what are the options
but petty trading? The effective interest rate stands at
30 to 40 percent, while some suggest it goes upwards of
60 percent in certain situations. Defaulters, therefore,
are on the rise, with many being compelled to take out
new loans from other sources at even higher interest
rates.
Worryingly, in the families of some 82 percent of female
borrowers, exchange of dowry has increased since their
enrolment with Grameen Bank – it seems that
micro-borrowing is seen as enabling the families to pay
more dowry than otherwise.
Only five to 10 percent of Grameen borrowers have showed
improvement of their quality of life with the help of
microcredit, and those who have done will tend to have
other sources of income as well. Fully half of the
borrowers who could not improve were able to retain
their positions by taking out loans from multiple
sources; about 45 percent could not do so at all, and
their position deteriorated. Many are thus forced to
flee the village and try to find work in an urban area
or abroad. It has now become clear that most Grameen
borrowers spend their newfound credit for their daily
livelihood expenditure, rather than on income-generating
initiatives.
The main difference between microcredit lenders and
feudal moneylenders was that the latter needed
collateral. It is true that microcredit has created
money flows in rural areas, but also that it created a
process through which small-scale landowners can quickly
become landless – if one cannot pay back the money at
high interest rates, many are forced to sell their land.
In cases of failure of timely repayment, instances of
seizure by Grameen of tin roofs, pots and pans, and
other household goods do take place – amounting to
implicit collateral.
This does not mean that credit is not useful to the poor
and powerless. The problem lies in the approach taken.
Poverty is conceptualised extremely narrowly, only in
terms of cash income; when in fact it has to do with all
aspects of life, involving both basic material needs
such as food, clothing and housing; and basic human
needs such as human dignity and rights, education,
health and equity. It is true that the rural economy
today has received some momentum from microcredit. But
the questions remain: Why has this link failed to make
any significant impact on poverty? Why, despite the
purported ‘success’ of microcredit, do people in
distress keep migrating to urban centres? Why does a
famine-like situation persists in large parts of
Bangladesh, particularly in the north? Moreover, why
does the number of people under the poverty line keep
rising – alongside the rising microcredit?
In fact, poverty has its roots and causes, and expanding
the credit net without addressing these will never
improve any poverty situation. Experience shows that if
countries such as Bangladesh rely heavily on microcredit
for alleviating poverty, poverty will remain – to keep
the microcredit venture alive. Grameen Bank’s ‘wonderful
story’ of prosperity, solidarity and empowerment has
only one problem: it never happened.
~ Khorshed Alam
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~ Patrick Bond is a senior
professor at
the University of KwaZulu-Natal School of Development Studies
Centre for Civil
Society in Durban, South Africa. Khorshed Alam
is executive director of the Alternative Movement for Resources
and Freedom
Society, based in Dhaka.
