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Microfinance: Shunning Down??

January 20, 2011

Courtesy: The New York Times

The world is not perfect! Likewise, no development strategy is totally perfect either.  A phenomenon that took the development world by storm was microcredit. Coined in 1983 by Noble Peace Prize winner, Dr. Muhammad Yunus, microcredit was aimed at the poor and disadvantaged in society (then specifically in Bangladesh). Today, almost 3 decades later, it seems like the very success of microcredit has attracted bad apples!

Microcredit program are facing adverse criticism and opposition from various quarters. The criticisms are suggesting that microcredit has no role in poverty alleviation and development, but rather serves as a tool to exploit the poor.  Not very long ago, a forecast on the New York Times about the gloomy days of microcredit in India was published. David Roodman, in his blog for Center for Global Development, mentions that the number of microloans in India alone has shot from 1 million to 26.7 million since 2003. Echoing information uncovered by the Times investigation, Roodman claimed this boom is largely due to microlenders giving loans to women who can’t pay back previous microloans. Illustrating the crisis of microfinance in Andhra Pradesh, India, the articles (here and here) present a dire situation of microcredit.

Nobel laureate Yunus in Bangladesh defamation case

Most recently, a documentary published by Danish Journalist Tom Heinemann Fanget i mikrogjeld (Caught in Microdebt) reveals the same and also questions the pioneer of Grameen Bank for corruption. Yunus is accused of  funneling money to Grameen Kalyan, a subsidiary that finances his bank, as well as his phone company GrameenPhone—which is co-owned by a Norwegian company, Telenor. Apparently, Norway has provided $100 million in aid to the Bangladeshi-based Grameen Bank—and had a deal with the bank not to use money to finance other projects in 1997. As a result, Bangladeshi government has announced the formation of a committee to investigate the charges raised by the documentary—the use of Norwegian money, and the interest rates. However, many in Bangladesh suspect that this is essentially some sort of personal vendetta against Yunus by a prime minister who is fearful of him entering politics (as he briefly proposed to do when the country was under military oversight).

Yunus in his recent opinion piece in The New York Times mentions that he never imagined that one day microcredit would give rise to its own breed of loan sharks. He highlights two distinct reasons for the crisis of microfinance today:

-Commercialization has been a terrible wrong turn for microfinance. Commericalized microfinance is not really microfinance. It is usury, profiteering off the poor.

-Microcreditors should charge no more than 15% above their own cost of funds.

The argument Yunus makes about the interest rate is lopsided as it does not take into account equality and justness in lending.  As David Roodman in his blog points out, “The amount of credit matters too, as do the quality of disclosure about program rules, the degree of competition and multiple lending. Even debt at 0% can trap the poor.”

Even though the recent development of the Grameen Bank and the entire Dr. Yunus episode has generated much dispute, it cannot be denied that the creation of microcredit has had an enormous positive impact on Bangladesh and the world. In the process of gradual evolution, everything moves in the logic of induction and deduction. Microcredit is also not out of this phenomenon. After all nothing is perfect!

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