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Microcredit: Boom, Bust, and Beyond

5 May 2011 No Comment

by Mary Liepold, Editor in Chief

In the biblical story of the loaves and fishes, poor people put the little they have together and everyone has enough. I have heard contemporary versions of this miracle story again and again, from women in all parts of the world.

Mosammat Taslima Begum (left), representing Grameen Bank, and M. Yunus pose with their Nobel Peace Prize Medals and Diplomas. © The Norwegian Nobel Institute 2006 Photo: Ken Opprann

It starts with a circle. In every culture, Necessity, that well-known mother of invention, has combined with Mother Wit and a few neighbors and friends to birth informal, egalitarian local systems for saving and sharing, held together by bonds of social trust. Common storehouses, rotating funds that pool savings for the benefit of each member in turn, and cooperative village banks have probably all been in use somewhere in the world since prehistory.

In the Kirundi language used in Burundi and some neighboring nations, these practices are called ikibiri, working together, or literally, “big skin.” Ghana has its susus. Europe had the medieval guilds. Indonesians set up People’s Credit Banks in 1895. In India, in 1973, the Self-Employed Women’s Association established its own Cooperative Bank. Then, in 1976, along came Mohammed Yunus and the original Grameen Bank. Yunus freely admits that he was inspired by women’s cooperative saving and lending circles. He started out small, with a bit of his own money. As the Bank grew, he kept the solidarity groups (circles) and many other key features of his models.

No one can borrow from Grameen as an individual, or without contributing first. (In Bangladesh today the required deposit is 100 tuka, around $1.44.) No one can borrow without agreeing to save. And most important, Yunus says, the bank is owned by the investors―that is, by poor women, since 97% of Grameen borrowers are women.

The innovation, the chief difference from traditional models, was new, outside money. Yunus could see that self-help models, while far superior to the village loan sharks who often charged more than 100% interest, were not moving families beyond subsistence. In most cases that would require the kind of loans that were only available from commercial banks. And commercial banks didn’t lend to clients who walked in barefoot and without collateral. Yunus did. And the loans were repaid.

Microcredit Makes It Big

The idea spread, firing imaginations and attracting thousands of outside investors. In 1997, when RESULTS Educational Fund hosted the first Microcredit Summit in Washington, DC, 3,000 people from 137 countries set a goal of reaching 100 million of the world’s poorest people, particularly women, by 2006―and arguably, exceeded it. The United Nations declared 2005 the International Year of Microcredit, and awarded Yunus and Grameen the Nobel Peace Prize in 2006. Liberals and conservatives seemed to agree that microcredit, and the microenterprise it made possible, were the golden road to democratic capitalism for all. Organizations like KIVA even brought it back to the individual level. (I’m a microcredit lender; maybe you are too.)

Now it’s 2011, and Yunus is out of a job. In mid-April, the Bangladesh Supreme Court rejected his appeal of the decision to terminate his employment. Sheikh Hasina, Prime Minister of Bangladesh, claims that the nation’s mandatory retirement rule left her no choice. It’s true Yunus is 70, but members of the international movement that supports him (including former Irish President Mary Robinson and former World Bank President James Wolfensohn) are sure that’s not the real reason for his dismissal.

Hasina has made some strong statements, including this one: “There has been no improvement in the lifestyle of the poor so far. They were just used as pawns to get more aid.”

Given the built-in rivalry between governments and NGOS for the international aid she references, it’s fair to assume she’d like more of it directly under her own control. Her government owned 60% of Grameen―a controlling interest―until recently, and has now downsized to 25%. What’s more, Yunus came close to challenging her turf when he floated the idea of running for high office after his Nobel award.

Muhammad Yunus and loan holders of Grameen Bank. © Grameen Bank Audio Visual Unit, 2006

There were other reasons for Yunus’ fall from grace. A Danish documentary released in late 2010 points to several questionable practices. It’s fairly clear he made insider deals that benefited people close to him without consulting those presumed owners, the small investors. And although many surely have been helped, it’s easy to find examples of borrowers who have been crushed, even driven to suicide, by the high interest rates on their borrowing. Fortunately, microcredit is older than Yunus and it’s bigger than him too.

Back in Proportion?

Beyond bust and bailout in the banking industry overall, microcredit is still going strong around the world, even in wealthy nations. But beyond the facts of this particular case, there’s a radical critique that applies to microcredit and most other existing efforts to assist the poor. It begins with the existence of structural violence, in Johan Galtung’s now widespread term. Globalization (the pursuit of “borderless markets”), and “structural adjustment” (debt servicing) have made the rich richer and the very poor poorer across most of the world during recent decades.

According to the Guardian’s Madeleine Bunting, the microcredit solution “sidestepped the structural economic and political causes for people’s poverty in the first place, putting all the emphasis on individual effort and resourcefulness to break out―an impossible expectation that has led to much further suffering.”

What’s happening to some borrowers reminds me of the housing bubble and the bank collapse in the US. Here, low-income people were encouraged to take on debt beyond their ability to pay, with high-risk housing loans and high-interest credit cards. In both cases, bankers decided there was money to be made from people who had formerly been outside their purview. People who benefit from the system love to praise winners for their individual initiative and blame losers for their lack. But competition always produces more losers than winners. And both wealth and poverty are conditioned by increasingly global systems that rank profit above mutual assistance. With a few exceptions, the world’s fastest growing economies are not producing commensurate gains in human development, as the Human Development Index shows. (The 2010 Index, The Real Wealth of Nations, shares its name with Peace X Peace Advisory Council member Riane Eisler’s wonderful book by that title.)

Maria Otero. From geneva.usmission.gov

Overall, have the poor benefited from microcredit? María Otero, former President of Acción International, one of the world’s leading microcredit institutions, and current Under Secretary of State for Global Affairs in the Obama administration, said in 2009: “The conditions that spread poverty and social injustice are embedded in the threads that weave our modern society, and these threads are enlarged and multiplied with the plight of political and economic conflicts.” (Emphasis mine.)

In a world of structural violence and embedded injustice, there are no magical interventions. The backlash against microcredit is proportional to the unrealistic expectations it once inspired. Lending will continue as one element in a wide array of needed interventions, as part of the long-term, global pursuit of peace with justice.

It Takes More than Money

Peace X Peace member Marie Chantal Nimugire worked in microfinance for three and a half years at Amasezerano Community Banking in Kigali, Rwanda. She believes that microfinance work has two aspects―financial and social―and that the amount of social service required to do it right is one reason for the high interest rates. She also believes that not everyone is a candidate for microcredit.

“To lend small amounts to poor people is a good idea, but in lending money the microfinance must ensure that the borrower has an activity to finance which will generate income. If the microfinance lends money to the inactive poor, this one will use the money for his or her primary needs, such as food, medical expenses, clothes etc. Even for the industrious, their small works aren’t secure, because there are many reasons they can fail to pay. For instance, a woman can be doing well with her small business and once her child gets sick, she will use the money for business to meet medical expenses.”

Ingrid Munro, the daughter of Swedish missionaries, established Jamii Bora (Good Families) in Kenya in 1999. The impetus and the name both came from a group of 50 families who approached Ingrid after she had formally retired. This rapidly growing nonprofit is a microcredit lender, but it puts social work first and finance second, in order to avoid the kind of bind Marie Chantal describes. It provides health care with no upper limit for a fee of 30 shillings week (36 cents US). Its newest project is eco-friendly housing for 20,000 families. It seeks out the poorest of the poor: beggars, thieves, and prostitutes, and a solidarity group of five is the basic unit. So far, so good.

A bank like Grameen has to go to the people before and after it lends, “to follow the growth of the activities and still be beside the clients and advise them,” Marie Chantal observes. “The microfinance has to give small amounts and increase step by step, and that means that the incomes are not much!” It may in fact mean subsistence for the current generation. The hope is that children who would not otherwise attend school are able to go, so the second generation moves beyond daily bread.

A study of the Tamil Nadu Women’s Development Program in South India by Nathalie Holvoet, published in 2004 in Journal of Microfinance (now ESR Review), found that the factor measurably affecting attendance at school, especially for girls, was the mothers’ group membership, which “extended the female space.”

The size and number of loans didn’t matter, but the group support did. I think it’s all about that circle! What do YOU think?

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