Liam Black on the big issues around Grameen & Microfinance
1. Does micro-finance/ micro-credit work?
Development experts argue about the efficacy of micro-credit (ie small loans) as a route out of poverty. One indisputable fact is that after 30 years of microfinance – offered by Grameen and other large suppliers such as BRAC – Bangladesh remains pretty much as poor as it was in relative and absolute terms at independence in 1971. There has been no knock out micro-financed blow against poverty.
There is surprisingly little independent research into Grameen’s work and its real impacts on the lives of poor people in Bangladesh. In 1998 the World Bank reported that 5% of Grameen Bank borrowers moved out of poverty each year. In 2003, Shahid Khondkar again on behalf of the World Bank concluded: “The results of this study strongly support the view that microcredit not only affects the welfare of participants but also the aggregate welfare at village level”. Yunus claims – based upon his own internal survey that “56% of [Grameen’s] borrower families have crossed the poverty line by 2005, on the basis of ten indicators set by Grameen Bank to track impact of its programme”.
Few commentators approach this subject without an ideological axe to grind, but most critics of micro-finance and Grameen – whether from the left or the right – concede that the movement has undoubtedly done a great thing in bringing financial services to poor people and offering an alternative to unscrupulous loan sharks and, by focusing on women, may have contributed to building up their position within society.
But they challenge the overall impact such moves have had on ending poverty. Some critics have questioned Grameen’s claims about the high level – 98% – of repayment and say this is because of clever accounting and rolling over loans to massage the figures. A detailed Wall Street Journal investigation in 2001 made this claim. This is rejected by Grameen.
The New Yorker magazine carried out an extensive investigation into microfinance in 2006:
“Hyperbole distorts the debate on both sides. Yunus speaks eloquently of eradicating poverty, but some argue that microfinance burdens the very poor with debt. Since relatively few rigorous studies on the impact on microfinance have been completed, ideology tends to dominate”.
New York University’s Professor Jonathan Morduch is a long time researcher in this field who says that there is clear evidence that microfinance can help the very poor but warns that credit alone is not a panacea. It no doubt helps many individuals but loans to the poor have yet to demonstrate an impact on aggregate poverty levels. Quoted in the New Yorker, Professor Morduch said that: “The boldest claim for microfinance – that it can eliminate a large part of world poverty –outpaces, by a long distance, the evidence accumulated to date”.
2. Profit vs Not For Profit
At the Clinton Global Initiative in New York in September 2010, Yunus and Vikram Akula went head to head in a debate entitled: Profiting from the Poor? A Discussion on Microfinance IPOs. Akula is a prominent and multi award winning social entrepreneur and something of a protégé of Yunus. He is the CEO and founder of SKS an Indian based microfinance institution (MFI) which has experienced rapid growth and recently went to the capital markets to raise millions of dollars in capital to fund growth. Started as a “non-profit” in 1998, SKS is now a private business and Akula is likely to become a very wealthy man.
Akula’s argument is that, whilst honouring the amazing achievements of Grameen, the scale of the challenge of world poverty means that the poor will be waiting forever if the Grameen model of growth – based upon the slow accumulation of poor peoples’ savings and institutional banking reform across the world – is followed. The only way to grow big fast is to access capital from the markets, claims Akula. He believes too that the rigour of the markets will drive out inefficiencies and drive down interest rates.
Yunus counters that he is not against making profits, it’s what happens to those profits that is the issue. In Grameen they go to borrowers and to build the organisation’s reach and capabilities.
He says that whatever his good intentions now, Akula’s social goals will be inevitably trumped by the profit driven needs of investors. He would like the term ‘microfinance’ to be only used to describe his model and that Akula and others (like Pierre Omidyar the eBay founder and chairman and evangelist of the commercialisation of microfinance) should find another name for what they do.
The debate will run and run. What is clear is that the microfinance market globally will continue to be a mix of both models for some time to come. The crunch will come presumably when one of the market financed MFI’s fails. “Someday,” microfinance expert Jonathan Lewis observed, “people will have to cross a Rubicon because there will be events like foreclosures. Will Omidyar, when they are waiting for a liquidity event, say to thirty seven thousand women ‘Sorry, we’re closing down and you’re going to lose your loans-so go back to feeding your kids twice a day’?”