Yunis and micro-credit myths

"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." once declared Mohammad Yunus of the Grameen Bank, the microfinance institution he set up and Nobel Peace Prize winner. Grameen’s origins began 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 explained: "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." Today there are around 20,000 Grameen staffers servicing 6.6 million borrowers in 45,000 Bangladeshi villages, lending an average of $160 per borrower , 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.

According to Milford Bateman, a senior research fellow at the Overseas Development Institute who is one of the world’s experts on Grameen and microcredit says of Jobra? "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!" And 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." Bateman accuses Yunus’s model of actually destroying social capital and solidarity. 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.

Sarah Blackstock of New Internationalist reported "...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..."

Contrary to the 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." This 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. Governments across the world, especially in the United States, were pulling back from regulating financial markets. 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."
Yet in August 1995, Yunus endorsed the World Bank’s $200 million global line of credit aimed at microfinance for poor women. However the World Bank insisted on ‘full cost recovery’, 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 Wall Street-style.

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 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. The main difference between microcredit lenders and 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.
"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."
Ross Croulet of the African Development Bank, agreed "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."
Yunus has been weaned off the bulk of his international donor support, reportedly $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. 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.

The Wall Street Journal put it in 2001, "To many, Grameen proves that capitalism can work for the poor as well as the rich."

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. 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 whole premise that capitalism will save the world shows little understanding of the system. As Binay Sankar writes in an essay on Yunis "... poverty still exists and escalates among members of the producing class...because riches exist, not in the form of social wealth at the disposal of humanity, but in the form of the private property of the superfluous vampire-like parasite class that sucks the creative impulses of the producing class. Poverty is due to private property, not the lack of riches. Private property and poverty are twins born of the division of society into classes. To sail society beyond poverty you have to end private property and the wage-slavery that nowadays creates all capitalist rent, interest, (no different Grameen or Urban), industrial and commercial profits, philanthropy, taxes and subsidies."

Facts and quotes from here