Microfinance: Not quite a silver bullet, but definitely a silver lining. By Justin Winters.

By Justin Winters.

In the 1990s, the new idea in the global fight against poverty was the provision of microfinance. Small, manageable loans provided much needed capital for the impoverished to take control of their own lives. This was going to be a self-sustaining partnership for creating wealth among the impoverished in a true grass-roots approach. Lessons learnt in international development told us that lifting 1.4 billion people (living on less than US$1.25/day) out of extreme poverty needs this ‘bottom-up’ approach. Traditional banks were unwilling to make such low value loans due to a perceived high risk of default or an estimated low return on investment. Yet Microfinance Institutes (MFIs) have made a successful and sustainable business model out of exactly these kind of loans.

The Grameen Bank (translates to “Village Bank”), founded in 1983 in Bangladesh, is a notable early example which received critical acclaim worldwide. From the earliest days they chose to primarily loan to women. Women are disproportionately impoverished, yet are more likely than men to devote their earnings to their families. As recognised by most international aid organisations, the education and empowerment of women is one of the greatest tools for improving health, social advancement and economic growth.  The Grameen Bank enlisted these women as partners, and encouraged them to take control of their own lives as well as the direction of the bank itself. “It is very important to have the women owners have the final say in the management of their bank,” said Muhammad Yunus, founder of the Grameen Bank “It sends a very important message — they are not simply passive recipients of bank loans, they have an important voice in shaping the policies.” True to this ethos, nine of the twelve managing directors of Grameen Bank are women, and many of them were themselves originally recipients of loans.

The late 20th century was a difficult time for Bangladesh, which was still impoverished and in recovery from their declaration of independence from Pakistan in 1971. The birth rate was 6 children per woman, and female literacy was as low as 3% in some areas. The concept of loaning to women had vocal opposition. There were vociferous objections thrown around by fundamentalists and conservative clergy that the financial empowerment of women was dangerous and impious. Women seeking financial support were targeted and threatened with physical violence, or eternal damnation.

Despite the vocal resistance of the conservatives and fundamentalists, Bangladesh demonstrated the impact of investing in women. They achieved such progress that now half of the high school students are female, and the birth rate has dropped to 2.2 children per woman. Incorporating women into the mainstream of society also seems to have had a soothing effect on radicalism within the country.

In 2006, Yunus was awarded the Nobel Peace Prize for his “efforts through microcredit to create economic and social development from below”. Grameen Bank grew and evolved over the years, incorporating innovative strategies such as providing loans to community groups. Grameen entered the telecom and internet industries, and became one of the largest service providers to Bangladesh.

Around this time, microfinance began losing its lustre as a silver bullet for poverty reduction. A temptation with providing loans was to push the boundaries, to give more to those who could repay less. With the advent of microcredit, along came the concept of microdebt. The impoverished were just as susceptible to debt traps, debt cycles, confusing terms and conditions, and even more susceptible to personal or family sickness that could impact on the ability to repay a loan. A large number of loans were for investment in agricultural tools, yet poor crop yields or natural disasters destroyed the livelihood of millions of families. Unlike in Australia, there was no national insurance scheme to come to the rescue. The commercialisation and growth of the microcredit market gave rise to new predatory practices. The line between profit and profiteering was being blurred. Sub-Saharan Africa, South East Asia and South America all reported sky-rocketing interest rates for microfinance loans (for example, up to 200% in the Philippines). Mass defaults on loans sparked panic among lending organisations. In India, crippling debt led many farmers to suicide.

Failure to service personal debt became a new reason people had to fear physical harassment. Microfinance was under threat from the greedy, and the poor were suffering as a result. Yunus said “We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks… Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people.” Despite this comment, other MFIs around the world began joining in on this previously untapped market. The approach of the largest MFI in India was criticised by Yunus, who said, “microcredit is not about exciting people to make money off the poor. That’s what you’re doing. That’s the wrong message completely”.

Even some success stories of microfinance were beginning to lose their shine. Microfinance was lifting people out of extreme poverty, only to leave them in poverty. An arbitrary line was drawn under US$1.25 /day as the marker of extreme poverty – yet 80% of the world’s population still lives on US$10/day or less.

Allegations of embezzlement and immoral lending pursued Grameen Bank and Yunus during the early 2000s, fuelled by political ill-well and powerful vested interests in the Bangladeshi media. Despite being cleared of all allegations in 2010, an air of uncertainty and mistrust persists. Political pressure continued, and in 2011 Yunus was removed from his position as managing director of Grameen. A government panel concluded that the women on the board were ill-equipped to oversee a major financial institution. The Bangladeshi Government went on to enforce legislative changes, which effectively permits them to choose the Bank’s managing director. These radical, politically motivated changes fly in the face of the spirit of microfinance and empowering women.

The women elected to the board may not have had advanced education, but they are intelligent and they have intimate experience with poverty. Their collective journey is a prime example of the returns from investing in women and a unique example of women occupying the highest decision making positions on a financial board. Over 8.4 million other women entrusted them with their meagre savings, amassing $1.4 billion between them. This money finances all of the bank’s operations and, crucially, was independent from the often corrupt and self-serving Government.

Despite the lack of formal education, the Grameen board has a proven record of managing complexity, such as interest rate fluctuations in loans. Economic and microfinance experts around the world have found the board’s decisions to be in keeping with the most up-to-date research on microfinance.

There is not a single one-size-fits-all microfinance solution to alleviate extreme poverty. Poverty is complex and multifactorial in origin, and requires diverse strategies to achieve progress. Small loans for tiny businesses won’t miraculously lift nations of poverty and shift them towards sustainable prosperity. The Grameen Bank has undeniably been a force for good in Bangladesh. People should not lose faith in microfinance, but acknowledge that the successes of Grameen Bank extends beyond the simple loaning of money.

Image credit: Isak55 available: http://www.shutterstock.com/gallery-730744p1.html?pl=27795-42119 under a Creative Commons Attribution 2.0. Full terms at http://creativecommons.org/licenses/by-nc-sa/2.0/

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