The banker and the beggars

[nairiporter.livejournal.com]

Muhammad Yunus, the chairman of the famous Grameen bank in Bangladesh and guru of micro crediting has been fired. His firing is emblematic in that it raises a more fundamental question about the legitimacy of the practice of micro crediting overall.

He is an interesting person - for some he is a well-doer who helps the poor, for others his micro crediting system only increases inequality in the world. He has been known as "the banker of the poor", and in 2006 he was awarded a Nobel Peace Prize.

For a long time Yunus, who is an economist, used to be CEO of the Grameen bank, which is specialised with giving micro credits. But last week the 70 year old banker was fired with the excuse that his re-election in 2000 had not been coordinated with the Central Bank of Bangladesh, and besides he has passed the age of 60 years. The decision belongs to the Central Bank which can influence the dealings of Grameen because it owns 25% of its shares. A few days later the Supreme Court rejected his appeal as groundless. The decision has angered a lot of people working in the bank and they are planning to consult with lawyers and not give up so easily.

Some regard Yunus a national hero, and they are concerned that his firing would undermine the image of the country. Even the US ambassador in Dhaka recommended that the government should approach Yunus with the due respect and said that he was "deeply concerned" with his firing.

The attack on Yunus definitely looks to be politically motivated. It comes after months of government pressure for him to resign. The feud between the banker and the prime-minister Sheikh Hasina started 4 years ago and became a struggle for power between the government and the Grameen bank. The trouble for the famous economist began in 2007 when he founded a new party and said that it would be a real and effective alternative to the status quo. This put Hasina against him, she was at the time under home arrest under orders from the interim government. On the 2009 elections Hasina returned to power and she immediately began her campaign against Yunus. Recently she accused him of behaving "as if the bank is his own property" and she said Grameen is "sucking out the blood of the poor".

Last month 50 people, famous for their social and charitable activities, including the former Irish president Mary Robinson, wrote an open letter in which they called the smearing of Yunus "a politically orchestrated campaign". In December last year there was an investigation against him on charges of misappropriation of humanitarian aid, which had been sent by the Norwegian government in the 90's. And though the Norwegians completely freed him of any guilt, the damage was already done and the stain on his name remained.

For 30 years the inventor of micro financing and his bank Grameen has been serving more than 8 million people in Bangladesh (most of them women) and giving small credits to the poor. This is a practice which has spread across the whole Third World. Usually it is people who the other banks would ignore and strike off from their list of clients that are using this option. The money Grameen gives out is enough for starting a small business which could allow the poor to make ends meet, like growing vegetables or buying a cow.

The stated purpose of Yunus is to uproot poverty on a global scale. He is led by his idea that misery is due to an flaw in the system, not due to the laziness of the poor, and he believes that even those living on 1 dollar a day are capable of starting a business through which they could serve the credit. The idea appeared to him as he was witnessing the extreme poverty in Bangladesh.

The interest is much higher than that of most traditional banks - it starts from 15% and could reach 40% and even 100%. But, unlike other banks, Grameen can give small amounts even to street beggars.

The firing of Yunus has re-ignited the debate "for" or "against" micro crediting again. The government in Dhaka is skillfully using the recent discontent with the low results from micro financing to additionally smear the banker. In The Time magazine, the famous Bangladeshi economist prof. Anu Muhammad calls the micro crediting model "a death-trap for the poor", which "reproduces poverty" instead of reducing it. Similar criticism can be heard for the micro financing institutions in Latin America, Africa and Asia.

The supporters of micro crediting are citing a report which says that the system has helped 10 million people in Bangladesh in the 1990-2008 period, and many families have increased their income above 1.25 dollars per day. But according to another statistic for the period 2006-2007, only 7% of those who used micro credits have brought their income above the poverty line, and 90% have remained at the same level.

The critics believe that the concept of micro financing has been discredited, citing the extremely high interest rates. More than half of those who took such credits are also taking credits from another bank in order to pay off the first one, and this way they are stuck in a vicious circle. Besides, it could take 10-20 years until the credit is finally paid off in full. The installments are usually required from week-1 after taking the credit, and this doesn't allow enough time for the client to develop whatever business they are starting. Many villagers complain of a too rude attitude from the debt collectors, including physical violence in some cases. In the Indian state Andhra Pradesh even several suicides were registered of people who were stuck in debt. Until 2010 about 250 financial institutions in the state had given out credits worth 1.65 billion dollars, but only a small part of that amount had been paid off. In India this sector, which amounts to 7 billion dollars, has provided micro crediting for 30 million households, and the average amount of the credit is 250 dollars. In an editorial in The Financial Times, it is stated that micro financing by itself may not drag people out of poverty, but it "helps cope with illness or other temporary shocks".

As he was leaving Grameen, Muhammad Yunus said that he is just hoping his successor could guarantee the future of the bank. But he expressed concern that the government will now try to put a marionette in charge. The position of the rulers is that the institution is solid enough to handle the rule of another chairman. But still, economists are following these events with great concern, because what is happening in Grameen could reflect on the stability of the micro financing industry worldwide.

Comments

[htpcl.livejournal.com]

At an interest rate of 40% and a loan whose first payment begins from first week, the idea of the good philanthropist who's helping the poor is starting to get a bit incomprehensible to me.

Whatever they say, "uprooting poverty on a global scale" is not the only motivation for the actions of this banker. Seems like a legal(ized) way of unscrupulous profiteering.

[nairiporter.livejournal.com]

You have a point with the first part. And yet I'm not going to be as quick as others have been to jump on the anti micro finance bandwagon though. A finance system relies on debt repayment, or there is no incentive to loan the money. The interest rates are not onerous (for the most part, and for such small amounts), so repayment should be achievable if the business it was loaned to is sound and the repayment rates set by the Grameen bank were reasonable. But the fact is, indeed in some cases people are being plunged further into debt rather than escaping from it. That’s always a risk when you take on debt, but if this is happening too much, then the poor will stay poor and the beneficiaries will be the vendors of business services, equipment and inventory whose stuff is bought with Grameen’s loans. There are 4 possible failures here. I think it’s unfair to criticise the Grameen Bank for insisting on recovering its loans - these are helping hands, not handouts, and the money will dry up if default rates grow.

1. Failure to properly assess the viability of the business or the entrepreneur’s talent. If someone is likely to default, don’t give them the rope with which to hang themselves!

2. Failure to properly educate people, first to figure out whether this is the right thing for them, secondly what the consequences and expectations attached to these loans are, and thirdly, maybe closer monitoring and business training over the term of the loan could be provided to reduce default rates organically.

3. When interest rates are truly too onerous. Reportedly they are in the region of 20%. That’s a remarkable growth rate to achieve.

4. Failure to set the right repayment schedule, demanding money back before it has had time to provide returns.

But what worries me a great deal more than the unhappy endings for loans (it has 100 million clients, aiming for half a billion loanees by 2020!), is this. The Grameen Bank, its employees, and even the Nobel Peace Prize winner, Mohammed Yunus, have gone to ground - journalists are met with total impasse and obscurity when they try talking to these people for their side of the story, finding out more about default rates, etc. I refuse to believe that anything that’s truly good for humanity and treating humans respect should have the slightest thing to hide - from the most boring memo, to the opinions of its staffers, to its accounts, etc. What needs to happen after this story is not a call to end micro finance, but a call for total openness and transparency and a reform of the micro finance system.

[ddstory.livejournal.com]

Of course microcredit has enormous potential as a tool for poverty alleviation. But the more this strategy moves into the development mainstream, the more urgent the need to think about its role in development initiatives and its limitations and to assess its historic successes. There's a significant risk in its often uncritical adoption. This risk is in the systematic failure of many microfinance institutions (MFIs) to engage the communities where they work in the process of designing and evaluating microcredit programs. Like in many other development programs, the voices of communities and individuals who are the supposed beneficiaries of microlending are very obviously absent from the projects which are supposed to determine their futures. What most people who address the issue fail to recognize is that the most crucial part is to start evaluating the impact of microcredit from the perspective of those who have the most to gain and lose. The recipients. Not from the perspective of bankers or even the markets.

[gunslnger.livejournal.com]

Maybe a better explanation will help your understanding.

http://www.kiva.org/about/microfinance

[htpcl.livejournal.com]

That's some huge read but it looks promising.

[mrsilence.livejournal.com]

If, upon first consideration, micro-credit loans sound like a great idea - until you hear the interest rate, at which point it sounds like exploitation, that's probably because it is, on both counts.

[ddstory.livejournal.com]

I think there are some good ideas in this way of financing the poor. Despite its flaws it has some advantages.

From one side, consider this. Imagine that you're a hobo who hasn't eaten for 20 days and you're barely able to stand up, no money to get clothes to look decently and apply for a job and start to make a living and be fit to work again... What does the interest matter if no one would ever give you this money and you're dead anyway?

Sure, the 7% who have achieved some kind of progress thanks to this doesn't sound like too much, but otherwise those people wouldn't have had any chance to do something with their lives at all, no chance to have a decent life without this opportunity.

So the question is fundamental. Do these people deserve a chance to make a normal life or not?

But surely, the system needs further adjustment because it does allow for profiteering at the back of gullible people with no education. Especially with those high interest rates. Which brings me to the next question. Should there be a regulation on the maximum interest rate, or the invisible hand of the market should be allowed to set this right on its own?

Personally I think there should be some legislation framework on this. You can't expect a guy from a village somewhere in the periphery of Bangladesh to have complete access to a myriad of companies, each of them offering various interest rates so he could easily take a pick and make the dream of libertarians about the free market come true. No, he'd probably have just one option available: take it or leave it. This is not the US, we're talking about the Third World.

[anfalicious.livejournal.com]

Should there be a regulation on the maximum interest rate, or the invisible hand of the market should be allowed to set this right on its own?

Bans on Usury go right back to biblical times, for good reason.

[mrsilence.livejournal.com]

Absolutely I can get on board with all of that, excepting that in a situation where you are faced with starvation and are being offered a loan that will allow you to get through a few more days, the only realistic choice is to take it, regardless of what it means for next week.

Sure you'll be in even more dire financial straits by then, but at least you'll be alive.

[mijopo.livejournal.com]

Yes, I think this is roughly right. As I noted below, any microcredit system will have to have high interest rates to be economically viable, but that doesn't mean that there's only one way to implement, i.e., with complete blind faith in the free market. A microcredit system might realize the objective of serving people neglected by the traditional banking system while avoiding the extremes of unfair profiteering and implement basic constraints on how these loans are distributed. We don't close banks after banking crises, we reform them, we should be just as motivated to distinguish baby from bath water in this situation.

[gunslnger.livejournal.com]

Maybe a better explanation will help your understanding.

http://www.kiva.org/about/microfinance

[htpcl.livejournal.com]

Redundancy is redundantly redundant.

[ddstory.livejournal.com]

Why don't you summarize it for the tl/dr crowd? Feeling lazy?

[mrsilence.livejournal.com]

Oh I understand the general justification behind the high interest rates, I just think that given the power differential between the parties, that it tends to lends itself to that reasoning being used to justify what is effectively exploitation.

There is clearly a need, or at least a strong motivation for people to take up such loans, but virtually no way to ensure the rate they are paying in any given case is reasonable or justified in the sense outlined in the article you linked to.

Btw, anecdata time (again).

[htpcl.livejournal.com]

In 2001, some emissaries of Muhammad started browsing through my country too. Back then, the media were bringing to the fore Simeon II Saxe-Coburg-Gotha, the son of our last king, as the new Messiah and Savior of the Nation (we always have those, and we never learn). He was supposed to save the desperate Bulgarians from the evil hands of the bad, bad Kostov. So, envoys of the Unrealized King were visiting all TVs, radios and newspapers, spreading the word about the Muhammadian experience.

You'd hardly believe it and it might sound exotic to you, but they were claiming that Muhammad would give 5000 dollars in brand-new $20 bank notes as loans to village women to start making straw-mats! And they'd never ask them to pay the money back! And the King would bring this innovative scheme and save the Nation! Or whatever had remained of it after a decade of "Transition".

So, the one segment who followed the call en masse, were the Gypsy population (or nation). And they flocked into the ballot rooms on election day to cast their ballots for the Coburg.

He got lots and lots of votes, and an absolute majority in the parliament. Then follows his famous phrase: "I'll sort this country out in 800 days!" It never happened. So now he's history.

Meanwhile, the Gypsies here in the Stolipinovo ghetto in my town (Plovdiv), decided they had been waiting enough for the promised 5000 bucks which never materialized. So, one month after that election, they gathered on a protest in front of the Municipality, to demand for their money.

The police was sent in to disperse them with batons and to escort them back to the ghetto...

So, yeah. We do have "some" experience with Mr Muhammad's Bangladeshi schemes.

I hear he treats the non-payers from the rural areas of his country in quite a similar way.

Re: Btw, anecdata time (again).

[nairiporter.livejournal.com]

Wait, you elected a king to be your prime minister?

Re: Btw, anecdata time (again).

[htpcl.livejournal.com]

Not me. I've been voting for VMRO (center-right moderate-nationalist platform, historically significant but presently a ridiculously tiny party, not even represented in parliament). But yeah, he got well above 50% and lots of MPs. 4 years later his party had slipped below 15% and he had to be the smallest of 3 parties in a center-left coalition led by the Socialists. When this government ended its term and was removed (we've never had a government for 2 consecutive terms in modern history), the King's party had slipped below the 4% threshold to go into parliament. So now they're largely irrelevant. Their last trace on the political scene is that they got 2 EU MPs but I'm sure that's their last sojourn in Brussels, too.

Gives you a perspective about pseudo-Messiahs and their pseudo populist promises about a pseudo future in which we'll be all "sorted out good" (btw the word for "sort out" is the same as the slang word for "fuck" in my language, so there you go).

And yes, BG is so crazy and weird that we're the only country who elected a former king for prime minister. Go figure.

/anecdata

[mijopo.livejournal.com]

Yes, people got all excited about microcredits for a while, but turns out it was just a new word for an old practice, i.e., loan sharking.

There are two things you can do here, implement microcredits with lower interest rates, in which case it becomes charity/altruism, an old story that we shouldn't disparage especially if it's directed towards helping those in developing countries develop their own means of self sufficiency, or face the fact that these loans will be economically viable for the loan giver only if the interest rate is high.

[gunslnger.livejournal.com]

Yes, people got all excited about microcredits for a while, but turns out it was just a new word for an old practice, i.e., loan sharking.

You are incorrect.

http://www.kiva.org/about/microfinance

[nevermind6794.livejournal.com]

Some of the non-profit microlenders have been fine, but as with all things the for-profit lenders realized that large amounts of microloans can be very profitable. They are the ones who basically displaced the loan sharks.

[kylinrouge.livejournal.com]

The government in Dhaka is skillfully using the recent discontent with the low results from micro financing to additionally smear the banker. In The Time magazine, the famous Bangladeshi economist prof. Anu Muhammad calls the micro crediting model "a death-trap for the poor", which "reproduces poverty" instead of reducing it. Similar criticism can be heard for the micro financing institutions in Latin America, Africa and Asia.

Agreed.

[farchivist.livejournal.com]

Screw a 40% interest rate. I'd cut my throat before accepting that and any who does is an idiot and a fool. I can get a better rate (and payback terms) from a title loan company.

And yes, gunslngr, I've read your link and I still consider it to be a not-smart financial move. Don't bother.

[ddstory.livejournal.com]

What title loan company (http://community.livejournal.com/talk_politics/927703.html?thread=71475415#t71475415)? Are we still talking about Bangladesh?

[nevermind6794.livejournal.com]

Depends on the terms of sale for those fishing rods. Some of the microlenders have simply taken the place of local loan sharks, and resort to similar tactics to get their profits. That cycle, locking people into poverty, is the problem.

And I don't know that many organizations do targeted microcharity on similar scales. Heifer International, I think, is supposed to be good.