November 1995
Volume 13, Number 11
The Micro-Credit Cult
Jeffrey Tucker

In the story of Rumpelstiltskin, an evil dwarf saves the life of a king's bride by spinning flax into gold. But the price is high for performing this seeming miracle. She must give the dwarf her first-born child.

The story could be an allegory for the "micro-credit" movement, the current enthusiasm of the political Left here and abroad. It promises credit for poor people with no savings or collateral. A closer look, however, shows the movement to be financially dangerous, subtly coercive, and, in its most famous case, an enemy to children and families.

The micro-credit movement got a big boost at the summer 1995 UN world conference on women. The person who received the largest round of applause was not Hillary Clinton or Bella Abzug. It was a banker, and a man no less: Bangladesh economist Muhammad Yunus.

"Capital does not need to be the handmaiden only of the rich," Yunus announced in Beijing. "Access to credit should be a human right irrespective of economic situation." In July this year, the House Committee on International Relations sat in awe as Yunus made similar promises to politicians who should know better.

Yunus runs Bangladesh's Grameen Bank, the most politically correct bank in the world. The literature on him is hagiographic in the extreme. Academic journals and books tout Yunus and Grameen in dozens of studies. All major newspapers, including the Wall Street Journal, have run glowing profiles. "McNeil-Lehrer Newshour" did a full segment. The Economist magazine has been taken in. He has been nominated for the Nobel peace prize!

Meanwhile, governments are urging their bankers to replicate Yunus's alleged successes. Next year, Washington, D.C., will host a world summit on the micro-credit movement, with the enthusiastic support of the Clinton administration and many Republicans in Congress. Conventional commercial bankers should prepare for some bitter attacks on their lending policies.

In the fairy-tale version of events, Yunus founded the Grameen Bank in 1976 to give credit to the poor and save them from the usurious interest rates of greedy commercial banking. Now the bank loans more than $400 million per year to people — mostly women — with no assets and no credit history. He has profitably granted two million loans from 1,000 branches, and an astounding 98% of them are repaid.

It sounds so wonderful. Yunus has spun flax into gold. "Someone had to demonstrate that it really works," says this alchemist.

The adulation has a political subtext. If Grameen can give loans to poor women without assets, why can't Citicorp? Why are Western bankers keeping money from the poor? It must be greed, cultural barriers, bad training, or racism. Lack of collateral is but an excuse for hatred of the poor.

But if Grameen were really profitable, Western bankers wouldn't need to be cajoled and harangued into copying it. They would rush to try his gold-spinning machine. Bankers would love to discover that the poor are 98% credit worthy. They would long ago have tossed out cumbersome formalities like credit ratings and collateral.

It turns out, however, there's more to Yunus's banking scheme than meets the eye. Grameen is not a bank at all. Deposits from individuals and firms account for a mere 3% of its assets. The bank actually functions as a conduit for huge grants from governments and international agencies. That aid is then used as the basis of a credit pyramiding scheme that not only provides micro-loans but also funds a creepy form of feminist social engineering that wars against children and marriage.

Contrary to legend, Yunus wasn't an independent entrepreneur when he started his bank. He used his personal wealth and high-level connections to arrange special privileges and millions in subsidies. Before the Grameen Bank lent one Taka, he had government backing for fully 60% of its operations.

The UN International Fund for Agricultural Development provided Grameen with its first major loan of $3.4 million. That Fund has consistently pumped money in ever since. In addition, Grameen receives grants and subsidized loans from the governments of Norway, Sweden, Canada, Germany, and even the Ford Foundation in the United States, not to mention the IMF and World Bank.

If the funds aren't given as gifts to Grameen, they are lent at below-market rates, usually 2%. Grameen Bank then deposits that money in fixed-term and short-term accounts in commercial banks that pay higher rates. Grameen makes a killing by pocketing the difference.

The bank says this is merely arbitrage, but if private citizens did this with government funds, it would be called graft. These ill-gotten profits are then used to pay 12,000 staffers and subsidize the loan operations that everyone claims work so well.

Grameen charges its customers 20% interest, below the market in a country with high inflation and virtually no savings. At this rate, the reinvestment scheme subsidizes its loans by 39%. The bank is forever forecasting future profits. Somehow that day never arrives — which doesn't mean that its managers and top employees are doing charity work.

The 98% repayment figure does not reflect the behavior of actual individual borrowers. Grameen relies on the "peer group" method of repayment. Borrowers are lumped into cells of five. Any future loans — which offer 80% more money than the first one — depend on repayment by the entire cell.

If one person doesn't pay, others in the cell "lean" on them to fork over the cash, or pay it themselves. The person in the cell who wants another loan has the incentive to get all the money one way or another. In this way, Grameen does get paid. But the 98% repayment rate records final payments grouped by cells, and only on first-time loans.

The bank claims the system is "self policing." But observers note that its employees (many of them Western ne'er-do-wells in search of foreign utopias) engage in weekly, door-to-door monitoring of all borrowers. Even then, the payback rate for second-time borrowers is much lower.

"Confidentiality breeds lies," says Yunus, and that rule applies to more than finances. The bank's ideological mission requires that when you borrow, you turn over your private life to the bank's staff. Borrowers must take vows to "keep our families small," to "build and use pit-latrines" and to "plant as many seedlings as possible during the planting seasons."

It gets stranger. The bank requires borrowers to attend weekly physical-training exercises. They must participate in parades where they repeatedly chant the "Sixteen Decisions," a narrative summing up the bank's worldview. Among the choruses is this: "We shall take part in all social activities collectively."

Yunus was cheered at the UN conference because 93% of Grameen's borrowers are women. But this fact too is a function of its social agenda. Yunus — and the international organizations that fund him — have concluded that population and marriage are the primary causes of Bangladesh's poverty. Women drawn into the Grameen orbit "emancipate" themselves from family and biology and enslave themselves to Grameen instead.

Consider the treatment of dowries, a traditional transfer of property between families on the occasion of a marriage. For many countries, prohibiting them would be the equivalent of criminalizing the diamond engagement ring. But Grameen's "Sixteen Decisions" calls the dowry "a curse" and makes borrowers swear "we shall not take any dowry in our sons' weddings, neither shall we give any dowry in our daughters' weddings."

Borrowers with children are strongly "encouraged" to send them to one of 18,000 "feeder schools" from a very young age. There they are taught with Grameen textbooks that promote the Sixteen Decisions. People who work for the bank must also demonstrate loyalty to the Sixteen Decisions.

All this suggests the Grameen Bank is more of a cult than a financial institution. But let's consider its financial claims more carefully. It claims to be privately owned. But that's because borrowers are forced to buy at least one share in the bank. Currently about 88% of the bank's ownership is spread between 1.5 million borrowers, while the government still owns the other 12%. Borrowers cannot sell the shares they "own," however, and each borrower also pays a 5% "contribution" to a "cell group fund," plus 1% to a savings fund that pays no interest.

So let's say you're a borrower in Bangladesh. You, along with the four others in your credit cell, are approved for a loan of $75. After all mandatory payments are extracted, you end up with $69.50 in hand, which you must spend immediately, and an obligation to pay $90 to Grameen in one year. If all other members of the cell default, your liability zooms to $450. To make sure that doesn't happen, you have to spy on the other members (or worse) and tolerate being spied upon (or worse). You own one stock in Grameen Bank, but you can't sell it and neither does it earn dividends.

Meanwhile, your private life is gone. The Grameen staff is in charge of your family size and the workings of your latrines. Your friends must be Grameenites. You chant the Sixteen Decisions ad nauseam and attend tedious exercise sessions and parades. If you're single, the prohibition on dowries limits your marital prospects. If you're married with children, your children are farmed out to Grameen Day Care. You can't have any more if you want to. Plus, you must periodically abandon your primary occupation to dig around in the dirt planting tree seedlings to please international agencies.

Like the king's bride, these borrowers might regret that they ever made the original deal with Yunus. But Bangladesh's legendary poverty makes it appear that our Rumpelstiltskin offers the only way out of a desperate situation.

Agree or disagree with Grameen's femino-socio-financial engineering, there's no economic miracle worth copying in the Grameen model. At best, its operations are wasteful and Ponzi-like; at worst, they are parasitical, usurious, and communistic. This bank would not be viable apart from the government subsidies and financial trickery, facts which prove that its grandiose claims are false. The Grameen Bank's fame is a consequence of its far-leftist social agenda, not its economic successes.

Thanks to its benefactors, Grameen isn't going away soon. So what's next on its agenda? In Rumpelstiltskin, the king's bride has forgotten her promise to give up her baby until the dwarf comes to claim him. In the real life version, Yunus is now opening health clinics to "help" the beneficiaries of his gold-spinning talents. The clinics will be "self financing" and, he hopes, bring about "zero-population growth." What ghoulish financial, medical, and social plans are in store for these poor women under Professor Yunus's medical care we can only shudder to think.

http://mises.org/freemarket_detail.aspx?control=215

YouTube- Muhammad Yunus

That's a very nice piece of debunking.

Microlenders, Honored With Nobel, Are Struggling

By VIKAS BAJAJ
Published: January 5, 2011

MUMBAI, India — Microcredit is losing its halo in many developing countries.

Microcredit was once extolled by world leaders like Bill Clinton and Tony Blair as a powerful tool that could help eliminate poverty, through loans as small as $50 to cowherds, basket weavers and other poor people for starting or expanding businesses. But now microloans have prompted political hostility in Bangladesh, India, Nicaragua and other developing countries.

In December, the prime minister of Bangladesh, Sheik Hasina Wazed, who had championed microloans alongside President Clinton at talks in Washington in 1997, turned her back on them. She said microlenders were “sucking blood from the poor in the name of poverty alleviation,” and she ordered an investigation into Grameen Bank, which had pioneered microcredit and, with its founder, was awarded the Nobel Peace Prize in 2006.

Here in India, until recently home to the world’s fastest-growing microcredit businesses, lending has slowed sharply since the state with the most microloans adopted a strict law restricting lending. In Nicaragua, Pakistan and Bolivia, activists and politicians have urged borrowers not to repay their loans.

The hostility toward microfinance is a sharp reversal from the praise and good will that politicians, social workers and bankers showered on the sector in the last decade. Philanthropists and investors poured billions of dollars into nonprofit and profit-making microlenders, who were considered vital players in achieving the United Nations’ ambitious Millennium Development Goals for 2015 that world leaders set in 2000. One of the goals was to reduce by half the number of people in extreme poverty.

The attention lavished on microcredit helped the sector reach more than 91 million customers, most of them women, with loans totaling more than $70 billion by the end of 2009. India and Bangladesh together account for half of all borrowers.

But as with other trumpeted development initiatives that have promised to lift hundreds of millions from poverty, microcredit has struggled to turn rhetoric into tangible success.

Done right, these loans have shown promise in allowing some borrowers to build sustainable livelihoods. But it has also become clear that the rapid growth of microcredit — in India some lending firms were growing at 60 percent to 100 percent a year — has made the loans much less effective.

Most borrowers do not appear to be climbing out of poverty, and a sizable minority is getting trapped in a spiral of debt, according to studies and analysts.

“Credit is both the source of possibilities and it’s a bond,” said David Roodman, a senior fellow at the Center for Global Development, a research organization in Washington. “Credit is often operating at this knife’s edge, and that gets forgotten.”

Even as the results for borrowers have been mixed, some lenders have minted profits that might make Wall Street bankers envious. For instance, investors in India’s largest microcredit firm, SKS Microfinance, sold shares last year for as much as 95 times what they paid for them a few years earlier.

Meanwhile, politicians in developing nations, some of whom had long resented microlenders as competitors for the hearts and minds of the poor, have taken to depicting lenders as profiteering at the expense of borrowers.

Nicaragua’s president, Daniel Ortega, for example, supported “movimiento no pago,” or the no-pay movement, which was started in 2008 by farmers after some borrowers could not pay their debts. Partly as a result of that campaign, a judge recently ordered the liquidation of one of the country’s leading microlenders, Banco del Exito, or Success Bank.

“These crises happen when the microfinance sector gets saturated, when it grows too fast, and the mechanisms for controlling overindebtedness is not very well developed,” said Elisabeth Rhyne, a senior official at Accion International, a organization in Boston that invests in microlenders. “On the political side, politicians or political actors take advantage of an opportunity. When they see grievances, they go, ‘Wow, we can make some hay with this.’ ”

While a broad thread of resentment and disenchantment runs across the globe, the hostility toward microcredit stems from different circumstances in each nation.

In Bangladesh, Ms. Hasina appears to have become embittered with Grameen after its founder, Muhammad Yunus, who shared the Nobel, announced in 2007 that he would start a political party. At that time, the country was ruled by a caretaker government appointed by the military. Though Mr. Yunus later gave up on the idea, analysts say Ms. Hasina and Mr. Yunus have not made amends.

Ms. Hasina’s recent comments about microcredit were prompted by a Norwegian documentary that accused Grameen of improperly transferring to an affiliate $100 million that Norway had donated to it more than a decade ago. Ms. Hasina said Grameen, 3.4 percent of which is owned by the government, might have transferred the money to avoid taxes.

The bank, which has denied that accusation, reversed the transfer after Norwegian officials objected to it. Norway recently issued a statement clearing Grameen of wrongdoing.

The prime minister’s press secretary did not return calls seeking comment.

In India, leaders in the southern state of Andhra Pradesh, which accounts for about a third of the country’s microloans, have accused lenders of impoverishing customers. Stories proliferated in the local news media about women who had amassed debts of $1,000 or more as loan officers cajoled them into borrowing more than they could afford and then browbeat them to repay. Many had used the money to pay for televisions or health care or to soften the blow of failed crops, rather than as seed money for businesses.

Microcredit firms in India were also accused of siphoning borrowers from government-run “self-help groups” — women’s organizations that can borrow small amounts at subsidized interest rates from government-owned banks.

The movement against microcredit was started by opposition politicians, who have encouraged borrowers not to repay their loans and have accused senior leaders of the ruling Congress Party of being in cahoots with lenders. The Congress-led state government made the cause its own and passed a tough new law in December to cap interest rates and regulate collections.

The crisis has had ripples across the nation. Banks, the primary source of money for microlenders, have turned off the tap because they are worried about the industry’s future. As a result, microlenders have slowed or stopped lending nationwide.

Grameen Financial Services, a microlender in Bangalore that is not related to Grameen Bank, has idled 600 new employees it hired just a few months earlier with plans to expand into western and central India. The firm does not lend in Andhra Pradesh.

“This is frustrating,” said Suresh K. Krishna, managing director of Grameen Financial. “This is not what we set out for. The whole objective of floating this was to support entrepreneurs and support people in the rural areas and people below the poverty line.”

Industry leaders say they hope the issues will be resolved soon. The federal government and the Reserve Bank of India, the country’s central bank, are working on new federal regulations to oversee microcredit, said Alok Prasad, chief executive of the Microfinance Institutions Network.

Still, some industry officials acknowledge that the sector needs to reform itself to overcome political opposition and live up to its promise. They say organizations that now offer only loans need to diversify into microsavings accounts, which many specialists assert are much better than loans at easing poverty.

The industry, they say, also needs to speed up efforts to build a credit bureau that would reduce overlending. And organizations need to measure their success not just by growth and profits, but by how fast their customers are getting out of poverty, experts say.

“We at microfinance have a job to do to make it easier for politicians to support us,” said Alex Counts, the chief executive of the Grameen Foundation, a nonprofit in Washington that is not part of Grameen Bank. “Rather than make claims that get out in front of the research, we need to impose on ourselves the discipline of transparency about poverty reduction.”

http://www.nytimes.com/2011/01/06/business/global/06micro.html?_r=1&pagewanted=all