Banking on the Poor

The microfinance revolution began inauspiciously in August 1976, in a small Bengali village called Jobra.

Five years earlier, Dr. Muhammad Yunus, an economics professor at nearby Chittagong University, had supported Bangladesh’s struggle for independence, only to see his new nation fall victim to apocalyptic famines soon thereafter.

Compelled to act, the Vanderbilt-trained economist turned to the market. In what he calls “a very modest local initiative,” Yunus befriended a handful of impoverished women entrepreneurs. Shunned by commercial banks, these women relied on village loan sharks to get the money they needed to buy the supplies to make and sell their hand-made crafts, such as bamboo stools.

The loan sharks charged exorbitant rates of interest, so—out of his own pocket—Yunus offered to help the women with very small loans at reasonable rates of interest.
The first few loans were repaid successfully, but Yunus says, “I realized very soon that the problem was not at all a local one. In order to solve the problem, the entire banking system would have to be turned upside down and fully reorganized.” And so, Yunus founded his own bank, the Grameen (“Village”) Bank—which would operate with different values and principles than typical commercial banks.

This article tells the story of how one man’s effort to help his village neighbors in need flourished into a $10 trillion global industry—albeit not necessarily the kind of industry he wanted it to be. It is a story about money and power; it is the story of microfinance. Only 35 years after its inception, nearly 4,000 microfinance organizations operate in over 100 countries around the world (even in the U.S.), providing very small business loans (typically under $1,000) and other financial services to over 150 million disadvantaged entrepreneurs who aspire to work their way out of poverty.

It was 1978 when Grameen officially began lending, and the bank’s business grew steadily. In 2010 it lent out nearly $10 billion to over 8 million people—over 90 percent of whom were women. Those 8.4 million people are not only the Bank’s beneficiaries, they are its owners; over 95 percent of Grameen’s equity belongs to them (the remainder is with the government), and each year Grameen’s net income is distributed to these owners in the form of dividends or deposited into an emergency relief fund borrowers can draw upon if they are affected by flooding or bad weather. In addition to sharing in Grameen’s profits, the borrowers share in its governance. Nine of the 13 members of Grameen’s board of directors are borrowers who have been elected to the board by their peers.

This was not the first institutionalized attempt to employ finance as a means of poverty alleviation and empowerment, but, arguably, Grameen has been the most successful. As the figurehead of the burgeoning microfinance movement, Yunus has garnered praise from world leaders, and he even won the Nobel Peace Prize in 2006. Despite these successes, Grameen has faced challenges. Researchers have noted that the bank’s claims to alleviate poverty are difficult to verify—and are frequently exaggerated—because Grameen tends to lend to people who already had favorable prospects for upward mobility before they began borrowing. Women who borrow with Grameen tend to have been more empowered before borrowing—not because of it. Further, many women turn over at least some of their loan to their husband; those who don’t may find themselves overburdened with both entrepreneurship and household chores. Economist Robin Isserles has questioned the logic of drawing the poor directly into an economic system that exploits them. He challenges the notion that microfinance could empower women without first changing broader structures of oppression in society.

But these quarrels are not to say Grameen is a failure. As the organization has grown, it has evolved in ways meant to try to address these criticisms. Today Grameen not only lends money, but also offers scholarships, low cost health care, solar power, and a variety of other services to Bangladesh’s rural poor. And while it may not live up to all expectations, most researchers who have studied the bank closely have found at least some benefit to its presence in Bangladesh. Worldwide research shows that it is possible for some poor persons to benefit from microcredit when conditions are conducive to entrepreneurship and when the credit is offered with low interest rates. This has made Grameen and microfinance appealing to activists and politicians alike.

The pace at which the microfinance movement has grown is astounding. No longer a village experiment, today’s microfinance is big business. A new generation of international lending agencies work for profits, even enlisting Wall Street investors. But such growth has come at a cost. The rhetoric of financial revolution that epitomized the early years of the movement has been supplanted by a free market discourse that has undermined local support for microfinance. This article offers a sociological perspective on how microfinance has grown and gone astray. The commercialization of microfinance is the result of co-optation by government-backed agencies. Through the provision of resources and information dissemination, they’ve turned a movement into a high-finance industry.

Change from the Bottom

In the early 1990s development practitioners and humanitarian activists seeking an alternative to the usual bureaucratic, big government approaches to poverty alleviation began arriving in Bangladesh to see for themselves how Grameen worked. Visitors from Vietnam, Columbia, Botswana, and myriad other nations would spend two weeks in the villages of Bangladesh, then convene in Grameen’s head office for semi-annual “Grameen International Dialogue” sessions. Participants exchanged ideas about how to implement microfinance projects in their own countries. The atmosphere was kinetic and hopeful; this was truly a global movement.

For microfinance to spread beyond Bangladesh’s borders, though, required more than just attention: it needed money. The untold story of the microfinance revolution is the persistent lobbying efforts of a small, but highly dedicated group of activists in the United States. The leader of this group, Sam Daley-Harris, founded a citizens’ lobbying organization called Results in 1980. The group is dedicated to passing legislation that will end hunger and poverty worldwide. “The change that is needed will have to come from the bottom,” asserts Daley-Harris. In his book, Reclaiming Our Democracy, Daley-Harris recounts the efforts of Results’ activists and offers some insight into Results’ strategy. One notable strategy was to creatively frame his group’s message in ways that would resonate with the Reagan-era conservatism that pervaded Washington, D.C. at the time. To the extent that Results was effective in this tactic, it also changed the trajectory of microfinance.

For example, Steve Valk, an activist in Atlanta, worked tirelessly to gain the attention of his staunchly conservative representative in Congress, Pat Swindall. Valk was not conservative, but he and other activists met with Rep. Swindall repeatedly, showing up at various town hall meetings specifically to press the issue of microfinance. In spite of ideological differences, the group developed a relationship with Rep. Swindall. They appealed to his conservative nature by likening microfinance to free market economics and presenting microfinance as a hand-up rather than a hand out. And, although the idea for microfinance originated in Bangladesh, they sold it as a profoundly American concept. Rep. Swindall eventually signed on to a bill to fund microfinance loans to hundreds of thousands of Latin America’s poorest families.

Due in large part to Valk and other Results volunteers around the country, the bill gained broad bipartisan support in both houses of Congress. One Congressman remarked, “I have never encountered an issue that had as many members [of Congress] massaged into place by constituents in such a timely fashion.” Although strongly supported, the bill did have its detractors. Most notably, administrators of the federal government’s agency for foreign aid, the U.S. Agency for Development (USAID), were immediately opposed to the bill. One senior USAID official flatly told Daley-Harris, “[US]AID doesn’t work with the poorest of the poor.” Instead, the agency preferred a trickle-down approach through economic growth. USAID sent letters to every member of the Senate to try to dissuade them from voting for the bill—or at least to soften
the bill’s mandate to lend to the poorest of the poor.

In spite of such high-level resistance, the bill passed in 1987, thus inaugurating a new era for the microfinance movement. Daley-Harris unabashedly claimed that Results “blew things wide open” with that bill. Now the Grameen idea would be known throughout Latin America—and soon the rest of the world. But hard fought victories often come at a cost: these newly funded microfinance programs would be administered by the same powerful and well-established agency that had opposed the microfinance bill, USAID.

Control from the Top

Daley-Harris soon found himself locking horns with USAID over the implementation of microfinance funding in Latin America. USAID remained reluctant to implement the Grameen model. One might have taken this power struggle as an omen that growing the movement too quickly could mean relinquishing control to powerful governmental agencies with conflicting ideals and motives. However, Daley-Harris remained committed to globalized microfinance, which he intended to advance by organizing the Microcredit Summit in Washington, D.C. in 1997. The event was attended by 2,900 delegates, including government officials and celebrities from 127 nations who agreed to a goal to reach 100 million of the world’s poorest families with microfinance loans.

This goal was met by 2007.

It could not have been done without the financial support of large government-backed agencies. In the 1990s, USAID was joined in the microfinance movement by the most influential of all such agencies: the World Bank. Originally created in the aftermath of World War II to rebuild Europe, the World Bank now manages a $112 billion portfolio intended to foster economic development around the world. Typically, the World Bank approach has been predicated on mainstream economic principles, which have often translated into policies that favor economic growth over social justice and free markets over social spending. Such policies have been met with anger and local resistance around the world, especially in poorer nations. Throughout the 1980s and ‘90s, the World Bank was bedeviled with riots, protests, and criticism in cities and villages around the world. As Grameen’s popularity grew, World Bank officials saw a foray into microfinance as an opportunity to improve their public image while still adhering to core, free market values. The willingness of private foundations to collaborate in this endeavor also made microfinance appealing. Unlike USAID a decade before, the World Bank expressed keen interest in microfinance and, true to form, did so in a grand manner.

In 1995 the World Bank established a consortium of 33 high-level public and private funding organizations and invited Muhammad Yunus to join its board of directors. The consortium was named the Consultative Group to Assist the Poor (CGAP), and its purpose was to support the growth of microfinance. In her book, Poverty Capital, Ananya Roy, a scholar of city and regional planning, shows how CGAP was able to assume control over the agenda of microfinance. With over 1,000 publications posted online, CGAP now sets the standard for everyone to follow. It establishes norms, metrics, and best practices for the industry, and these look remarkably similar to the norms, metrics, and best practices of Wall Street. CGAP also offers real time credit ratings and ranks the top microfinance providers based on financial and outreach criteria, but notably not on social impact. CGAP has even helped to develop global risk scoring models similar to the consumer credit systems used in the U.S. According to one senior CGAP staff member, “What is measured is what is managed. We script. We manage. We control.” Thus, the task of fighting poverty becomes akin to any other business venture, based on financial benchmarks and procedures that cater to the interests of investors rather than the needs of the borrowers. The intent is to bring microfinance into the fold of the World Bank’s paradigm of economic growth, which necessitates corporate capital.

To this end, CGAP has teamed up with the Gates Foundation to establish an elite annual conference in scenic Turin, Italy. The annual conference now garners far more attention and holds far more political sway than the much humbler Grameen International Dialogue. The cost of attendence, nearly $10,000 per person, is steep; but participation conveys a mark of validation and authority within the microfinance industry. There is little talk of poverty alleviation at this conference and much more talk of “going to scale.” As a result, high interest rates—often exceeding 30 percent and frowned upon at the Grameen International Dialogue—have become a “best practice.” Presumably, these higher interest rates generate more income and, in turn, allow lenders to reach more people. Theoretically, high interest rates also allow lenders to allocate loans more efficiently, since only the most lucrative businesses could afford to take such costly loans. To an economist, this makes perfect sense. But to a poor entrepreneur on the margins of subsistence, high interest rates are simply immoral.

The Microfinance Machine

Muhammad Yunus resigned from CGAP’s board of directors after only two years. He may have turned banking upside-down, but the World Bank flipped it back over again. The focus had shifted from poverty-alleviation and empowerment to organizational efficiency and profitability. That meant high interest rates and unforgiving terms and conditions—not unlike the loan shark market Yunus had hoped to subvert. In statements to the press, Yunus has decried what he calls the “commercialization” of microfinance—the corporate ownership of microfinance institutions. But his pronouncements have not deterred media criticism and political backlash in his home country. Bangladeshi politicians now associate Grameen with the new breed of microfinance and accuse Yunus of usury. Actually, Grameen’s interest rates remain comparable to commercial bank rates for small loans, but facts like these don’t seem to matter in moments of public outrage, and the Prime Minister of Bangladesh accused Yunus of “sucking money out of the people” before she forced

him to resign from the bank he started. Meanwhile, in neighboring India, angry protestors filled the streets of Hyderabad in the fall of 2010 demanding tighter regulation and lower interest rates for microfinance after the suicides of several desperately indebted farmers. Borrowers throughout the region refused to repay their loans, leading to a crisis akin to Wall Street’s mortgage meltdown. It was what Daley-Harris called “a near death experience for microfinance.” This is significant because the region surrounding Hyderabad, Andhra Pradesh, had been recognized worldwide as a pioneer market for the new form of commercialized microfinance, fed on investments from international corporations for rapid growth.

In their study of Andhra Pradesh published just before the 2010 crisis, political scientists Britta Augsberg and Cyrill Fouillet presciently opine: “One needs to ask whether… the ‘microfinance machine’ has gone berserk. Whatever the answer, we see it as an occasion to trigger a collective and widespread reflection on the dysfunction of microfinance, not only in India but the worldwide sector as a whole.”

While Yunus implies that corporate investors are to blame for this situation, evidence shows that the private sector did not force itself upon microfinance. Rather, powerful agents like the World Bank strategically redesigned microfinance to induce corporate participation. While we might be tempted to blame organizations like the World Bank for fostering the current situation, it is important to note that it was the proponents of microfinance themselves who solicited the support of these organizations and at times willingly collaborated with them. Advocates, like the Results volunteers, employed free market rhetoric to garner political favor and access the resources necessary to grow their movement exponentially. But this meant that the movement became beholden to the values and principles of its donors, not its constituents.

It is not too late to apply the lessons learned to the microfinance movement itself. CGAP recently responded to criticism by toning down its free market rhetoric, and, in addition to traditional financial indicators, it is now utilizing some social performance indicators to monitor microfinance. CGAP’s responsiveness suggests there is an opportunity for the kind of civic engagement that Sam Daley-Harris and his volunteers exhibited in the 1980s; advocates could lobby donor agencies and policymakers to ensure the people’s interests are protected. But this time it could happen not only in the U.S., but around the world. Modern technology affords the opportunity for the people of Andhra Pradesh to join forces with advocates in the U.S. or anywhere else to demand appropriate financial services and other forms of community support. At the same time, advocates could draw upon the lessons learned from Andhra Pradesh and Wall Street to foster a sincere discussion about the proper role of finance in our daily lives—not solely as a tool for economic growth, but also as a way to empower people to lead better, more fulfilling lives.

Rather than depending on investors, microfinance providers could also return ownership to their borrowers—a fundamental innovation of the Grameen Bank that was forgotten as the movement went global. Though this strategy would entail slower growth, it may be preferable to the rise of another meltdown of the sort that occurred in Andhra Pradesh. Borrower-owned microfinance would return control to the people microfinance seeks to empower, enabling them to decide for themselves what the appropriate means of economic development might be.

Recommended Readings

Augsberg, Britta and Cyril Fouillet. “Profit Empowerment: The Microfinance Institution’s Mission Drift.” Perspectives on Global Development and Technology (2010), 327-355. Recounts how market-based microfinance went awry in Andhra Pradesh.

Daley-Harris, Sam. Reclaiming Our Democracy: Healing the Break between People and Government (Camino Books, 2004, 10th anniversary ed.). Offers a detailed, first-hand account of the creation and growth of an organization and offers lessons for would-be activists and lobbyists.

Isserles, Robin. “The Rhetoric of Empowerment, the Reality of ‘Development as Usual’,” Women’s Studies Quarterly (2003) 31(3/4): 38-57. Critiques microfinance’s flaws and shortcomings.

Roy, Ananya. Poverty Capital: Microfinance and the Making of Development (Routledge, 2010). Looks inside the World Bank to see how it controls the development agenda.

Yunus, Muhammad. Banker to the Poor: Micro-lending and the Battle against World Poverty (PublicAffairs, 1999). Provides a philosophy of development and a first-hand account of the Grameen Bank.