Trouble in Paradise

March 30th, 2011

There is trouble in the world of microfinance.

Muhammad Yunus, the founder of Grameen Bank, a winner of the Nobel Peace Prize, and a pioneer of microlending, is in some hot water.  Earlier this month, the government of his home country, Bangladesh, ordered him out of his post as head of Grameen bank for failure to comply with the nation’s retirement laws, which mandate the retirement of company heads at the age of 60.  Yunus has already met his 70th birthday.

Yunus’ Grameen Bank (which, incidentally, also funded the Grameenphone, a topic of another blog) is a pioneer in microlending, the practice of extending small loans to impoverished borrowers, often women, who have traditionally lacked access to credit, but who want to start a business or grow an existing business.  After nearly 35 years of making such loans, Grameen Bank has reached over three million borrowers and has disbursed a total of $4 billion.

Microfinance, like Yunus, is also in a bit of a predicament.  Since microfinance has been not only effective, but also quite profitable, it has attracted some predatory lending sharks.  Take Te Creemos, a Mexican lender, which charges a whopping 125% annual rate , compared to the average in Mexico, 70%, and the world average, about 37%. Emmanuelle Javoy, the managing director of Plant Rating, a firm that evaluates microlenders notes that “Mexican microfinance institutions charge such high fees simply because they can get away with it.”

But the sharks didn’t stop with the high rates.  In an effort to reach ever higher profits, many micolenders, particularly those in India, have over-extended loans to poor families, shouldering them with debt they will never be able to pay off. Kamal Munir of the UK’s Cambridge Judge Business School notes microfinance “has trapped a lot of people in a vicious debt cycle” and that often impoverished borrowers need to take extra loans to repay previous debts.  It has resulted in a crisis not only for the borrowers, but also the lenders, who have now found their balance sheets full of defaults.

Many suspect ulterior motives in the Bangladeshi government’s actions against Yunus.  Their conviction has certainly come at a suspicious time—over ten years past its legal due date.  Many Bangladeshis believe Prime Minister Sheikh Hasina is frightened that Yunus’ philanthropic success and public support will translate into political success and that he would form a formidable challenger.  The fact that he set up a short-lived political party in 2007 has only added fuel to the fire of these allegations.

Yunus himself is not without criticism, though.  Many in Bangladesh contend the Nobel Laurette has exaggerated their country’s problems in order to make his achievements look that much more resplendent.  And others believe his microlending has led to a vast influx of foreign money, which exposes Bangladesh to the “dangers of foreign influence.”  The fact that U.S. Secretary of State Hilary Clinton called Yunus to offer her support has only antagonized these critics.

But Yunus is not going down without a fight.  Deferred today at the request of the prosectuion, Bangladesh’s Supreme Court will hold a hearing on April 4th to decide wither Yunus was illegally removed from his post.

Even if the Supreme Court holds up the government’s decision and Yunus is not permitted to return to his job, we are unlikely to see any further negative impact on the world of microfinance.  Yet this predicament has shown (yet again) that the lines between black and white are never bright in the world of global development.  Yunus may be heralded as an international hero, but his own people have found plenty of reasons to be wary of him.  And the same goes for microfinance—once the darling of the West—is now meeting a moral crisis as we now see it’s not without its own set of setbacks and moral reprehensions.

My conclusion here is that the world of development is full of gray areas.  Far from an impasse, however, these issues present opportunities to explore—and find—sustainable solutions to the developing world’s most critical challenges.

Written by Ann Hollingshead

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