di Chiara Zaccone
Microfinance is defined as sustainable finance of the poor, who offers them “access to basic financial services such as loans, savings, money transfer savings and microinsurance”. Aside from this technical definition, its two main characteristics are the absence of collateral requirements and low interest rates: these two taken together would allow people, who are usually redlined by banks, to access credit, with good chances of repayment. The quotation is from the Consultative Group to Assist the Poor (CGAP), one of the most prominent voices in the world of microfinance, which is housed in the World Bank. In fact, even though the merits of the spread and success of the right to credit promulgated by the Nobel Laureate Muhammad Yunus are acknowledged, the wave of microcredit, and microfinance in particular, have been taken over by western-based intermediaries and institutions, CGAP and the World Bank to cite two among the most powerful. This relatively new anti-poverty tool, born from the grassroots experience of the Bangladeshi economist, has increasingly found legitimation among the more developed countries, which supported and sustained it. Thousands of non-profit and for-profit organizations have flourished. Private donors and international organizations from Europe and the United States in particular have poured a lot of money and resources in the hands of microfinance non-governmental organizations. A growing network of agencies and financial intermediaries all round the world works to provide services to new borrowers: thus, while enhancing economic development in the poorer countries, the system creates jobs in the third sector of the Western World, too: we might see in it the bright sight of the global economy. Moreover, the model of microlending has being recently imported also in cities such as New York and San Francisco, proving once again its effectiveness in times when the aftermath of the financial crisis has left many people with less power to access the traditional financial instruments. Thinking about microfinance as an anti-poverty tool, which has to do just with the Indian women or poor households in the Philippines, could not be more far away from the reality: it is a phenomenon that concerns everybody as part of the global trend of an integrated economy. With that said, let’s now come to the core: the myth of the microfinance as an optimal strategy to make banking viable to the poorest seems unravelling”. In 2009 microcredit has reached nearly 70m of people, for a total of $70 billion in loans: half of the recipients live in India and Bangladesh.
As microfinance institutions multiplied, the sector has grown extremely fast and extremely unregulated: the initial success of the high repayment rates of borrowers attracted investors, who saw good money coming from the poverty business. Without any doubts, the low interest rates demanded for the repayments is nothing but a good news for people who were usually subject to loan sharks, charging unreasonably high interests. The drawbacks are evident in a system that has become increasingly “Walmartized”, where borrowers are offered so many different options and products (from micro-insurance to individual loans, and housing mortgages). Many of them found themselves with multiple small loans, juggling to repay them. This is not definitely the way microfinance was meant to work to alleviate poverty.
Now microfinance is under attack also by the political arena: the risk of a western-style credit bubble in the sector has fomented the resentment of political forces in Bangladesh, which saw big microfinance institutions such as the Grameen Bank enter the hearts of some many voters. In December, the prime minister of the country, Sheik Hasina Wazed, ordered an investigation into Grameen Bank about the use of development fund provided to Grameen by Norad, the Norwegian aid agency, in the 1990s. The accusation of the Bangladeshi government is that the bank would allegedly have diverted funds to evade taxes. So far, no proofs of that are found. Meanwhile, the founder of the Grameen Bank is expected to appear in court to face charges of defamation, apparently for accusing politicians to pursue only money. Grameen Bank is the biggest microfinance provider in the country: with 2,500 branches, it lends more than $100 million a month, from loans for beggars, to micro-enterprise loans of about $1,000. According to the World Bank, microcredit (and rising inflows of workers’ remittances) has helped to alleviate poverty in Bangladesh in recent years. Bangladesh remains a poor, overpopulated nation, that despite the political instability and poor infrastructure, insufficient power supplies and slow implementation of economic reforms, succeeded to achieve a 5-6% growth per year since 1996, and throughout the 2008-2009 financial crisis. The microfinance sector, which seemed to turn out unscathed by the early recession, now is the cause of growing concerns, as some providers are demanding excessive interest payments from poor borrowers, seeking profit instead of helping alleviate poverty. If this is at least partially true, as one of the risks entailed by the spread of commercial microfinance institutions, at the root of the unhealthy economic environment in which all these institutions operate there are problems of widespread corruption and rising inflation. Especially consumer price inflation is expected to remain relatively high in the future, and the inflation pressure persists especially for poorer households, who spend the great bulk of their disposable income on basic food items. The public discontent is coupled by the rising voice of the main opposition party to the ruling Awami League, the Bangladesh opposition party. The latter is leading street agitations in order to challenge the government, which at the moment does not seem to face any serious challenge by these agitations. So far, analysing these voices of dissent on the economic situation in general in the country and on the misrules in the microfinance sector in particular, what emerges is apparently a capitalization of the crisis by the political forces. On one hand, the generalized attack by the prime minister Hasina against Grameen seems sterile and aimed to hit just the symbol of the system, channelling the public discontent to the private sector. On the other, the main opposition party’s strategy based on street agitations does not carry effective results, undermining instead business confidence in the region.
Yunus, in a recent opinion article on the New York Times, dismissed the political games on both sides. Instead of defending himself against the accusations, he focuses on the real weaknesses of the microfinance system, stressing the risks and consequences of demanding excessive interest payments to achieve high profits. He clearly advocates for stricter government regulations, and for the existence of a microcredit regulatory authority. Even though he makes special reference to India, instead of Bangladesh, where such authority is already present, the idea of strong commitment of the state in performing good economic and infrastructural policy cannot be misunderstood, whichever poor country we talk about. Governments not only should work on their own, but they should improve cooperation to strengthen the potential of microfinance jointly.
 Consultative Group to Assist the Poor (CGAP), see http://www.cgap.org/p/site/c/template.rc/1.26.1302/.
 See In India, Microcredit has suffered a Black Eye, New York Times, 05/01/11.
 Note: interest rates charged by MFIs are higher than the one of standard credit system (10-15 % above cost), but much lower than the ones charged by loan-sharks (they can reach the 100%).
 See Suicides in India revealing how men made a mess of microcredit, Bloomberg, 28/12/2010.
 See Grameen Bank: Saint under siege, The Economist 08/01/2011
 See Sacrifing Microcredit for Megaprofits, New York Times 14/01/2011
 See Country Report December 2010, The Economist Intelligence Unit.
 See Sacrifing Microcredit for Megaprofits, New York Times, 14/01/2011