End the Witch Hunt for Dr. Muhammad Yunus, Microfinance

Published on January 6th, 2011 | by

There’s no doubt that the news from Andhra Pradesh, India about indebtedness crippling microfinance clients is troubling.

SKS, India’s largest microfinance bank, raised cash last year by selling shares at 95 times their initial value. And now comes an increased chorus from politicians in Andhra Pradesh about fraud, corruption and impoverishment linked to SKS — quite a bell to un-ring.

Microfinance clients do often borrow at interest rates greater than 100% given the extraordinarily high cost of capital to service such small contracts given the absence of consumer credit infrastructure, such as a credit bureau.

It’s not news that microfinance loans are risky and thus carry high rates, nor is it news that former NGO-funded microfinance institutions (MFIs), have made a profit by going public. MFIs in Latin America and Asia have been down this path with great scrutiny for years. A leading opponent of for-profit microfinance lending is none other that one of model’s founders, Dr. Muhammad Yunus.

Suddenly, the political winds blowing across developing economies have turned on microfinance as an anti-poverty tool. Not only are politicians in India claiming microfinance is a tool of usury, but here comes Nicaragua, Bolivia and Pakistan joining the fray.

And today comes the stunning news that a corruption investigation has been ordered by Bangladesh government against the Grameen Bank. Dr. Yunus, the Nobel Prize winner and one time darling of international development, has been ordered to face a court on charges of defamation.

Can the media kindly take a breath and stop the madness? Why is the action of a few bad apples in India (and beyond) summarily condemning the integrity of Muhammad Yunus and the microfinance industry?

Simply put, microfinance — namely the joint liability contract where peer groups act as repay monitors in the absence of credit history — has been a powerful innovation in Bangladesh and beyond. But the joint liability contract pioneered and scaled by the Grameen Bank is not impervious to the common blips that occur along the normal path of business.

Furthermore, microfinance proponents have never claimed the model was a silver bullet for development, nor do leading advocacy groups like the DC-based Grameen Foundation claim that over indebtedness is not a concern.

Indeed, these actors fund research that looks into how the simulation of more robust regulation can mitigate borrowers just taking out new loans to pay the old ones.

Microfinance is banking for poor people. With some differences, poor banking customers can often behave like less poor banking customers; repay at uneven intervals based on legitimate and not so legitimate variables.

If the burgeoning anti-microfinance movement needs a job to do, why doesn’t it consider the systemic failures (e.g., the absence of state-sponsored credit tracking) that have led to poor borrowers falling underwater?

As we’ve seen in the US, a functioning lending market requires robust regulation and public/private partnership.

End the witch hunt on microfinance the model and start the push to regulate against predatory lending in all forms.

Image credit by Yodel Anecdotal via Flickr under a CC license


About the Author

A lifelong conservationist, angler, gardener and writer, Lane is a Corporate Responsibility strategy consultant based in Chicago, where he currently works a CR consultant for PricewaterhouseCoopers (PwC). Prior to joining PwC, Lane was a global sustainability performance and stakeholder engagement specialist for Sodexo North America. He has experience in microfinance program evaluation at Grameen Foundation. A former President of the Net Impact Chapter at the University of California, San Diego (UCSD), Lane has a master's in International Development Economics from the School of International Relations and Pacific Studies at UCSD (IR/PS) and a bachelor's in history and international studies from Kenyon College. Prior to working in the sustainable business sphere, Lane spent six years as a communications and marketing professional focusing on arts and culture in New York City, where his work included the creation of the jazz website gothamjazz.com and serving as the publicist for the New York Philharmonic.
  • This is a great article I completely agree with you. There is to much of the throwing the baby out with the bath water here. Every industry will have blips but I honestly like the concept of microfinance because it brings and opportunity that was not there to the little guys.

    I hate how it seems lately the media simply forgets journalism and instead just has a love hate relationship with every topic.

  • This was enjoyable reading. When will the corruption end it’s in government, finance, oil and just about anywhere where money is involved.

  • Elin M Carlsson

    Brilliant position and well written! I work in a government donor agency and made the same assessment. But you spelled it out better than i ever could! Now i can spread your words and link to this commentary. Thanks!

  • Beth Watson

    I interned with a Microfinance NGO in South Africa last year – PlaNet Finance Southern Africa, and have a toooooon of things to say about the direction microfinance should be going in. Firstly, things like insurance need to be common place when in combination with tiny loans for creating income. Ex. A woman’s cow dies that she bought with her loan. Now she cant sell the milk or the cow. She has to pay a loan but she quite literally has NO money.

    Secondly, microfinance is not in the area of making profit. Its just not. Believe me, I think alot of companies an industries can make money but in the area of microfinance all of the retained earnings need to be going back into the poor and making their loans more affordable instead of going public and worrying about shareholder’s making a return on their investment. I could probably write a good sized article about changes or ideas that may work for microfinance!!

    http://samsaraca.blogspot.com/

  • Although there are problems, Yunus has provided the poor with access to credit which they would never have access to otherwise. I’ve seen Yunus speak a couple of times here in Chicago and I think he’s brilliant. No program works perfectly.