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Can Microcredit Reclaim Its Visionary Mission?

Kanya D'Almeida

WASHINGTON, May 6 2011 (IPS) - As controversy mounts over the efficacy of microfinance as a global poverty-alleviation effort, the 15th Global Microcredit Summit, scheduled to kick off on Nov. 14 in Valladolid, Spain, will be forced to answer critical questions about poverty, resources and tactics.

Convened by the Microcredit Summit Campaign, a project of the RESULTS Education Fund, this year’s summit will strive for the twin goals of extending credit options to 174 million of the world’s poorest families, thereby reaching 875 million people, and hoisting 100 million of the world’s poorest families over the 1.25 dollars a day threshold, thus enabling 500 million people to leave the ranks of abject poverty by 2015.

Last year, the ideology and institutions of the microcredit enterprise (MCE) – the three decade-old brainchild of Bangladeshi economist Muhammad Yunus, designed to provide basic collateral to impoverished women hungering after financial self-sufficiency – weathered a storm of opprobrium.

Two days ago, in what was broadly believed to be a politically motivated smear campaign against the microcredit veteran, the appellate division of the Bangladesh Supreme Court agreed to fire Yunus from his post as managing director of Grameen Bank, the founding institution of what is now a global MCE.

Sam Daley-Harris, founder of the Microcredit Summit Campaign, blasted the move Thursday in an article entitled “Two Steps Backward for Innovation to End Poverty“, calling the dismissal of the Nobel laureate “disgraceful”.

“The atrocity here is the fact that the independence and integrity of one of the world’s premier poverty-fighting institutions is now at grave risk,” Daley-Harris wrote in Microfinance Focus Thursday.

“Grameen Bank, an… institution with more than eight million microcredit borrowers, that took 35 years to build, could be destroyed in a matter of months by incompetent government action.”

However, government interference in the MCE is only one of several obstacles barring the way forward for the campaign.

From non-profit to for-profit: a critical transition

Vikas Bajaj, the Mumbai-based New York Times columnist, co-authored an article last year lambasting the MCE’s transition from “a promising path out of poverty for millions” into a joyride for “foundations, venture capitalists and the World Bank who have used [poor countries] as a petri dish for for-profit ‘social enterprises’ that seek to make money while filling a social need.”

It is now a widely accepted notion, according to Bajaj, that microfinance in pursuit of profit – where local and foreign private equity investors seek huge returns on their initial investments – in fact push women, who constitute the enterprise’s primary “market”, further into debt and disempowerment.

David Korten, president of the People-Centered Development Forum, wrote extensively about the “turn to Wall Street” in Yes! magazine early this year, stating that, “As microlending programs became… focused on repayment rates and growing the size of their loan portfolios, they looked for new sources of capital to expand their reach.”

“[M]any turned to foreign commercial equity investors,” Korten added, “but since private equity conflicts with the nonprofit model… many nonprofit microcredit programs changed their status to for-profit enterprises and converted their philanthropic nonprofit assets into private for-profit assets.”

Yunus himself noted the consequences of these changes early on when he said, “To ensure that the small loans would be profitable, banks… raised interest rates and engaged in aggressive marketing and loan collection – the kind of empathy that had once been shown toward borrowers when the lenders were nonprofits disappeared.”

Looking at the numbers, it is easy to see how microfinance for profit is so attractive to venture capitalists. Both Microfinance Focus and the New York Times reported that by mid 2010, shareholders of Indian microfinance giant SKS generated over 350 million dollars on the stock market and witnessed an annual revenue increase of 100 percent in five years.

The downside, of course, is that women are getting “trapped in a spiral of debt” according to officials and economists in the global south. In January this year, Bajaj reported that in order to sustain its returns, the for-profit model often enticed women to borrow more than they could afford, sometimes amounting to debts of over 2,000 dollars for a 200-dollar loan.

Future of microcredit?

Some activists and economists who have long criticised microcredit as a short-term credit-based solution to a structural, rights-based problem have seized on microfinance’s fall from grace in the eyes of many to push forward a more radical agenda.

Indian environmentalist-philosopher Vandana Shiva has said for years that microfinance is only a solution in a particular context. “But credit, loans and money circulation cannot solve the problems of alienation,” she stressed. “Privatisation of water leading to a high cost of water could be financed by flows of credit, but the solution to access is really about the basic right to water.”

“Rights cannot be substituted by credit,” Shiva added. “They need to be recognised as the collective rights to the common wealth of this planet—credit can come after that rights solution has been offered.”

However, Daley-Harris cautioned, this moment should not be exploited to destroy the legacy of microcredit but to reclaim its visionary mission.

“People either say microfinance is really bad or really good, as if there were one model of microfinance out there – there isn’t,” Daley- Harris told IPS.

“And any attempt to shut down the Grameen Bank in Bangladesh is a travesty,” he said, adding that the international community must distinguish between activists’ legitimate critiques and rackets raised by corrupt governments for political manipulation.

“We at microfinance have a job to do to make it easier for politicians to support us,” Alex Counts, chief executive of the Washington-based Grameen Foundation, told the New York Times earlier this year.

“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.”