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Microcredit Wins Nobel: A Stocktaking

The Nobel Peace Prize euphoria over Muhammad Yunus and the Grameen Bank will soon recede. But the fundamental issues of the microcredit/micro-finance programmes, like the incorporation and retention of the very poor, challenges in offering a variety of financial services and enhancing participation of the poor in decision-making, will remain.

Microcredit Wins Nobel: A Stocktaking

The Nobel Peace Prize euphoria over Muhammad Yunus and the Grameen Bank will soon recede. But the fundamental issues of the microcredit/micro-finance programmes, like the incorporation and retention of the very poor, challenges in offering a variety of financial services and enhancing participation of the poor in

decision-making, will remain.

K KALPANA

“The poor themselves can create a

poverty-free world…. Credit can

create self-employment instantaneously. Why wait for others to create a job for you?” [Yunus 2005]. Muhammad Yunus, the founder of the Grameen Bank and the celebrity patron of the burgeoning global microcredit movement, asserts here what he has repeatedly articulated in his speeches and writings – the self-evident nature of the relationship of credit access to self-employment. Indeed, Yunus’ compelling oratory has, over the years, foregrounded appealing images of the hardworking poor carving a niche for themselves within the informalised segments of market economies. Images of poor women, who initiate and sustain tiny, often homebased enterprises in harsh economic environs and strive for upward mobility even as they unfailingly repay micro loans have come to constitute the staple public perception of the global microfinance industry and have, no doubt, influenced the Nobel Committee’s decision to recognise both the institution and the individual and, therefore, the idea they jointly represent – that access to microcredit, is one of the means by which “large population groups find ways in which to break out of poverty”.1

It is by now well known that the relative absence of interest subsidies in microcredit/ finance2 programmes, the high repayment performance deriving from the adoption of appropriate lending technologies and peer monitoring mechanisms, as well as the reduced transaction costs to lenders (visà-vis the costs of individual targeted lending) have earned microcredit on global acclaim as a market-based, finance-led solution to the problems of poverty and development. Microcredit is thus perceived as a development tool which enables the microfinance institution (MFI) to fully recover all costs and make profits, even while addressing concerns of poverty alleviation for the low income communities who constitute the bulk of its clientele.3 Consequently, a dramatic change has been

Economic and Political Weekly December 16, 2006

effected in the perception of the poor by powerful commercial players. By addressing some of the more intractable issues in lending to a large number of small, dispersed borrowers, rural poor communities are increasingly perceived, not just as “bankable” and “creditworthy”, but also as a vast, as yet largely untapped, market of savers and borrowers with immense potential. As K V Kamath, the CEO of the ICICI Bank puts it, working with agencies such as MFIs is a strategy for the ICICI towards “leveraging the rural economy” in order to “break into the top league of global banks”.4 The discovery by corporates that “people at the bottom of the pyramid can be brought into their business model” [RBI 2005: 42] and the concomitant urge to upscale and expand outreach of such programmes draws an attention to the critical issues of the interfaces between microfinance projects and the poor communities they serve, the structures of credit delivery (whether democratic and amenable to user-control or top-down and authoritarian) and the actual poverty impacts of micro-loans. The experience of the Grameen Bank provides us an entry-point to briefly reflect on some of these issues.

Institutional History

The record of the Grameen Bank is impressive not least because of the scale of its operations in Bangladesh. As of May 2006, the Grameen had provided loans worth Tk 290.03 billion to 6.67 million borrowers (97 per cent female) through 2,247 bank branches in over 72,000 villages, accounting for 86 per cent of villages in Bangladesh [Yunus 2006]. The institutional trajectory of the Grameen Bank, since its inception as an experimental project launched in 1976 by Muhammad Yunus to target collateral-free credit to the poor organised into small borrower groups, owes much to the early support from the Central Bank of Bangladesh, which authorised the Grameen project to function as a bank through a special charter in 1983. The Grameen Bank is thus legally empowered to raise deposits from its borrowers and the larger public – a feature that has enabled it to finance 100 per cent of outstanding loans from its own deposits, though donor funding was crucial for its operations in its early years (ibid). At a diminishing interest rate of 20 per cent charged on the majority of loans offered, the Grameen Bank is known to offer the lowest lending rates of all the big microfinance programmes in Bangladesh [Rutherford 2006].

The Nobel Peace Prize has been awarded to the Grameen Bank at an interesting phase in its institutional history, given that it re-invented itself in 2001 and announced a shift from the older Grameen (or “Classic Grameen”) to “Grameen II” in response to a series of crises such as borrower boycott of weekly group meetings and cessation of loan repayments, in protest against certain rigid programme features. The fall in repayment performance was worsened by Bangladesh’s disastrous floods of 1998 when borrowers found themselves unable to simultaneously repay older loans alongside the new, relief-oriented ones offered by the Bank [Yunus 2002]. Globally too, the brand Grameen took a beating after the Wall Street Journal charged the Grameen Bank with concealing its falling repayment rates and using accounting systems that did not meet industry standards [Pearl and Phillips 2001].

Concomitantly, since the 1990s, research focused largely on the Grameen Bank and other Grameen-modelled microcredit programmes in Bangladesh critiqued rigidities in the financial products such as standardised credit packages, absence of easy-access emergency loans, constraints placed on consumption lending that made clients camouflage household subsistence needs as demands for enterprise loans, inflexible and mandatory weekly loan repayments incompatible, for the most part, with the seasonal earnings and income fluctuations of the poor, involuntary savings that remained inaccessible to MFI members even during a period of great need, and an inadequate emphasis on savings or deposit mobilisation relative to that on loan disbursal [Fernando 2001; Jain and Moore 2003; Montgomery 1995; Montgomery et al 1996]. Research literature, consequently, characterised the Grameen-led microcredit sector as a “limited product industry” offering a narrow range of standardised products and underscored the urgency for MFIs to develop “client-centred” programmes that dovetail better with borrowers’ diverse livelihood and consumption-related demands and preferences.

Research literature also pointed to the trade-offs that result when programme features aimed at generating revenues that cover all costs – in response to mounting criticism of dependence on subsidised donor funds of MFIs – inadvertently discriminate against core poor sections. The Grameen Bank effected certain changes in the mid-1990s that included increasing the number of loans per borrower, introduction of larger-sized loans, more punitive enforcement of repayment discipline and branch managers’ obsession with increasing the scale of investment or loans outstanding [Jain and Moore 2003; Matin 1998; Rahman 1999]. Reports of coercive repayment tactics deployed by programme staff that led to the suicides by Grameen Bank borrowers and involved the seizure of property of defaulters were buttressed by researchers’ accounts of the exacerbation of exclusionary pressures against poorer members in a context of structural disempowerment of microcredit clientele vis-à-vis staff of Grameen-modelled programmes [Hulme and Mosley 1996; Montgomery 1995]. For reasons of selfexclusion and lack of institutional incentives, the consensus, by the later 1990s, was that microfinance programmes (including those that were poverty-targeted like the Grameen Bank) usually excluded the poorest or destitute sections and that the majority of membership comprised moderate and vulnerable non-poor households [Sebstad and Cohen 2000].

Grameen II

The Grameen Bank’s response to its internal crises and the host of issues raised by the contemporary research took the form of Grameen II, which sought, among others, to offer savings products that could be easily accessed, allow branch-level staff to design flexible repayment schedules of varying duration (thereby replacing the former one-year duration on all loans) and provide borrowers facing repayment difficulties the option to renegotiate their current loan to a “flexi loan” with easier repayment terms. In the words of Yunus, a tension-free microcredit and full dignity to the borrower were the most important features of Grameen II [Yunus 2002]. A subsequent analysis of Grameen II finds that the diversity of financial services offered, which include new savings products (both open access and pension savings) had greatly spurred the Grameen’s growth as reflected in a doubling of its total clientele and trebling of its deposit base within three years of its introduction, ending an earlier period of stagnation [Rutherford 2006].

However, the Grameen II has not significantly eased repayment-related tensions in weekly meetings or enabled borrowers to easily switch to the “flexi-loan” option, largely on account of the primary role

Economic and Political Weekly December 16, 2006 assigned to the Grameen branch staff in offering variable loan terms to borrowers’ vis-à-vis the latter’s agency in picking and choosing appropriate products. The Grameen branch staffs’ control over interpretation of Grameen II in the field was compounded by the absence of printed material explicitly stating the terms and conditions of financial products, members’ resultant ignorance of variable loan and repayment terms and staff unwillingness to execute policies which they feared might undermine repayment or “disturb the rhythm of the bank”. While the Grameen II introduced a zero-interest loan scheme for beggars in order to encourage participation among the poorest and also tightened its poverty-based recruitment criteria, the greatly increased demand for membership of Grameen among the non-poor classes owing to the more attractive financial products (diversified savings products and large-sized loans), was found to have strained Grameen staff’s adherence to poverty-based recruitment criteria in an environment marked by great pressure to maintain steady rates of membership growth (ibid).

Even as the Grameen model (Grameen “classic” rather than the Grameen II) has come to be replicated across the world through the Grameen Trust, countries like India have largely chosen alternative structures of microcredit delivery – the homegrown self-help groups (SHGs) that play to the strengths of the nationalised banking infrastructure.5 While it may be posited that Indian SHGs represent a more user-controlled, flexible mode of doing microcredit relative to the Grameen model,6 serious issues have been flagged here too, notably the scope for abuse of power within groups of very poor women [Morduch and Rutherford 2003] and the challenges of providing bookkeeping and accounting training to millions of SHG women with low formal literacy [Ghate 2006]. Meanwhile, the growth of Grameenmodelled MFIs in India (that lend to both five member joint liability groups as well as to SHGs) has gathered pace in recent years. The new drivers of MFI growth in India are a host of corporate players that include large commercial banks such as the ICICI, HSBC and ABN Amro, private venture capital funds and social venture capitalists.7 Lending models, by which banks such as the ICICI use MFIs to disburse, monitor and collect loans to the poor enable the former to expand their operations in rural hinterlands without incurring the expenses of establishing infrastructure [Duflo 2005].

Repayment Tensions

Issues pertaining to repayment tensions, rigidity of repayment schedules and participation of borrowers in the design of credit packages that Grameen II attempts to resolve – with mixed results – resonate in the Indian experience of microfinance as well. Earlier this year, the media reported suicides of close to 60 borrowers of Grameen-replicate MFIs in Andhra Pradesh allegedly attributed to harassment by the MFIs. The media also reported loan collection strategies such as forcing women to stand in the hot sun until co-members pay up, verbal abuse and humiliation of poor women by the MFI staff, even demanding physical collateral such as house title deeds of borrowers and charging “non-transparent” interest rates – the stated 31 per cent diminishing rate reportedly inflated through hidden costs.8 While political tensions resulting from competition between MFIs and state-sponsored SHGs in Andhra Pradesh are understood to have played a part in vitiating relations between the state and MFIs there, the Sector Report on Microfinance in India for 2006 acknowledges that MFI practice of full repayment and nil tolerance of default carried a high cost in terms of client dissatisfaction. The latter calls for a greater flexibility to accommodatecases of extreme distress and wider use of emergency loans and cautions MFIs to not overlook issues of client protection and the dangers of over-financing households in the “rush to grow” [Ghate 2006]. As an outcome of the crisis, Sa-dhan, the national association of MFIs, adopted a code of conduct that emphasises reasonable and transparent interest rates, avoidance of competition with the SHG network and eschewal of intimidation tactics by MFI staff. It remains to be seen, however, whether the sites of MFI projects, in India, Bangladesh or elsewhere, remain contentious and witnesses further conflict born of demands for poor-friendly programme design.

Credit Access

The literature available on the poverty effects of credit access suggests that evidence of microcredit contribution to mitigation of household vulnerability is stronger than the evidence that links it to the mitigation of income poverty [Zaman 2004]. Consequently, debates on the poverty impacts of credit access have come to emphasise the contribution of microcredit towards the non-income impacts of creditaccess, viz, those of strengthening the risk management and vulnerability reduction strategies of borrowers so as to better cope with stress events that exert downward

Economic and Political Weekly December 16, 2006

mobility pressures on poor households [Sebstad and Cohen 2000; Snodgrass and Sebstad 2002; World Bank 2001]. Research literature further suggests that the relationship between credit access and enhancement of income levels is mediated by a number of factors including pre-existing poverty levels of borrowers and their life circumstances (on account of upper poor sections being better equipped to profit from enterprise opportunities relative to the bottom poor) and conducive macroeconomic environments, pointing thereby to the context-dependent and contingent nature of the relationship [Hulme and Mosley 1996; Zaman 1999]. Contrary to the assertions of Yunus (that this paper begins with), the relationship of credit access to self-employment is not automatic, but subject to the influence of structural factors and macroeconomic policies (those that impact markets for goods and services produced by the poor, for instance) that the poor have little control over. It would appear, therefore, that for engagement with poverty reduction to be truly meaningful and effective, microcredit promotion cannot substitute confrontation with systemic inequities that sustain discrimination.

Following closely on the heels of the declaration by the United Nations of the year 2005 as the International Year of Microcredit, the award of the Nobel Peace Prize to Muhammad Yunus and the Grameen Bank will further reinforce the near-iconic status of micro finance within the global development industry. However, whatever the model by which microfinance is extended to the poor (whether SHGs or the Grameen), the fundamental issues are the same and pertain to incorporation and retention of very poor sections, to the challenges of offering a variety of financial services that are fine-tuned to borrowers’ needs while keeping costs affordable for the poor, to enhancing participation of the poor in decision-making with regard to the terms and cost of credit and to recognition by policy-makers that microcredit can be no more than a small part of a comprehensive strategy for poverty reduction. Even as the euphoria over the Nobel Prize for Yunus and the Grameen recede, these issues and the questions they raise will remain.

EPW

Email: kalpa@vsnl.com

Notes

1 Nobel Peace Prize Citation. 2 It is generally agreed that “microcredit” or small

loans for income-generation or consumption purposes are but one component of more comprehensive “microfinance” services that include savings, insurance, money transfers, etc. However, the terms are used interchangeably in this paper.

3 See Otero and Rhyne (1994) for a transition of the MFI in stages to full financial sustainability.

4 Knowledge@Wharton 2006: ‘ICICI’s K V Kamath Shapes a Business Plan in Rural India’s Uncertain Financial Terrain’, July 26, interviewwith K V Kamath. http://knowledge.wharton. upenn.edu/article.cfm?articleid=1529.

5 For a description of the differences in structure and organisation between the Grameen and the SHG models of microfinance, see Harper 2002.

6 For a discussion of whether SHGs offer greaterpotential for delivery of “protectional” financial services to members relative to Grameenmodelled programmes, see Kalpana 2005.

7 Lakshman (2006); Iyer (2006).

8 Surya (2006); The Hindu, April 17, 2006; April 20, 2006.

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  • Economic and Political Weekly December 16, 2006

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