Microfinance in crisis

Microfinance – the provision of small loans to the poor – is in crisis. Anyone who is in any doubt should listen to the words of Sheikh Hasina Wajed, the prime minister of Bangladesh, as quoted (registration required) in yesterday’s Financial Times:

“Microlenders make the people of this country their guinea pig,” she said. “They are sucking blood from the poor in the name of poverty alleviation.”

Bangladesh, it should be remembered, is central to the discussion of microfinance. Muhammad Yunus, the founder of Grameen Bank which was a pioneer in the field, jointly won the Nobel peace prize in 2006, along with the bank itself, for promoting microfinance.

It should also be remembered that microfinance is central to the development strategy favoured by western governments and multilateral institutions such as the World Bank.

Attacks on microfinance have come from several directions. In the Indian state of Andhra Pradesh, another centre for microfinance, the regional government has blamed microfinance for a spate of suicides among farmers.

In Bangladesh a Norwegian television documentary accused Yunus of diverting Norwegian aid money from one part of Grameen bank to another – although he was cleared of allegations. The programme also put forward arguments saying that microfinance does more harm than good.

Yunus has countered by accusing lenders of “misusing and abusing” the original concept. He blames firms for commercialising the practice.

For me the problem is not intrinsically with providing loans to the poor but the promotion of microfinance as an alternative to development. For Yunus it is part of a “small is beautiful” philosophy: a deliberate alterative to economic transformation. In my blog post of 24 May 2009 I quoted him saying: “The bigger the world economy, the bigger the threat to planet Earth”.

Grameen Bank, with 97% of its borrowers women, is also an explicitly Malthusian organisation. The “16 Decisions” its borrowers are “encouraged” to adhere to include keeping their families small. They must also promise, among other things, to grow and eat plenty of vegetables as well as building and using pit latrines.

Publications such as the Economist and the Financial Times are following the debate from a mainstream perspective. David Roodman, a senior fellow at the Center for Global Development in Washington DC, has a blog specifically on the subject. It has also received coverage on the Aidwatch blog . Diane Coyle has written on books on microfinance here and here.

I have covered the subject in previous blogs including 15 October 2006, 27 March 2007, 20 August 2009 and 4 October 2009.