The recent ouster of the Nobel Prize-winning Bangladeshi economist Mohammed Yunus as managing director of Grameen Bank, which blazed a trail for microfinance in developing countries, has thrown a spotlight on the crisis engulfing a business that was once seen as a harbinger of hope for millions.
Yunus’ tussle with the government of Bangladesh, which had tried to retire him on grounds of age (he is 70) before firing him from his own board, is entangled in his country’s complicated politics. However, Bangladeshi President Hasina Wajed’s remark that Yunus had “spent years sucking the blood of the poor” echoes similar charges being made in neighboring India against companies and banks that sought to emulate Grameen.
Last November, Andhra Pradesh, one of India’s most populous states, cracked down heavily on private microfinance institutions (PMFIs), banning many of their activities and telling borrowers they did not need to repay their loans. State authorities said they were prompted to take decisive action by a spate of suicides by borrowers who were unable to pay their debts. Roughly 80 clients were reported to have taken their own lives last year — an alarming figure, though tiny relative to the 26.7 million active borrowers from PMFIs in India.
Andhra Pradesh officials charged that PMFIs, which had lent about 80 billion rupees (nearly US$2 billion) in the state, levy “usurious” interest rates (24 percent to 30 percent per year) to sustain their promoters’ extravagant salaries and profits. In addition, too many borrowers had taken multiple loans from different sources and were unable to repay them. Aggressive agents were marketing the loans with no heed to borrowers’ capacity to repay. It was alleged, too, that coercion was being used to exact repayment, leaving victims with no way out but to end their own lives.
One institution that received unwelcome attention was SKS Microfinance, once a poster child for the PMFIs, which had done so well and grown so large that its initial public offering last year was oversubscribed 13-fold and raised US$350 million. The salaries paid to its top executives — as a reward, essentially, for lending successfully to the poorest of the poor — were excoriated by leaders across India’s political spectrum. SKS chairman Vikram Akula reportedly made US$13 million by selling some of his shares last year. Is it moral, critics asked, to profit so much from providing services that alleviate poverty?
However, the counter-argument is that professionally run private microcredit is better than no credit at all — the situation most of the poor confront. State banks are supposed to lend generously to India’s rural poor, but their operations are mired in inefficiency and corruption. Loans often require bribes and the banks’ procedures are bewildering to the unlettered. Traditional moneylenders are the only alternative and they extort far more than 30 percent a year — often at the point of a knife, or worse.
The problems with microcredit raise a larger question: Should the poor be served by modern financial institutions that raise their funds in capital markets or must they rely exclusively on non-profit sources of support? The late Indian management guru C.K. Prahalad suggested in his bestselling book The Fortune at the Bottom of the Pyramid that businesses could make healthy profits by serving the poor — and so satisfy their shareholders while promoting social development.