Microcredit

There has been of late a fascinating outbreak of discussion of microfinance at Marginal Revolution.

The first time I wrote of microcredit in this blog, in December 2010, I noted that Muhammad Yunus was generally considered its father, Grameen Bank was the DNA, and Bangladesh was the cradle.

I reported in that and a following entry on a controversy over a particular transfer of funds from Grameen Bank to Grameen Kalyan, a sister organization.

Half a year later I returned to the subject and referenced efforts to extend the basic model to the US.

A lot of newsy water has passed under the bridge since then. The significance of the discussion at Marginal Revolution, though, is that it takes our attention away from Yunis, away even from the 20^th and 21^st centuries, and asks us to think of microfinance/microcredit with a much longer life.  Jonathan Swift gently rocked its cradle in 18^th century Ireland.

That discussion will in turn direct you to this book.

Happy reading.

Microfinance

Felix Salmon posted a blog entry recently about his conversation with Muhammad Yunus. 

Salmon is generally skeptical about efforts to bring microfinance to the US via Grameen America, but he does seem to have been personally impressed by the flagbearer.

He was pleased that Yunis found the emphasize on the poorest of borrowers, and on microfinance as a pseudo-charity, to be "undignified."  This is the approach associated with Kiva, and you can read about it here.

After all, the beneficiary of microfinance is someone whois paying interest.  Yunus asked rhetorically:
"Why should you advertise her as someone who’s deserving of donations? It’s an undignified way of doing it. She’s running a business. Respect her as a client. As somebody who’s paying full cost.” 

Here's a coupling of Kiva and Gameen by a Seattle columnist a coiuple of years ago. Click

Of course, a business can cut costs if it can get people to volunteer their hours.

As Alicia Quinn has written: "This is a mutually beneficial relationship; organizations receive labor at little to no cost and volunteers fulfill their desire to give back. However, there are farther-reaching impacts of volunteers on microfinance organizations."

I'm afraid that's the sort of hippie-dippie language that gets my own dander up.   If they are a sustainable capitalist endeavor, as Yunus for one certainly believes, they should be able to pay the market rate for the labor they require.

Microfinance II

If all you knew of them was what I described in the preceding post, you'd think Yunus and his Grameen Bank universally beloved.

But of course, on this conflict-ridden planet, nobody is universally beloved.

Bangladesh Foreign Minister Dipu Moni spoke on December 7th of how "famous Yunus" can not be considered above the law, and a certain charge must be investigated "for the sake of the truth".

Those comments came about because a reporter asked the Foreign Minister about a documentary that aired on Norwegian television, November 30, entitled "Caught in Micro Debt." Why Norwegian television? Apparently because the Grameen bank has become a 'cause' in northern Europe. People from Norway, as well as Sweden and Germany, impressed by Yunus' work, have donated money to assist the bank in its micro-lending.

The most explosive allegations in the piece involved a transfer of funds from Grameen Bank to Grameen Kalyan, a sister organization that offers health "microinsurance".

Authorities in Norway say that they find it "totally unacceptable that aid is used for other purposes than intended no matter how praiseworthy the causes might be."

The maker of the documentary said that the transfer was a tax-evasion trick. (Whose taxes does it help evade? Norway's? Bangaldesh's? Both?) At any rate, the govt of Norway has formally dropped the matter, Yunus and Grameen have denied they did anything wrong, and the controversy over this particular transfer is only significant because it is a part of a larger whole: continued confusions over the morality, and practical significance, of lending money for interest at all.

If interest rates are inherently suspect, then lending money to the poor is even more so. If lending for interest is a natural and practical part of a system by which a country can develop and pangs of poverty can be banished -- or at the least lessened -- then what Yunus is doing is right, but one should also re-examine the laws by which people are stigmatized and punished as "sharks" for doing much the same.

A recent FT story on Grameen Bank quoted Mirza Azizul Islam, a former adviser to the finance ministry in Bangladesh, "Microcredit has played an important role in poverty alleviation in Bangladesh. My reservation is that people have gone just above the poverty line, but they have not been able to graduate much further."

Yes, for going "much further" something more than village bike repair shops, and the other microprojects that Grameen finances, would be necessary. Still, that fact hardly allows one to deprive Grameen of the credit for extending those services to those villages.

Microfinance I

In the mid 1970s, about 80 percent of Bangladesh population was below the poverty line.

In 2010, that number is 38 percent.

I take those statistics from the Financial Times weekend edition, which had a story entitled "Cradle of Microfinance Rocked."

But let's back up a bit. In 2006, the Nobel Peace Prize gave its renowned award jointly to one man and one institution: Muhammad Yunus and the Grameen Bank. The former was the founder of the latter.

More recently, Yunus has received the pop-culture equivalent of the Nobel Prize: an appearance on The Simpsons. In the second episode of 2010-11 season of the Fox network's hit animated program, Lisa sees a video in which Yunus discusses microfinance, and Lisa is inspired to lend her $50 of disposable income to Nelson Muntz. Nelson plans to start a bicycle repair shop with it.

The only thing wrong with the Muntz example is that it is set in the U.S. The typical "microfinance" loan takes place in the developing world, and goes to a prospective entrepreneur in a village. Some have argued that village social constraits are crucial to its success. Microfinance works because institutions like Grameen don't have to use draconian collection means. In a village, everybody knows everybody, and peer pressure sees to it that the borrower makes good use of the money. Perhaps with a profitable bicycle repair shop.

So the idea of "microfinance," the idea that won that Nobel Prize is that institutions can make money by banking people that traditional banks would never touch.

Yunus does in fact have videos on the web through which he promotes the idea. This is one of them.

So ... what went wrong? What is "rocking" this promising system of development? I will hold off on that point until tomorrow.