[DEBATE] : Critique of Yunus

[Patrick Bond]

(Have submitted to ZNet. Feedback welcome.)


A Nobel loan shark?

What sort of dogmatic free-market ideologue would use poor people’s 
(often socially-constructed) desire for credit to justify shrinking the 
already beleaguered welfare policies of wretched Third World states?

Consider this outlandish claim: ‘I believe that “government”, as we know 
it today, should pull out of most things except for law enforcement and 
justice, national defense and foreign policy, and let the private 
sector, a “Grameenized private sector”, a social-consciousness-driven 
private sector, take over their other functions.’

Grameen is Bangladesh’s ‘barefoot bank’ specializing in group loans to 
low-income women. And the Vanderbilt University-trained economist who 
made that statement, Muhammad Yunus (in his autobiography Banker to the 
Poor), just won the Nobel Peace Prize.

Yunus has a grand self-image, telling a Dhaka press conference last 
week: ‘Now the war against poverty will be further intensified across 
the world. It will consolidate the struggle against poverty through 
microcredit in most of the countries.’

Yet this seemingly benign, three-decade old attempt to foster 
entrepreneurship amongst impoverished women has attracted intense 
grassroots – and also professional – criticism.

Or did you miss the critiques? Not surprisingly, the establishment press 
loves Yunus, nearly as much as do Bill and Hillary Clinton. The 
Financial Times made this outlandish claim, backed by no evident 
research: ‘Microfinance has played a central part in Bangladesh's 
success in reducing poverty by almost 10 percentage points over the past 
five years, to 40%, a rate that puts Bangladesh on track to meet its 
Millennium Development Goal of halving poverty by 2015.’ Moreover, 
‘Grameen's business model is in rude health.’

The Wall Street Journal profiled Yunus on its front page five years ago: 
‘To many, Grameen proves that capitalism can work for the poor as well 
as the rich,’ having ‘helped inspire an estimated 7,000 so-called 
microlenders with 25 million poor clients worldwide.’

Yet looking more closely, the Journal’s reporters - including the late 
Daniel Pearl (senselessly beheaded by Islamic extremists) - conceded the 
prevalence of Enron-style accounting. A fifth of the bank’s loans in 
late 2001 were more than a year past-due: ‘Grameen would be showing 
steep losses if the bank followed the accounting practices recommended 
by institutions that help finance microlenders through low-interest 
loans and private investments.’

A typical Grameen gimmick is to reschedule short-term loans that are 
unpaid after as long as two years, instead of writing them off, letting 
borrowers accumulate interest through new loans simply to keep alive the 
fiction of repayments on the old loans.

(A Bostonian called Ponzi made this reverse pyramid technique infamous 
amongst bankers many years ago, and the Bretton Woods Institutions 
updated the practice during the 1980s during the Third World debt 
crisis, and continues to lend often simply to permit payments to be made 
on old debt in arrears.)

Not even extreme pressure techniques - such as removing tin roofs from 
delinquent women’s houses, according to the Journal report - improved 
repayment rates in the most crucial areas, where Grameen had earlier won 
its global reputation amongst neoliberals who consider credit and 
entrepreneurship as central prerequisites for development.

By then, even the huckster-filled microfinance industry felt betrayed: 
‘Grameen Bank had been at best lax, and more likely at worst, deceptive 
in reporting its financial performance’, wrote leading microfinance 
promoter J. D. Von Pischke of the World Bank in reaction to the WSJ 
revelations. ‘Most of us in the trade probably had long suspected that 
something was fishy.’

Agreed Ross Croulet of the African Development Bank: ‘I myself have been 
suspicious for a long time about the true situation of Grameen so often 
disguised by Dr. Yunus’s global stellar status.’

Several years earlier, Yunus was weaned off the bulk of his 
international donor support, reportedly $5 million a year, which had 
until then reduced the interest rate he needed to charge borrowers and 
still make a profit. Grameen had become ‘sustainable,’ self-financing, 
with costs to be fully borne by borrowers.

He had also battled backward patriarchal and religious attitudes in 
Bangladesh, and his hard work extended credit to millions of people. The 
secret was that poor women were typically arranged in groups of five: 
two got the first tranche of credit, leaving the other three as 
‘chasers’ to pressure repayment, so that they could in turn get the next 
loans.

But at a time of new competitors, adverse weather conditions (especially 
the 1998 floods) and a backlash by borrowers who used collective power 
of nonpayment, Grameen imposed dramatic increases in the price of 
repaying loans. And it is here that Grameen Bank’s main philosophical 
position – ‘We consider credit as a human right’ – was reduced merely to 
an argument for access, not affordability.

In that regard, Yunus is entirely different from all the rights-based 
social movements which have demanded ‘rights’ in terms of free lifeline 
access to healthcare, education, housing, land, water, electricity and 
the like.

Although criticism of Grameen ‘is still a minority view’ and Yunus 
performed ‘miracles’ in rolling out credit to the masses, according to 
Munir Quddus, who chairs the Department of Economics and Finance at the 
University of Southern Indiana, the hype needs more investigation than 
apparently was given by the Nobel committee: ‘The very nature of setting 
up groups leaves out the very poor who would be perceived by fellow 
members to have no ability to generate income and therefore high risk.’

Quddus continues: ‘Others have pointed out that micro-credit simply 
deepens the exploitation of the women since the rates of interest 
charged by the bank in real [after inflation] terms are quite high; 
consequently, credit often worsens the debt situation and gives the 
husbands even more leverage.’

Gaining leverage over women – instead of giving them economic liberation 
- is a familiar accusation. In 1995, New Internationalist magazine 
probed Yunus about the 16 ‘resolutions’ he required his borrowers to 
accept, including ‘smaller families’.

When New Internationalist suggested this ‘smacked of population 
control’, Yunus replied, ‘No, it is very easy to convince people to have 
fewer children. Now that the women are earners, having more children 
means losing money.’

In the same spirit of commodifying everything, Yunus set up a 
relationship with Monsanto to promote biotech and agrochemical products 
in 1998, which, New Internationalist reported, ‘was cancelled due to 
public pressure.’

As Sarah Blackstock reported in the same magazine the following year: 
‘Away from their homes, husbands and the NGOs that disburse credit to 
them, the women feel safe to say the unmentionable in Bangladesh – 
micro-credit isn’t all it’s cracked up to be… What has really sold 
micro-credit is Yunus’s seductive oratorical skill.’

But that skill, Blackstock explains, allows Yunus and leading imitators 
‘to ascribe poverty to a lack of inspiration and depoliticize it by 
refusing to look at its causes. Micro-credit propagators are always the 
first to advocate that poor people need to be able to help themselves. 
The kind of micro-credit they promote isn’t really about gaining 
control, but ensuring the key beneficiaries of global capitalism aren’t 
forced to take any responsibility for poverty.’

Though I have never been to Bangladesh and have only discussed these 
problems with Yunus once (more than a decade ago when he visited 
Johannesburg), microfinance gimmickry certainly did damage in Southern 
Africa.

For example, in 1998, when the emerging markets crisis raised interest 
rates across the Third World, a 7% increase imposed over two weeks as 
the local currency crashed drove many South African borrowers and their 
microlenders into bankruptcy.

Next door in Zimbabwe, a $66 million flood of World Bank financing 
during the 1980s (in lieu of land reform) revitalized a rural 
microfinance sector initiated under late 1940s racist Rhodesian rule. 
The Bank program ultimately reached 94,000 households. But within a 
decade, the result was a peasant default rate of 80% in the impoverished 
‘Communal Areas’ (equivalent to apartheid Bantustans).

Repayment affordability was a huge factor, since a typical lender’s 
overhead and collection costs represent 15-22% of the amount of a small 
loan, including incorporation of a 4% default rate. In Zimbabwe, 
servicing loans of even just a few hundred US dollars represented 
enormous burdens when, according to one Agriculture Ministry survey in 
1989, the average net crop profit per hour of labour was just $0.15.

Michael Drinkwater’s detailed study of central Zimbabwe showed that 
‘improving farmers’ access to credit has placed many of them in serious 
difficulties’ compounded by ‘an overzealous launching of a group credit 
scheme’ and the ‘doubtful viability of high cost fertiliser packages’ 
inappropriate for the erratic climate. ‘The increase in credit use means 
farmers have to market more to stay solvent... At the household level it 
is commonly debts not profits that are on the rise.’

To address the crisis, in 1991 the World Bank unsuccessfully promoted 
even more Grameen-style group credit, albeit with the caveat that 
‘Zimbabwe’s experience to date with group lending has not been 
favourable. The organisation of groups is initially expensive and 
time-intensive’, and ‘major problems have become apparent.’

Not far away, in Lesotho, anthropologist James Ferguson studied a 1975 
World Bank report that guided the country’s development strategy: ‘In a 
“Less Developed Country”, where the cash economy is on such a precarious 
basis, there must be [according to the Bank] “a conspicuous lack of 
credit for the purchase of farm inputs,” and it is obvious that “credit 
will play a critical role in all future major agricultural projects.”’

Rebutted Ferguson, ‘It is never explained exactly why the need for 
credit is so critical. It is true that most Basotho invest very little 
in agriculture probably due to their intelligent appreciation of the low 
potential and high risks of capital intensive farming in Lesotho but 
this is usually not a matter of being unable to obtain the cash to make 
such an investment. Most families have access to wage-earnings or 
remittances, and this money most commonly comes in large lumps which 
could easily be used for agricultural inputs, but for the most part is 
not. Yet in the “development” picture, the need for credit is almost an 
axiom.’

Ugandan political economist Dani Nabudere has also debunked ‘The 
argument which holds that the rural poor need credit which will enable 
them to improve their productivity and modernise production.’ For 
Nabudere, this ‘has to be repudiated for what it is ─ a big lie.’

Even from inside the World Bank these lessons were by then obvious. 
Sababathy Thillairajah reviewed the Bank’s African peasant credit 
programmes in 1993 and advised colleagues: ‘Leave the people alone. When 
someone comes and asks you for money, the best favour you can give them 
is to say “no”... We are all learning at the Bank. Earlier we thought 
that by bringing in money, financial infrastructure and institutions 
would be built up ─ which did not occur quickly.’

But not long afterwards, Yunus stepped in to help the Bank with 
ideological support, as it rejuvenated microfinance with a $200 million 
global line of credit aimed at poor women in August 1995, just prior to 
the Beijing gender conference.

The global justice movement’s Attac group has an excellent Oslo branch, 
which this week published a new book, Economic Apartheid. Its members 
pointed out to me that that Yunus was strongly supported by his friends 
in the Norwegian ruling class, including a former top finance ministry 
bureaucrat and leading officials of Telenor, Norway’s phone company. 
Telenor owns 62% of GrameenPhone, which controls 60% of Bangladesh’s 
cellphone market.

At a time when the centre-left Norwegian government has a high profile 
for partially cancelling illegitimate Third World debt and threatening 
to defund the World Bank, both of which are applauded by local 
activists, the people who make these decisions were conscious of how 
important it is for Norway to project the possibility of capitalism with 
a human face.

The question is whether they looked hard enough at conflicts generated 
by credit, at the risk of putting this Nobel in the same category as 
Peace Prizes granted to Shimon Peres, F.W. deKlerk and Henry Kissinger.

(Patrick Bond’s new book, Looting Africa: The Economics of Exploitation, 
is available from Zed Books.)