December 10, 2010 5:54 pm

Cradle of microfinance rocked

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Bangladeshis were euphoric in 2006 when their country’s renowned “banker to the poor”, Muhammad Yunus, founder of the pioneering microlender Grameen Bank, won the Nobel Peace Prize for efforts to “create social and economic development from below”.

With that accolade, Bangladesh, once famously derided as an “international basket case”, was recognised as the cradle of a globally significant idea: that lending small sums of money to poor women to help them start micro-enterprises could lift them out of poverty.

Months later, Bangladesh was in turmoil as a military-backed government sought to purge the political stage of two strong women leaders, Sheikh Hasina Wajed, of the Awami League, and Khaleda Zia, of the Bangladesh Nationalist party, whose bitter personal enmity had poisoned the country’s political life.

Mr Yunus entered the political fray, unveiling plans for a new party, Nagorik Shakti, or Citizens’ Force, to clean up venal politics. Though his foray was soon abandoned, Mr Yunus was marked by politicians as a potential rival for power.

That resentment was on display this week when Ms Hasina, now prime minister, fiercely attacked microfinance – and its celebrated founder, Mr Yunus – after a Norwegian television documentary raised questions about microcredit’s true impact.

At a Dhaka press conference, she lashed out at Bangladesh’s vast and diverse microfinance industry, which has some $2.2bn in outstanding loans to about 30m borrowers, in extraordinarily harsh language. “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.”

Taking her cue from an issue raised in the television documentary, Ms Hasina accused Mr Yunus of playing “a trick” to evade taxes in the mid-1990s, when Grameen Bank transferred millions in European donor money for housing loans from the poor to a sister entity, Grameen Kalyan.

The transfer, which caused friction with Grameen’s Norwegian donors, was subsequently reversed, and Erik Solheim, Norway’s international development minister, this week dismissed any suggestion that it involved financial impropriety.

When Mr Yunus began microlending in Bangladesh in the mid-1970s about 80 per cent of the population was living below the poverty line. Today, that figure has dropped to about 38 per cent. “In this achievement, microcredit has played an important role,” said Mirza Azizul Islam, a former finance ministry adviser.

Yet Ms Hasina’s attack gave voice to old questions in Bangladesh about how far the small, high-interest loans offered by Grameen and other private microlenders to start tiny businesses such as tea stalls, grocers’ and other kiosks can genuinely lift people out of poverty .

Similar questions are rocking the fast-growing microfinance industry in India, where some officials have accused local microlenders of pursuing “hyper-profits” from the poor.

“In south Asia, the belief that the anti-poverty efforts should be managed by government is pretty pervasive,” said Alex Counts, president of the Washington-based Grameen Foundation, which promotes ethical microfinance. “Whenever you have claims of an effective response not controlled by government but by the private sector, there is bound to be some discomfort with that.”

Indian microlenders are now struggling to survive after authorities in Andhra Pradesh state, which accounts for 35 per cent of India’s $6.7bn microloans, adopted draconian rules restricting their activities and favouring state-run schemes instead.

In Bangladesh, where the independent Micro-credit Regulatory Authority was set up four years ago, lenders do not appear to face any imminent disruption, though interest rates for microloans were capped at 27 per cent last month.

“There is certainly no contemplation that microcredit is going to be banned,” said Mr Islam.

Yet even sympathisers are questioning whether the tiny, informal businesses can do any more than take the edge off borrowers’ poverty or whether new innovations are required to put millions on a sounder economic footing.

“Microcredit has played an important role in poverty alleviation in Bangladesh,” Mr Islam said. “My reservation is that people have gone just above the poverty line, but they have not been able to graduate much further.”

Ifty Islam, of Asian Tiger Capital Partners, a boutique investment bank in Dhaka, says developing countries need to improve financial access for small and medium enterprises with real prospects of creating sustainable large-scale employment.

“Providing expensive credit to individuals in the villages doesn’t necessarily create sustainable businesses,” he said. “Not everybody can be an entrepreneur.”

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