NEWS WIRE: Microcredit : Altruism or Eploitation?

Original editorial available here.

MICROLOANS were invented to help the poorest of the poor help themselves. Now major banks and pension funds are getting into the business, as they discover that the interest paid by the poor can produce high returns. Is it aid or exploitation?

Muhammad Yunus is the banker of the poor. He took a risk and transformed a bank, the most important tool of capitalists, into an instrument to fight poverty. And he turned the loan, for centuries a privilege of the affluent to increase their wealth, into a human right.

Muhammad Yunus is on a par with Nelson Mandela, Martin Luther King and Mother Teresa. Like them, he won the Nobel peace prize and, like them, Yunus believes in man’s inherent ability to be reformed.

Like Yunus, Shafiqul Haque Choudhury is also involved in the business of eliminating poverty.

Both manage banks. Yunus is permitted to use the word Bank to refer to his organization, Grameen Bank. But for legal reasons Choudhury’s organization, ASA, cannot call itself a bank. It is formally a non-governmental organization (NGO).

Yunus’ most famous client
Yunus changed the lives of millions of people, like Laily Begum. In their former life, her husband Atiqullah was a day labourer and Laily was a housewife. They lived in a mud hut, which they shared with their children, and their livestock. They lived on the food they grew in their garden and from their earnings as manual labourers. On many an evening, they had to decide who should be allowed to eat his fill — the children or the husband.

Today they face different decisions. Should the eldest study abroad after finishing high school? Should they buy a new television set? Are three mobile phones enough for a family of six?

The source of their affluence is a row of five shops on the main road, each of them around half the size of a garage, protected against burglars with metal shutters. The shops belong to Laily Begum. She had them built, then rented them out. Begum also owns a small apartment building next to the row of shops. There are nine apartments, and she rents them unfurnished. Behind her house is a stable with cows in it. The milk and the rent for the apartments and shops provide Laily Begum, her husband and their three children with a daily income of about $23, or $698 a month.

The Begum family has Yunus to thank for its success. More than 30 years ago, he recognized that an important cause of poverty was the fact that the poor are excluded from the services that financial sector offers. Banks don’t lend money to poor people, because they can provide no collateral. In the average banker’s opinion, lending them money is tantamount to “gradual suicide.”

Yunus, a professor of economics at the University of Chittagong at the time, disagreed. He issued his first loan to 42 female basket weavers. The total loan amounted to $51. All of the women repaid their shares of the loan in full.

Women handle money more responsibly
That was the beginning of Grameen Bank. To this day it issues small loans to the poor, and to this day its repayment rates remain phenomenal, above 98 percent, according to the bank. Although Grameen Bank’s loans are disbursed to individuals, a group of borrowers — of which each customer must be a member — is liable for repayment. If one borrower doesn’t pay up, the members of the group are responsible for his or her payment. This method has been profitable for Grameen Bank, which has reported an average annual earnings of $7.3 million in the last 10 years. The bank reinvests its profits in new branches.

Grameen Bank charges 20 percent interest. “That’s extortion,” says Yunus’ critics. His response is that they understand nothing about his business. His employees travel out into the villages and collect the loan payments during the borrower groups’ monthly meetings. This personal form of collection costs money.

Laily Begum felt that the terms were acceptable, and she received her first loan in 1997. She used the money to buy a mobile phone. Anyone who wanted to call friends or relatives paid 7 taka a minute. Begum kept 4.4 taka, and the rest went to the telephone company. It was a good business — and a brilliant idea. Both Begum and the villagers benefited from her new business.

Grameen Bank currently has microloans issued to more than 7.5 million women in Bangladesh. This is an astonishing success, but not all women are capable of handling their new power and opportunities. Some entered the village phone business too late in the game, others unwittingly bought sick or old cows and yet others had to look on as their husbands drank away the money. According to estimates, roughly one in two borrowers has been able to pull her family out of poverty with the help of microloans.

‘The problem with charity is that you get lazy’
An estimated 10,000 microlending organisations operate in 93 countries worldwide, issuing loans to 60 million poor people. Some organisations, like Grameen Bank, were founded by dedicated individuals, while others are the continuation of former aid projects. For a long time, many founders adhered to Yunus’ principles and rules, but now a new class of poverty eliminator is entering the picture. It includes people like Choudhury who, unlike Yunus, are no longer interested in reforming capitalism, but instead intend to fight poverty and make a good living at the same time.

“The problem with charity is that you get lazy and begin to lose transparency. You spend money instead of saving it,” says Choudhury.

“People accuse me of turning my employees into robots. They’re right. For the work I do, I don’t need a bunch of creative people. What I need is reliability and predictability. I’m creative enough myself.” He takes out a pad of paper and draws two rectangles that form a T, then a circle. “This is what it looks like in my branches,” says Choudhury, tapping dots onto the paper with the tip of his pen. “Two tables with employees sitting at them. One fan. No extras, no guards at night. Two employees who are required to sleep in the office at night. That’s how you save money and that’s how you remain effective.”

Perfecting the system — or destroying it?
Choudhury is the man who is perfecting Yunus’ system — or destroying it, depending on one’s perspective.

He is famous in the microcredit industry for the manner in which he transformed the ASA business model from one day to the next. In the 1980s, ASA was an aid organisation that issued microloans as a secondary activity.

Choudhury is in the same business as Yunus, but he doesn’t conduct it like a missionary who is familiar with human weaknesses. Instead, Choudhury conducts his business like a staff sergeant.

He prides himself on running the world’s most effective micro lending organisation. The business magazine Forbes supports his claim. In a comparative study conducted last year, ASA was ranked first among more than 600 microlending organisations.

Like many others, Choudhury copied the principles of Yunus’ bank, but he also made some important changes. It was these changes that led Ratna Akhtar to take out her loan with ASA.

Akhtar lives in the countryside, in Bhaturia. Akhtar owns a few cows and some fields, which she and her husband bought using loans. They sell the milk and the vegetables they grow to a wholesaler at a nearby market. Their business has been sufficiently profitable for a two-room house, a television set, a mobile phone and a savings account with a balance of $ 93.

Akhtar and about 20 other women meet in a courtyard once a week. They squat on the ground, holding money and their account books in their hands. An ASA employee sits in front of them on a chair, collecting the money and recording the amounts into the account books.

There are groups, as with Grameen, but there is no group liability. ASA employees apply pressure to delinquent customers. They are instructed to camp out in front of the respective borrower’s door until the borrower pays up. Choudhury also boasts a 95-percent repayment rate. He charges 23 percent interest.

Enlisting the help of egoists
The biggest difference between the two men is that Yunus wants to convert people, while Choudhury does not. Choudhury wants to fight poverty by enlisting the help of egoists. In the last two-and-a-half years, he has traveled around the world, visiting investment bankers and pension fund managers, hoping to convince them to invest in ASA.

A few listened to him as he explained the system and told them about his repayment rates, and they asked him for more information. Then they offered Choudhury money, sums like $100,000 or $ 200,000. Choudhury was outraged. “What do you want me to do with that?” He would ask. “I want to establish a fund that’s worth $125 million. With that much financial backing, I will set up ASA branches in China, Pakistan, India, Nepal and Sri Lanka. I can promise a 10-percent annual yield over 10 years.”

Choudhury got his money. His investors now include major pension funds, like ABP in the Netherlands and the American TIAA-CREF mutual funds, together worth $775 billion. But they are not the only ones that consider an investment in the poor to be worthwhile.

In the last four years, the amount of foreign investment in microlending organizations has tripled. From more than $1 billion to $4 billion. New entrants to the business include Credit Suisse, Morgan Stanley, the French insurance group AXA, the Blackstone and the Carlyle Group. All are attracted to the idea of helping the poor while turning a profit.

Exploitation behind a humanitarian façade
Many of these companies use the combination of capitalism and altruism for promotional purposes. But in some cases it is difficult to detect any altruism at all. Compartamos is a case in point. For Yunus, this Mexican microlending bank is the epitome of modern exploitation hidden behind a humanitarian façade.

Today Compartamos is Mexico’s most profitable bank, and it still specializes in issuing microloans to the poor. But Compartamos charges annual interest rates of close to 90 percent. About 850,000 Mexican women are paying off the loans they received from Com-partamos. The bank, a darling of investors, boasts returns of 55 percent.

Usurers disguised as do-gooders
Muhammad Yunus is unhappy about the development. He fears that the microlending industry will pay more attention in the future to investors’ returns than to fighting poverty. “Our goal was to force out the usurers,” says Yunus. “Now they’re coming back, disguised as do-gooders.”

Nowadays, everything revolves around more, not less: more for the poor, and more for the investors.

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