The Paul Gosling Column
Laily Begum has become famous in Bangladesh. She is the public face of those who borrowed from Grameen Bank, the microfinance institution that creates opportunities for Bangladesh’s rural poor. Begum’s face has been on thousands of posters and leaflets, promoting the benefits of microcredit.
Begum’s loan from Grameen was for a mere 500 taka (about £4 at today’s exchange rate), which at the time, 11 years ago, was enough to obtain a mobile phone. With this, Begum became possibly the first ‘village phone lady’ in Bangladesh, establishing a profitable business in letting fellow villagers make calls to sort out their business.
In fact, her enterprise was so successful that Begum has moved onward and upward, now she and her husband – a former farm labourer, living on subsistence earnings – own a row of five shops, each let to tenants, and a small apartment block. Microfinance gave the Begums the chance to move from losers to (at least in a local context) winners in the game of capitalism.
So it is, too, with microcredit itself. The Grameen Bank has stayed true to its roots. It is a mutual organisation – owned by those (almost all women) who borrow from it. But it is now a giant institution, which owns its own skyscraper headquarters in Dhaka, has 7.5 million borrowers, over 24,000 staff, more than 2,500 branches and works in 82,000 villages. Since its first loan in 1974, Grameen has loaned $7.1bn, almost all of which has either been repaid or is being repaid. It charges interest on loans at 20%, which Grameen recognises is not cheap, but covers its costs in collecting money in a rural environment where agents of the bank have to spend much time travelling on bicycles and mopeds over dirt roads.
But Grameen’s high margins have enticed others into the potentially lucrative microcredit market. Perhaps inevitably most of those new entrants are not mutuals. True, the Co-operative Bank is involved, for all the right reasons, in microlending. And the bank’s Richard Wilcox – head of structured and asset finance – is one of the speakers at a major conference on microfinance in London at the end of next month.
Other speakers represent some of the most powerful banks in the world. They include the ‘global head of microfinance’ at Standard Chartered, the managing director of ‘global social investment funds’ at Deutsche Bank, a senior executive at Merrill Lynch and the ‘global director, microfinance’ at Citigroup. The involvement of Citigroup is no surprise as it is one of the most active global banks in entering the microcredit market, having provided $30m to the Accion charity in Texas to lend to the local poor.
Globally, about 10,000 new microfinance institutions have emerged. Various major banks have entered the market, including Barclays, Morgan Stanley and BNP Paribas. In Mexico, the Compartamos microfinance bank has even listed on the Mexican stock market, having converted, as the New York Times phrases it, from “a nonprofit that lent money to Mexico’s poor into one of the country’s most profitable banks”.
Despite working through local charities, the big banks expect to obtain strong financial returns through providing funds for microlending. The same is true within Bangladesh, where the ASA charity is competing for business with Grameen. Its lending is backed by the Dutch ABP pension fund and the TIAA-CREF investment fund in the US. According to Germany’s Spiegel magazine, total investments in microlending worldwide have increased from little more than $1bn to $4bn in the last four years. Deutsche Bank believes the market has by no means peaked, with an opportunity for $250bn in microcredit lending worldwide.
This explosion of banks’ involvement worries Grameen’s founder, Mohammed Yunus – who won a Nobel Prize for his work two years ago. Yunus issued a warning recently that the dramatic growth in microlending could create a financial meltdown similar to that of the sub-prime credit market in the US, which has caused the global financial system to stall.
“If you build it up that there’s a lot of money to make, you can get a sub-prime kind of thing, but this time it’s the really poor people who will be in trouble,” Yunus was quoted as saying. He contrasted the approach of Grameen with that of the big banks now moving in. “When you are making profits you are moving into the mentality of the loan shark. We are trying to get that loan shark out.”
There are, of course, two viewpoints here. The fundamentalist one is that activities designed to take the poorest people out of poverty are not ones that global PLCs should engage in. As far as the banks are concerned, they say they offer the potential for massively expanding the pool of finance available to those who most need it – if they earn a profit from doing good, surely, they argue, this is socially responsible investment?
Both arguments have value. In the end it perhaps comes down to the questions of whether the terms of lending are extortionate, whether borrowers can affordably repay their loans and whether the lending drives or restricts growth in the poorest regions. All of these criteria will vary according to specific circumstances.
Yet Yunus raises valid concerns. Irresponsible lending that promotes the desire for borrowing is extremely dangerous – it stoked the sub-prime crisis. New entrants to the microcredit market, motivated by profit, may not share the culture, let alone the experience, of Grameen and warn borrowers against taking out unaffordable loans.
Our movement will note that, yet again, innovation from the co-operative and mutual sector has been copied by the mainstream economy to make profits. True, it has also generated a movement for change. What remains unclear, though, is whether, in the hands of PLCs, that process of change is entirely positive.