The Crisis of Microfinance

NEW DELHI – The recent ouster of the Nobel Prize-winning Bangladeshi economist Mohammed Yunus as Managing Director of the Grameen Bank, which blazed a trail for microfinance in developing countries, has thrown a spotlight on the crisis engulfing a business that was once seen as a harbinger of hope for millions.

Yunus’s tussle with the government of Bangladesh, which had tried to retire him on grounds of age (he is 70) before firing him from his own board, is entangled in his country’s complicated politics. But Bangladeshi President Hasina Wajed’s remark that Yunus had “spent years sucking the blood of the poor” echoes similar charges being made in neighboring India against companies and banks that sought to emulate Grameen.

Last November, Andhra Pradesh, one of India’s most populous states, cracked down heavily on private microfinance institutions (PMFIs), banning many of their activities and telling borrowers they did not need to repay their loans. State authorities said they were prompted to take decisive action by a spate of suicides by borrowers who were unable to pay their debts. Roughly 80 clients were reported to have taken their own lives last year – an alarming figure, though tiny relative to the 26.7 million active borrowers from PMFIs in India.

Andhra Pradesh officials charged that PMFIs, which had lent around 80 billion rupees (nearly $2 billion) in the state, levy “usurious” interest rates (24-30% per year) to sustain their promoters’ extravagant salaries and profits. In addition, too many borrowers had taken multiple loans from different sources and were unable to repay them. Aggressive agents were marketing the loans with no heed to borrowers’ capacity to repay. It was alleged, too, that coercion was being used to exact repayment, leaving victims with no way out but to end their own lives.