The Economy of Shame: A review of Microfinance and Its Discontents

By Ghazal Zulfiqar
Wellesley Centers for Women

Karim_microfinance coverIn the late 1990s Muhammad Yunus, the founder of the Grameen Bank in Bangladesh and the winner of the 2006 Nobel Peace Prize, proudly claimed that thanks to microfinance, by the year 2030, poverty would be relegated to a museum. Microfinance has since been referred to as a panacea, a magic bullet, and a critical turning point in development history. Unlike other antipoverty interventions, microfinance institutions can graduate from relying heavily on donor support to being completely financially sustainable. Moreover, its proponents argue that the poor are more entrepreneurial and financially savvier than the nonpoor: even when commercial banks refuse to deal with them, they borrow, lend, and save informally. Microfinance institutions help, proponents say, by offering loans at rates that are lower than those of usurious village moneylenders—although still, admittedly, very high, since the banks have to cover the cost of operating in remote rural areas and catering to the very poor, who often require unusual lending arrangements. In fact, microfinance interest rates easily run into double digits and may rise to as high as 100 percent, as in the case of the Mexican microfinance giant, Banco Compartamos.

Recently, sobering news from Andhra Pradesh, India, about dozens of microfinance-related suicides of overindebted, poor borrowers, has rocked the development boat somewhat. The suicides have occurred at nearly the same time that the Indian capital market made a billionaire out of Vikram Akula, the founder of SKS Microfinance, the first microfinance institution to go public in India, with an initial public offering of nearly $350 million. SKS had been expanding rapidly in India since the late 1990s, and Andhra Pradesh was one of its main markets. Following the news of the suicides, in early 2011, Yunus was implicated in a much talked-about corruption scandal, which eventually led to his forced retirement from the Grameen Bank. Nevertheless, microfinance is still considered a development innovation that has brought relief to millions living in poverty. The Economist, in its November 2010 issue, referred to it as a “rare” antipoverty tool, since it breaks even: those who receive the loans nearly always pay them back.

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