As I blogged before, one of the last articles Daniel Pearl wrote for the Wall Street Journal before he was abducted and murdered---coauthored with Michael Phillips---exposed financial woes at the Grameen Bank. Appearing on page 1 on November 27, 2001, under the headline Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag, the piece described how some Bangladeshis were juggling loans from several microcreditors at once, how others had banded together to protest and resist the Bank's policies, and how the Bank's loose accounting standards and slow disclosure hid a decline in loan repayments.This post shares new data that suggest that history is repeating itself in important ways. The Grameen Bank, indeed all big microcreditors in Bangladesh, may be finding it harder to collect on loans. As far as the evidence goes, there has been no epidemic of default. But the combination of years of rapid growth and accelerating declines in key indicators of delinquency are so reminiscent of the lead-up to the global financial crisis that the broad implications hardly need explaining. A partial meltdown in the Mecca of microcredit would not sow the same economic destruction---microfinance is not the heart of Bangladesh's economy in Schumpeter's sense---but it could have lasting implications for microcredit worldwide.In his autobiography, Banker to the Poor, Muhammad Yunus describes how Grameen grew from an idea, to a project with his students, to a formal branch of a state bank, to an independent bank. By the mid-1990s, the Grameen Bank was a national operation with a global reputation. However, growth then slowed and the Bank ran into trouble persuading its borrowers to pay back. Stuart Rutherford:
Arrears on loan repayments began to grow, and more and more clients stopped attending the village-level weekly meetings where bank business is conducted. Then in 1998 Bangladesh suffered its worst floods in living memory, disrupting the bank’s work in almost two thirds of the country and dealing its balance sheet another severe blow.Yunus:
The system consisted of a set of well-defined standardised rules. No departure from these rules was allowed. Once a borrower fell off the track, she found it very difficult to move back on, since the rules which allowed her to return, were not easy for her to fulfill. More and more borrowers fell off the track. Then there was the multiplier effect. If one borrower stopped payments, it encouraged others to follow.Pearl and Phillips:
Grameen's performance in recent years hasn't lived up to the bank's own hype. In two northern districts of Bangladesh that have been used to highlight Grameen's success, half the loan portfolio is overdue by at least a year, according to monthly figures supplied by Grameen. For the whole bank, 19% of loans are one year overdue. Grameen itself defines a loan as delinquent if it still isn't paid off two years after its due date. Under those terms, 10% of all the bank's loans are overdue, giving it a delinquency rate more than twice the often-cited level of less than 5%.Some of Grameen's troubles stem from a 1998 flood, and others from the bank's own success. Imitators have brought more competition, making it harder for Grameen to control its borrowers.......microlending has lost its novelty. In Tangail, signboards for rival microlenders dot a landscape of gravel roads, jute fields and ponds with simple fishing nets. Shopkeepers playing cards in the village of Bagil Bazar can cite from memory the terms being offered by seven competing microlenders....Surveys have estimated that 23% to 40% of families borrowing from microlenders in Tangail borrow from more than one.Borrowers have also become more rebellious. "The experience was good in the beginning," says Munjurani Sharkan, who became leader of a Grameen group in Tangail's Khatuajugnie village in 1986. To put pressure on "lazy" group members who were slow making payments, she says she used to start removing the tin roofs of their homes. But one day, the whole group decided to stop making payments.They were protesting Grameen's handling of a fund it created for each group, using 5% of each loan and additional mandatory deposits. The "group fund" was meant for emergencies, but many borrowers wanted to withdraw money from the group fund. After a protest movement, complete with placards and amplified speeches, Grameen finally agreed to give borrowers easier access to the fund.The troubles and the exposé left several legacies. First, even before Pearl and Phillips got onto the story, Grameen embarked upon a program of transformation eventually called "Grameen II." Its hallmarks were simplification (of the various loan products), computerization, flexibility, and the taking of voluntary savings deposits. In response to the article, Yunus publicly regretted the Journal's failure to tell this story of positive change (and published all his e-mail exchanges with Pearl and Phillips!). He lacked credibility since Grameen's forthrightness had just been called into question; yet he was substantially right. Grameen II confounded the critics. Today, the icon of tiny loans for the poor does more microsavings than microcredit. Portfolios of the Poor extols the flexible new "topping up" system that lets people borrow back loan balances after 26 weeks of on-time payment.A second legacy: Grameen overhauled its metrics of loan delinquency and began posting them monthly on its web site. It thus set a standard of transparency that its main rivals, ASA and BRAC, are far from matching.Third, and far less important, when I started at the Center for Global Development in early 2002 and listed topics I could work on, my new boss Nancy Birdsall lit on "microfinance"; I think the recent Pearl and Phillips article was in the back of her mind. So it's one reason I am writing this today.Grameen II also confounded the critics in embarking upon a new round of growth---from 2.4 million Grameen members at the end of 2001 to a stunning 6.9 million at end-2006 and just under 8.0 million today. ASA and BRAC kept pace---in fact, closed the gap---so that that all the big three clustered around 6 million borrowers at end-2008. So strong is the convergence that one wonders whether the three are lending to the same 6 million households. (Not all 8 million Grameen members borrow at a time.)Indeed, multiple borrowing is widespread in Bangladesh now, and it has raised concerns that some Bangladeshis are juggling microcredit loans the way some Americans juggle credit card debt, in a merry-go-round that must one day stop. The worry, in other words, is that there is a microcredit bubble. In 2007, Shafiqual Haque Choudhury, founder and head of ASA, which is known as the most commercially savvy of the big three, worried aloud about a "train crash." And that was before the global financial crisis, which has probably been transmitted into poor Bangladeshi households via lower exports of clothing made in Bangladeshi factories and fewer construction jobs in the Middle East for Bangladeshi workers.Yet so far, at least from afar, tranquility seems to prevail. Repayment rates, to the extent they are reported, have remained high. In the last year, Portfolios of the Poor has depicted microcredit as a source of stability for Bangladeshi families more than instability. And Rich Rosenberg implicitly leaned on the high repayment rates in microcredit's exemplar nation in arguing that since people keep repaying loans over many years, and there have been only scattered credit meltdowns, most poor people must be avoiding gross over-borrowing.If Bangladeshi microcredit was approaching a train wreck---or at least a bumpy stretch---where would we see it first? On the website of the most transparent large microcreditor in the country. A few days ago, I visited Grameen's site, and was surprised to find this trend (full spreadsheet):
![Grameen Bank Loan Recovery Rate, 2002-](/doc/blog/Roodman%20open%20book/Grameen%20Bank%20Loan%20Recovery%20Rate,%202002-.png)
![Delinquency indicators, Grameen Bank, 2002-](/doc/blog/Roodman%20open%20book/Delinquency%20indicators,%20Grameen%20Bank,%202002-.png)
![Number of Grameen Bank members, 1980-](/doc/blog/Roodman%20open%20book/Number%20of%20Grameen%20Bank%20members,%201980-.png)
![Outstanding credit per Grameen Bank member, 2002-](/doc/blog/Roodman%20open%20book/Outstanding%20credit%20per%20Grameen%20Bank%20member,%202002-.png)
- I do not know whether Bangladesh's microcreditors are in major trouble. But if they are, the denouement will manifest much as in the graphs above.
- It is tempting to link the degradation in the Bank's portfolio to the mysterious dismissal of Deputy Managing Director Dipal Barua in December. I have no evidence for a link. However, when a financial institution forces out its head of operations while key indicators are going south, it raises questions. Shareholders---mainly the Bank's members---donors, and other stakeholders deserve an explanation.
- A crisis in Bangladesh, akin to recent ones in Bosnia, Morocco, Pakistan, and India, would tarnish the image of microcredit worldwide, perhaps permanently.
- Other microcreditors should quickly match Grameen's standards of financial disclosure so that we can get a better read on the extent of trouble.
- The Grameen Bank has repeatedly defied the skeptics and flourished for 34 years. This history should instill humility in any who would declare Grameen compromised now.
- Yet the Bank and its competitors have not quite proved that they can thrive without growth, as they must for permanence. A history of ending lending problems by outgrowing them is not entirely reassuring.
Disclaimer
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.