Professor Yunus’s Opinion

The New York Times has published an opinion piece by Muhammad Yunus on how to keep microcredit on this side of usury:

In the 1970s, when I began working here on what would eventually be called “microcredit,” one of my goals was to eliminate the presence of loan sharks who grow rich by preying on the poor. In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks.But it has.

For close followers of microfinance, Yunus's writing will ring familiar. For the general public, it is a concise statement of his thinking. He makes two concrete points:

• "Commercialization has been a terrible wrong turn for microfinance." Commericalized microfinance is not really microfinance. It is usury, profiteering off the poor. It should stop. Now, as Yunus clarified in his debate with Vikram Akula at the Clinton Global Initiative last fall, he is not against profit in microfinance, but against outside ownership of microfinance institutions---that's what he means by "commercialization." The borrowers should own the lenders. He thus favors cooperative corporate governance, an idea that, like group microfinance itself, traces back to the early socialist Robert Owen. The Grameen Bank, of course, is majority-owned by its borrowers (page 25).
• Microcreditors should charge no more than 15% above their own cost of funds. Here, the professor valiantly takes on the ancient challenge of defining the just price of credit. Once, the Christian Church, like Islam, deemed any interest unjust. After a thousand years or so, it switched to accepting interest within reasonable bounds. A papal decision written almost exactly 500 years ago on how much interest to charge the poor stuck to principles and avoided numbers---wisely, I think.

Overall, I think Yunus makes a good point about the dangers of commercialization as he defines it. Indeed, events in India have, to a degree, vindicated him. Although I criticized his line of argument before the Indian implosion (this, this) and will do so here, I have come to appreciate a contradiction in my own thinking. On the one hand, I have doubted the value of the Grameen Bank's example of cooperative ownership. Can others really be expected to follow it? On the other, I have blogged in praise of John Bogle for creating a cooperatively owned financial institution, the Vanguard Group. I trust Vanguard with my money because I know it is not trying to rip me off in order to favor outside investor-owners. Why should microcredit clients think any differently? Moreover, Yunus's distinction resonates historically: all forms of group microcredit popular today descend from the credit cooperative movement of 19th-century Germany (which in turn drew inspiration from those English socialists).So if all the microcreditors could raise all their capital from their clients then, I agree, that is the way to go.But almost none has---not even the Grameen Bank.Yunus's achievements should not be slighted. In its pioneer days, the way forward for the Grameen Bank was far tougher and more uncertain than for those that followed. That said, thanks to his pioneering status and his abilities as a salesman, Yunus had help: a couple hundred million dollars from the Ford Foundation, the United Nations, Japan, and Western donors. As Vijay Mahajan, the father of commercial microfinance in India, has pointed out, microcreditors today cannot expect the same help, whether because of limited funds among private and public donors or the donors' sense that microcredit has graduated from grants. If microcreditors today want such big chunks of capital from outsiders, they will have to buy it.In particular, while it is true that Grameen members hold legal claim to 97% of the Grameen Bank's net worth, they only contributed about $7.5 million in capital, at 100 taka ($1.40) per member. The Grameen Bank has not shown that microfinance can grow large purely through cooperative ownership.In fact, as I wrote last summer, an irony in Yunus's criticism of for-profit microlenders for going to the capital markets is that Grameen Bank is itself running low on capital, by which I mean risk-absorbing, profit sharing funds that banks are required to keep on hand in case of losses. And it is not clear (to me at least) how Grameen will get more. Maybe the government will step in...Also of dubious generalizability is Yunus's 15% spread cap. That limit might work in South Asia, but not very well in the rest of the world. Microcredit is cheaper to do in South Asia because of high population density---meaning that a loan officer can hit more villages in a day, serving more clients---and relative wage equality---which means that the wages of a, say, high-school educated loan officer are not so high compared to the size of the loans the poor can safely manage. That is why Grameen can charge just 20%, and why Chuck Waterfield, citing unreleased analayses, could tell a conference audience that India's microcredit interest rates are among the lowest in the world. Where workers are more expensive relative to the typical loan size, as in much of Latin America and Africa, they must be paid from higher interest charges (or subsidies, which Yunus eschews). Also, such a rate rule discriminates against creditors aiming to serve the poorest, with particularly little, thus costly, loans; and against small, young creditors that have not yet achieved economies of scale or that are trying to earn extra profits to reinvest in their growth. Adrian Gonzalez of the Microfinance Information Exchange (MIX) determined that 75% of microcreditors worldwide are in Yunus's "red zone," charging spreads of more than 15%. This large group makes smaller loans on average, perhaps serving poorer people. And profiteering does not explain the widespread trespass into the red zone: even if profits were zeroed out, it would thin only to 61% of microcreditors.So there is a kind of stubborn ignorance of facts and reason in this piece that rubs thinkers like me the wrong way---and probably helped make Yunus such an effective doer. On balance, I think it is fair to say that while Yunus has contributed much by being a pioneer, he should be more gracious in recognizing that not everyone can do microcredit the way he did it, let alone the way he says he does it.Since I share Yunus's diagnosis that commercial microfinance got out of hand in India yet disagree with his prescription, I should offer an alternative. A sensible proposal I heard from two microfinance leaders in India, Mahajan of BASIX and P.N. Vasudevan of Equitas, was for microcreditors, as distinct from governments, to cap their profit rates, as distinct from interest rates. At his office in Hyderabad last November, Mahajan told me that BASIX, which he founded, used to profit at the rate of 2 cents per dollar of assets (2% ROA), where "assets" are dominated by outstanding loans and "return" is interest and other income net of expenses. After competitors started raking in 5% ROA, BASIX inched up to 3% and used the extra profits to grow faster. So a cap of 2--3% might work. A few days before in a Delhi hotel lobby, Vasudevan told me that Equitas publicly limits its ROA, its Return on Equity (ROE), and the ratio in pay between the highest and lowest employees in the company.Credit is not an ordinary product. It is weighed down by millennia of baggage, for the good reason that it can do real harm. It is like a drug in that it is potentially healthy in small doses, but also potentially addictive. So it stands to reason that sellers of this product must take unusual steps to counteract its special problems of reputation and risk.Having taken Yunus's piece on its own terms, I want also to view it within its political context. Remarkably, the piece mentions only the controversy in India, not the one swirling around his own head in Bangladesh. I suppose it is not in Yunus's interest to raise awareness about that. But that does not mean his own awareness of the controversy played no role in the writing. Tom Heinemann's documentary was unfair in only showing the dark side of microcredit, but he still did a service in shining a light on that dark side. Yunus, by focusing on interest rates, an area of relative strength for Grameen, distracts from the fact that the justness and impact of lending to the poor depend on more than rates. The amount of credit matters too, as do the quality of disclosure about program rules, the degree of competition and multiple lending. Even debt at 0% can trap the poor. Focusing on interest rates plays into the Bangladesh government's fixation on that aspect of the credit relationship, as it sets out to investigate Grameen, drawing the investigators toward one of the Bank's strengths. In fact, the Grameen Bank is by many accounts a leader in the flexibility and diversity, cost and transparency, of its offerings. But none of that, certainly not low interest rates by themselves, guarantees that all is well with the Grameen Bank's clients.In a final and remarkable parry, Yunus reminds his prime minister, who recently accused microcreditors of "sucking blood from the poor in the name of poverty alleviation," that she once stood side by side with him and the woman who is now the most powerful diplomat of the most powerful nation, pledging to bring microcredit to millions. Prime Minister Hasina's opinion of microcredit may have flipped since 1997, but Secretary Clinton's has not. Perhaps Yunus is signaling to Hasina about how those abroad might take offense if her government goes too far in attacking him...or perhaps words published in New York hold little sway over deeds done in Dhaka.Further reading: Matthew Bishop of the Economist disagrees with Yunus. Felix Salmon of Reuters disagrees with Bishop.