The Free Market
Micro-Credit Cult, The
The Free Market 13, no. 11 (November 1995)
In the story of Rumpelstiltskin, an evil dwarf saves the life of a king's bride by spinning flax into gold. But the price is high for performing this seeming miracle. She must give the dwarf her first-born child.
The story could be an allegory for the "micro-credit" movement, the current enthusiasm of the political Left here and abroad. It promises credit for poor people with no savings or collateral. A closer look, however, shows the movement to be financially dangerous, subtly coercive, and, in its most famous case, an enemy to children and families.
The micro-credit movement got a big boost at the summer 1995 UN world conference on women. The person who received the largest round of applause was not Hillary Clinton or Bella Abzug. It was a banker, and a man no less: Bangladesh economist Muhammad Yunus.
"Capital does not need to be the handmaiden only of the rich," Yunus announced in Beijing. "Access to credit should be a human right irrespective of economic situation." In July this year, the House Committee on International Relations sat in awe as Yunus made similar promises to politicians who should know better.
Yunus runs Bangladesh's Grameen Bank, the most politically correct bank in the world. The literature on him is hagiographic in the extreme. Academic journals and books tout Yunus and Grameen in dozens of studies. All major newspapers, including the Wall Street Journal, have run glowing profiles. "McNeil-Lehrer Newshour" did a full segment. The Economist magazine has been taken in. He has been nominated for the Nobel peace prize!
Meanwhile, governments are urging their bankers to replicate Yunus's alleged successes. Next year, Washington, D.C., will host a world summit on the micro-credit movement, with the enthusiastic support of the Clinton administration and many Republicans in Congress. Conventional commercial bankers should prepare for some bitter attacks on their lending policies.
In the fairy-tale version of events, Yunus founded the Grameen Bank in 1976 to give credit to the poor and save them from the usurious interest rates of greedy commercial banking. Now the bank loans more than $400 million per year to people — mostly women — with no assets and no credit history. He has profitably granted two million loans from 1,000 branches, and an astounding 98% of them are repaid.
It sounds so wonderful. Yunus has spun flax into gold. "Someone had to demonstrate that it really works," says this alchemist.
The adulation has a political subtext. If Grameen can give loans to poor women without assets, why can't Citicorp? Why are Western bankers keeping money from the poor? It must be greed, cultural barriers, bad training, or racism. Lack of collateral is but an excuse for hatred of the poor.
But if Grameen were really profitable, Western bankers wouldn't need to be cajoled and harangued into copying it. They would rush to try his gold-spinning machine. Bankers would love to discover that the poor are 98% credit worthy. They would long ago have tossed out cumbersome formalities like credit ratings and collateral.
It turns out, however, there's more to Yunus's banking scheme than meets the eye. Grameen is not a bank at all. Deposits from individuals and firms account for a mere 3% of its assets. The bank actually functions as a conduit for huge grants from governments and international agencies. That aid is then used as the basis of a credit pyramiding scheme that not only provides micro-loans but also funds a creepy form of feminist social engineering that wars against children and marriage.
Contrary to legend, Yunus wasn't an independent entrepreneur when he started his bank. He used his personal wealth and high-level connections to arrange special privileges and millions in subsidies. Before the Grameen Bank lent one Taka, he had government backing for fully 60% of its operations.
The UN International Fund for Agricultural Development provided Grameen with its first major loan of $3.4 million. That Fund has consistently pumped money in ever since. In addition, Grameen receives grants and subsidized loans from the governments of Norway, Sweden, Canada, Germany, and even the Ford Foundation in the United States, not to mention the IMF and World Bank.
If the funds aren't given as gifts to Grameen, they are lent at below-market rates, usually 2%. Grameen Bank then deposits that money in fixed-term and short-term accounts in commercial banks that pay higher rates. Grameen makes a killing by pocketing the difference.
The bank says this is merely arbitrage, but if private citizens did this with government funds, it would be called graft. These ill-gotten profits are then used to pay 12,000 staffers and subsidize the loan operations that everyone claims work so well.
Grameen charges its customers 20% interest, below the market in a country with high inflation and virtually no savings. At this rate, the reinvestment scheme subsidizes its loans by 39%. The bank is forever forecasting future profits. Somehow that day never arrives — which doesn't mean that its managers and top employees are doing charity work.
The 98% repayment figure does not reflect the behavior of actual individual borrowers. Grameen relies on the "peer group" method of repayment. Borrowers are lumped into cells of five. Any future loans — which offer 80% more money than the first one — depend on repayment by the entire cell.
If one person doesn't pay, others in the cell "lean" on them to fork over the cash, or pay it themselves. The person in the cell who wants another loan has the incentive to get all the money one way or another. In this way, Grameen does get paid. But the 98% repayment rate records final payments grouped by cells, and only on first-time loans.
The bank claims the system is "self policing." But observers note that its employees (many of them Western ne'er-do-wells in search of foreign utopias) engage in weekly, door-to-door monitoring of all borrowers. Even then, the payback rate for second-time borrowers is much lower.
"Confidentiality breeds lies," says Yunus, and that rule applies to more than finances. The bank's ideological mission requires that when you borrow, you turn over your private life to the bank's staff. Borrowers must take vows to "keep our families small," to "build and use pit-latrines" and to "plant as many seedlings as possible during the planting seasons."
It gets stranger. The bank requires borrowers to attend weekly physical-training exercises. They must participate in parades where they repeatedly chant the "Sixteen Decisions," a narrative summing up the bank's worldview. Among the choruses is this: "We shall take part in all social activities collectively."
Yunus was cheered at the UN conference because 93% of Grameen's borrowers are women. But this fact too is a function of its social agenda. Yunus — and the international organizations that fund him — have concluded that population and marriage are the primary causes of Bangladesh's poverty. Women drawn into the Grameen orbit "emancipate" themselves from family and biology and enslave themselves to Grameen instead.
Consider the treatment of dowries, a traditional transfer of property between families on the occasion of a marriage. For many countries, prohibiting them would be the equivalent of criminalizing the diamond engagement ring. But Grameen's "Sixteen Decisions" calls the dowry "a curse" and makes borrowers swear "we shall not take any dowry in our sons' weddings, neither shall we give any dowry in our daughters' weddings."
Borrowers with children are strongly "encouraged" to send them to one of 18,000 "feeder schools" from a very young age. There they are taught with Grameen textbooks that promote the Sixteen Decisions. People who work for the bank must also demonstrate loyalty to the Sixteen Decisions.
All this suggests the Grameen Bank is more of a cult than a financial institution. But let's consider its financial claims more carefully. It claims to be privately owned. But that's because borrowers are forced to buy at least one share in the bank. Currently about 88% of the bank's ownership is spread between 1.5 million borrowers, while the government still owns the other 12%. Borrowers cannot sell the shares they "own," however, and each borrower also pays a 5% "contribution" to a "cell group fund," plus 1% to a savings fund that pays no interest.
So let's say you're a borrower in Bangladesh. You, along with the four others in your credit cell, are approved for a loan of $75. After all mandatory payments are extracted, you end up with $69.50 in hand, which you must spend immediately, and an obligation to pay $90 to Grameen in one year. If all other members of the cell default, your liability zooms to $450. To make sure that doesn't happen, you have to spy on the other members (or worse) and tolerate being spied upon (or worse). You own one stock in Grameen Bank, but you can't sell it and neither does it earn dividends.
Meanwhile, your private life is gone. The Grameen staff is in charge of your family size and the workings of your latrines. Your friends must be Grameenites. You chant the Sixteen Decisions ad nauseam and attend tedious exercise sessions and parades. If you're single, the prohibition on dowries limits your marital prospects. If you're married with children, your children are farmed out to Grameen Day Care. You can't have any more if you want to. Plus, you must periodically abandon your primary occupation to dig around in the dirt planting tree seedlings to please international agencies.
Like the king's bride, these borrowers might regret that they ever made the original deal with Yunus. But Bangladesh's legendary poverty makes it appear that our Rumpelstiltskin offers the only way out of a desperate situation.
Agree or disagree with Grameen's femino-socio-financial engineering, there's no economic miracle worth copying in the Grameen model. At best, its operations are wasteful and Ponzi-like; at worst, they are parasitical, usurious, and communistic. This bank would not be viable apart from the government subsidies and financial trickery, facts which prove that its grandiose claims are false. The Grameen Bank's fame is a consequence of its far-leftist social agenda, not its economic successes.
Thanks to its benefactors, Grameen isn't going away soon. So what's next on its agenda? In Rumpelstiltskin, the king's bride has forgotten her promise to give up her baby until the dwarf comes to claim him. In the real life version, Yunus is now opening health clinics to "help" the beneficiaries of his gold-spinning talents. The clinics will be "self financing" and, he hopes, bring about "zero-population growth." What ghoulish financial, medical, and social plans are in store for these poor women under Professor Yunus's medical care we can only shudder to think.
Cite This Article
Tucker, Jeffrey A. "The Micro-Credit Cult." The Free Market 13, no. 11 (November 1995).