The Rise and Fall of Global Microcredit

Development, debt and disillusion

Milford Bateman, Stephanie Blankenburg, Richard Kozul-Wright

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351856881
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

In the mid-1980s the international development community helped launch what was to quickly become one of the most popular poverty reduction and local economic development policies of all time. Microcredit, the system of disbursing tiny micro-loans to the poor to help them to establish their own income-generating activities, was initially highly praised and some were even led to believe that it would end poverty as we know it. But in recent years the microcredit model has been subject to growing scrutiny and often intense criticism. The Rise and Fall of Global Microcredit shines a light on many of the fundamental problems surrounding microcredit, in particular, the short- and long-term impacts of dramatically rising levels of microdebt.

Developed in collaboration with UNCTAD, this book covers the general policy implications of adverse microcredit impacts, as well as gathering together country-specific case studies from around the world to illustrate the real dynamics, incentives and end results. Lively and provocative, The Rise and Fall of Global Microcredit is an accessible guide for students, academics, policymakers and development professionals alike.

PART I

An overview

1

Introduction

Milford Bateman, Stephanie Blankenburg and Richard Kozul-Wright

Microcredit is a macro idea. This is a big idea, an idea with vast potential … Microcredit projects can create a ripple effect – not only in lifting individuals out of poverty and moving mothers from welfare to work, but in creating jobs, promoting businesses and building capital in depressed areas … Microcredit … has positive consequences on the entire community and creates a fertile soil for democracy to grow because women and men can hope in the future of the planet again. We must realize that our destiny is strongly linked to the destiny of the poorest on this planet!

(US Secretary of State, Hillary Clinton, remarks at the Microcredit Summit in Washington, DC, 3 February 1997)

The rise of microcredit

Of all the development fixes devised during the neoliberal era, nothing has captured the hearts, minds and pockets of the international development community, philanthropists and key Western governments quite as much as microcredit.¹ Conventionally defined as providing the poor with a small loan – a microloan – to help them establish or expand an informal business venture, the microcredit model was widely seen as not simply a means to alleviate poverty, promote local economic development and engender social progress, but the basis of a more peaceful and harmonious development path for the world. Who could seriously resist supporting those individuals in poverty who were attempting to exit their predicament through an informal microenterprise and providing new employment opportunities for their communities? Former US Presidential candidate, Hillary Clinton was certainly not alone in declaring that microcredit was nothing less than a revolution in finance for low-income people in the Global South.

The microcredit model is most closely associated with Dr Muhammad Yunus, the US-trained Bangladeshi economist, founder of the iconic Grameen Bank, and co-recipient (with the Grameen Bank) of the 2006 Nobel Peace Prize. With ideological backstopping from the Peruvian economist Hernando de Soto, who argued that Latin America’s historically entrenched poverty could be addressed by extensive deregulation and extending and strengthening property rights to the informal sector (de Soto, 1989; 2000), Yunus was able to sell the microcredit model to the new generation of neoliberal policy-makers that came to the fore in the 1980s. Starting in his native Bangladesh, he first mobilized international financial support to establish his Grameen Bank, which was officially launched in 1983. Several other new microcredit institutions (hereafter MCIs) were soon getting off the ground in Bangladesh, also with international support, notably BRAC and ASA. Very quickly Yunus began to claim that the Grameen Bank was ‘proof’ that massive poverty reduction was possible with the help of microcredit (Yunus, 1989), a claim that was made on the basis of very little evidence or independent assessments (see Bateman, Chapter 3, this volume).² Nevertheless, he was invited to play a cheerleading role in helping the international development community to establish and finance a raft of new MCIs elsewhere in Asia, Africa and Latin America. The global microcredit industry was born.

The basic objective of this new global industry was, essentially, to harness what were seen as the latent ‘animal spirits’ of the self-employed in the large informal sector of the Global South which, it was claimed, were being suppressed by an indifferent or hostile state bureaucracy and local officials. It greatly helped that the attention of the international community on the informal sector had already been raised by a series of international reports and missions in the 1970s by the International Labour Organisation (ILO), the Organisation for Economic Co-operation and Development (OECD) and the World Bank (ILO, 1972; Hart, 1973) which concluded that fighting poverty needed to move beyond the more state-centred strategies of import substitution-industrialization to a more employment-based and outward-oriented development strategy that could deliver ‘basic needs’ (Arndt, 1987: 92–106). What Hans Singer called a strategy of ‘incremental redistribution’ was adopted by Robert McNamara at the World Bank as the key to poverty reduction and it instrumentalized the informal sector as a means to deliver basic needs to the bottom 40 per cent of the global population. From the 1980s onwards, as the turn to more market-friendly policies took a firmer grip on development thinking, actively promoting the informal sector became the default solution to poverty and deprivation in the Global South (Levitsky, 1989; Stewart et al., 1990). The microcredit model fitted in perfectly with this new policy direction by providing what many saw as the crucial missing ingredient – capital – that, by definition, the global poor did not possess. And even if the conditions of informal sector employment were poor, if not as Mike Davis (2006: 186) has remarked ‘[a] living museum of human exploitation’, this was downplayed in favour of the aspirations of budding entrepreneurs. With many local communities soon being reached by microcredit, the global poor were now expected to individually escape their own poverty and deprivation by engaging in informal sector activities, thus effectively ‘bringing capitalism down to the poor’ (Arun and Hulme, 2008). Neoliberal policymakers and key Western governments could hardly contain their excitement at what they felt they were about to achieve both practically and ideologically.

But before the microcredit model could fully conquer the developing world and succeed in converting all of the global poor into ‘card-carrying capitalists’ (Harvey, 2014: 186), there was one important problem that had to be resolved. The initial source of funding for the microcredit sector, notably including the Grameen Bank itself, involved a variety of subsidies provided by the international donor community, host governments, private foundations, and other sources. Neoliberal policy-makers found this subsidization aspect to be a fundamental operational flaw in the microcredit model: it did not accord with their ideologically-driven ideas concerning ‘best practice’ operating principles for an organization, which they insisted must be based on the concept of ‘full cost recovery’. No matter how beneficial in alleviating poverty, neoliberal policy-makers felt that they could not excuse MCIs from abiding by this fundamental ideological imperative. More practically, even if very generous state and other subsidies continued to prop up the microcredit sector, it was realized that the enormous scale required to reach into every community in the Global South would simply never be reached on this basis.

The answer to this conundrum was to push forward with a new commercialized microcredit model, one that prioritized above all else the need to install in every MCI the drive for profitability and financial self-sufficiency, while still retaining its original social mission to prioritize the needs of the poor. With the World Bank and USAID taking the lead (see Committee of Donor Agencies [for Small Enterprise Development and Donors’ Working Group on Financial Sector Development], 1995; Robinson, 2001), the original Grameen Bank-inspired subsidized microcredit model was marginalized in favour of a for-profit microcredit model. From the mid-1990s onwards start-up financial support, technical assistance and many other forms of support would simply not be forthcoming unless an MCI was structured to operate as a commercial undertaking, while all existing MCIs were instructed to commercialize their lending practices as soon as possible.³ Governments in the Global South were expected to further support the move by comprehensively de-regulating their local financial systems in order to create the best possible ‘enabling environment’ for for-profit microcredit to flourish.

As promised by its advocates, the new commercialized microcredit model succeeded in quickly expanding the supply of microcredit across the Global South. Such was the progress achieved that, by the early 2000s, a growing number of countries and regions in the Global South had achieved the microcredit industry’s ‘holy grail’ – poor individuals in these locations could now very easily access as much microcredit as they might want. The ‘absurd gap’ that supposedly existed between the supply of and demand for microcredit and which prevented the global poor from benefitting as much as they might (see Robinson, 2001: 41, note 1) had been closed. High-profile commercialization advocates such as Maria Otero and Elisabeth Rhyne (see Otero and Rhyne, 1994) confidently began to predict a ‘new world’ of productive micro-entrepreneurship, massive poverty reduction and social progress.

Against this ideological backdrop and the rapid expansion of microcredit into virtually every community in the Global South, the microcredit model not only galvanized much of the international development community but even gained support from celebrities and in the popular press.⁴ It also greatly helped the World Bank in selling the microcredit model when two of its own economists, Mark Pitt and Shahidur Khandker, were seemingly able to provide important evidence to show that microcredit ‘worked’, especially involving female clients (see Pitt and Khandker, 1998). In spite of many serious flaws in their study that worked to over-estimate the positive impact – flaws that were only revealed much later on, however⁵ – Pitt and Khandker provided the global microcredit movement overall, and Muhammad Yunus in particular,⁶ with just what they were desperately looking for at the time: detailed evidence from a supposedly unimpeachable source that the microcredit model did work in practice as its advocates had all along said that it would. In its wake came numerous other studies and impact evaluations produced by supportive academics, microcredit advocates, boutique consultancy companies, and international development agency staff, virtually all of which claimed to confirm the view that microcredit was very effective development intervention (see the summary of many previous evaluations by Odell, 2010; see also Remenyi and Quiñones, 2000; Wright, 2000).

By the mid-2000s the global microcredit industry had reached its zenith as the UN was successfully petitioned from across the political spectrum to jump on board the microcredit band-wagon, agreeing to designate 2005 as the ‘UN Year of Microcredit’. A wide range of activities were undertaken and sponsored all across the Global South involving virtually all of the UN’s various agencies and key individuals. However, the supreme confidence of the global microcredit movement was most amply demonstrated at its annual conference – the Global Microcredit Summit – that took place in Halifax, Canada, in November 2006. Here, to wild applause, it was announced that the goal of providing microcredit to 100 million poor individuals, mainly women, had been reached and would be exceeded very shortly. The former head of the International Labour Organisation’s social finance unit, Bernd Balkenhol (2006, 2), summed up the general feeling of everyone present by claiming that microcredit was ‘the strategy for poverty reduction par excellence’ (underlining in the original). And just after the Halifax Summit, apotheosis finally arrived when Muhammad Yunus and the Grameen Bank were formally co-awarded the Nobel Peace Prize, an award that Director of the Microcredit Summit Campaign, Sam Daley-Harriss, called ‘a tsunami of positive recognition’ (Lloyd, 2006). The rise of the microcredit model appeared to be unstoppable.

But pride goes before a fall

Quite unexpectedly, however, shortly after the Nobel investiture in Oslo, the case put forward in favour of microcredit began to fall apart. The turning point came in April 2007 when Mexico’s largest microcredit bank, Banco Compartamos, undertook an Initial Public Offering (IPO). The IPO process inadvertently revealed two crucial things: first, in spite of its self-described role in poverty reduction, it became clear that there was no evidence whatsoever that Banco Compartamos had been instrumental in resolving poverty among its poor, mainly female, client-base⁷; and, second, and even more damaging, the IPO revealed a simply astonishing level of private profiteering engineered by Banco Compartamos’s co-CEOs, its senior managers and its investors. In other words, in one of the MCIs long held up by the global microcredit sector as an exemplary case of ‘best practice’, the conventional narrative that defined microcredit had actually been quietly and completely over-turned; microcredit was less about helping the vast numbers of individual clients and much more about enriching the small elite who owned and/or controlled the MCI.

Adverse reaction to the revelations unearthed by the Banco Compartamos IPO was immediate and came from all corners of the international development community. For some long-time microcredit advocates, the event spelled the beginning of the end of their association with the sector.⁸ For a time it looked as though things might change and parts of the commercialization model might be rolled back in order to reduce the profiteering possibilities associated with microcredit. But this did not happen. Instead, the exact opposite trajectory transpired: opportunistic individuals and institutions were made aware of the enormous profit possibilities offered by engaging with the microcredit sector, and a good number of them immediately set about copying and building upon the financial model uncovered at Banco Compartamos. By far the most notable of these early followers involved SKS, the leading MCI in the state of Andhra Pradesh in India. Its own IPO in 2010 spectacularly enriched its main promoter and CEO, Vikram Akula, before the reckless lending strategy adopted before the IPO, and emulated by the other large MCIs against which it competed, led to the collapse of the entire microcredit sector in Andhra Pradesh shortly after (see Bateman, 2012).

With a great many more instances of looting, profiteering and outright fraud emerging across the Global South involving many of the supposedly most ethical MCIs (Sinclair, 2012), one thing thus began to become clear: the global microcredit industry had effectively been taken over by greedy individuals, opportunistic so-called ‘social entrepreneurs’, aggressive private banks and hard-nosed investors. The global poor were no longer the primary intended beneficiaries of the commercialized microcredit sector, but were now increasingly viewed as merely its hapless victims.

As if this extreme profiteering and greed were not bad enough already, in the wake of the Banco Compartamos scandal, the evidence long held up as validating the development impact of the microcredit model came under closer scrutiny and quickly began to fall apart. Unfettered by the long-standing practice (if not contractual obligation) to design any impact evaluation or academic study in such a way as to reflect positively on the for-profit microcredit model, a steady stream of new academic studies and impact evaluations began to paint a much less positive picture of the microcredit sector. By far the most important individual study in this regard was the UK government-funded systematic review undertaken by Duvendack et al. (2011). This report was unofficially meant to provide some justification for the UK government’s own extensive microcredit programmes in Africa and Asia, but what it provided instead was the most comprehensive denunciation to date of the accumulated evidence used to demonstrate a positive impact from microcredit.⁹ Concluding that the global microcredit movement had effectively been ‘constructed upon foundations of sand.’ (ibid.: 76), this final word on the matter sent shock waves through the microcredit industry. The important work by Duvendack et al. was not long after followed by a raft of six major randomized control trial-based (RCT) impact evaluations of microcredit (the RCT being a supposed benchmark of evaluation), the results of which were summarized by Banerjee et al. (2015). The conclusion reached was that, overall, microcredit had had very little to no positive impact on the ground. In spite of the enormous effort and financial costs involved in ensuring very easy access to microcredit for the poor, there was almost no identifiable improvement in their lives. Their summary was supremely telling, finding that, ‘The studies do not find clear evidence, or even much in the way of suggestive evidence, of reductions in poverty or substantial improvements in living standards. Nor is there robust evidence of improvements in social indicators’ (ibid.: 13; emphasis added). Coming from several long-time microcredit enthusiasts,¹⁰ this was a damning conclusion.

Another feature of the global microcredit sector also came under closer scrutiny around 2007. Not unlike the case of sub-prime lending by Wall Street’s financial institutions which directly precipitated the global financial crisis in 2008 (Galbraith, 2014), and before this the Saving and Loans (S&L) crisis of the 1990s in the USA (Black, 2005), reckless lending had become an intrinsic feature of the global microcredit sector. The quite dramatic rise in client over-indebtedness and ‘microcredit meltdowns’ were the inevitable results. Appropriately enough, the first such episode of reckless lending leading to a ‘microcredit meltdown’ emerged in the very first developing country to be pressured into commercializing its microcredit sector: Bolivia (see Rhyne, ...

Table of contents

• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Preface
• List of contributors
• PART I: An overview
• PART II: Country case studies
• PART III: Policy implications
• Index