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The Godfather of Microcredit: Muhammand Yunus’ Vision of ‘Social Business’ Is a Curious Amalgam of Left and Right

Mark Engler Feb 18

Is Muhammad Yunis selling free-market neoliberalism under the guise of ending poverty?

Muhammad Yunus, the Bangladeshi economist, godfather of microcredit and founder of the now-famous Grameen Bank, enchants many different types of people with his imaginings of a better future. A popular public speaker, Yunus is a relatively short man with a silver mane, a round beaming face, and a perpetually optimistic demeanor. At his talks, he regularly draws standing ovations from socially conscious progressives, business-oriented free-marketeers and numerous personalities in between.

What Yunus has to offer, his supporters would say, is a method for ending poverty. These supporters include the Norwegian committee that awarded Yunus and his Grameen Bank the 2006 Nobel Peace Prize. This makes things all the more frustrating for Yunus’s detractors. Those to the left would argue that the economist is selling “free market” neoliberalism in the guise of liberal do-gooderism. Right-wing libertarians, in contrast, contend that he is peddling communitarian snake oil in a business-friendly container.

BANKER TO THE POOR

Although Yunus’ Grameen Bank is not the world’s first micro-lender, it is the most famous. Born in 1940, Yunus spent his late 20s studying in the United States, earning a PhD from Vanderbilt University. In June 1972, shortly after Bangladesh won its independence, he returned to his home country to take a position as a professor of economics at Chittagong University. He dreamed he would be part of building a resilient new nation. Then, in 1974, famine struck. Yunus watched emaciated people use their last strength to travel to the cities in search of help, then slump in the streets, resigned to dying.

Yunus vowed to “abandon classical book learning,” as he writes in his memoir, Banker to the Poor, and instead apply his knowledge to addressing rural poverty. Immersing himself in village life he met a woman who spent her days working in her mud-floored hut making intricate bamboo baskets. They were beautiful, but because the woman had no savings, she had to turn to a moneylender in order to buy raw materials. By the time she paid him off, she had only pennies to show for her efforts. Yunus surveyed the village and found that 42 people were similarly trapped in a cycle of quasi-bonded labor even though they had collectively borrowed only $27. Seeing the amount of misery created by such paltry sums, he offered a loan out of pocket, with the idea that the poor could pay back in small installments. The villagers were thrilled. Inspired, Yunus tried to convince ma i n s t r e a m banks to step in on a larger scale to provide a humane alternative to the loan sharks, who exact interest rates of 200 to 300 percent. When the banks refused, he devoted himself to creating institutions that could provide small loans to the very poor that would allow them to receive the just profits of their labors. The Grameen Bank was born. Over the next two decades it became a celebrated success. By 2007 it had distributed $6 billion in loans in Bangladesh, expanding to serve some seven million people in 78,000 villages.

The basic idea that inspired the Grameen Bank now drives a worldwide microcredit movement. At a 2006 summit, the movement claimed to have reached its goal of providing financial services to 100 million families to help them “lift themselves … out of poverty.” Yunus posits that the poor have an entrepreneurial drive and well-honed survival skills that they can convert into household businesses if given the opportunity. Lending a poor woman $50 or $100 to buy chickens for a small farm, to purchase yarn for a home weaving operation or to set up a taco stand outside a nearby factory can allow her to bring in enough income to make the difference between starvation and subsistence and, over time, between destitution and a dignified life.

The Grameen Bank is widely credited with two innovations: lending primarily to women and relying on support groups to ensure a high rate of loan repayment. Yunus decided to break a significant cultural taboo and give money to poor women. “When men make money, they tend to spend it on themselves,” he writes, “but when women make money, they bring benefits to the whole family, particularly the children.”

To facilitate repayment and heighten a sense of accountability, Grameen gives loans to women in groups of five, so that the groups can meet regularly and provide mutual support. “If an individual is unable or unwilling to pay back her loan, her group may become ineligible for larger loans in subsequent years until the repayment problem is brought under control,” Yunus explains. “This creates a powerful incentive for borrowers to help each other solve problems and — even more important — to prevent problems.” Today, Grameen claims a remarkable repayment rate of 98.6 percent.

BOOTSTRAPS AND COLLECTIVISM

Yunus’ social vision is a curious amalgam of left and right. On the one hand, Yunus sounds like a Reaganite, in celebrating bottom-up entrepreneurialism and railing against “handouts” and denounces the dependency created by welfare systems in Europe and the United States. Tellingly, a recent book on the movement, entitled A Billion Bootstraps, trumpets microcredit as “The Business Solution for Ending Poverty.”

On the other hand, Yunus is harshly critical of the global economy’s insensitivity to the plight of the poorest and its erroneous assumption that “all people are motivated purely by the desire to maximize profit.” Some right-wing think tanks, such as the Ludwig von Mises Institute, accuse Yunus of promoting a “far-leftist social agenda.” One of their main objections is that, once borrowers enter into the Grameen system, they are encouraged to participate in social programs promoting literacy and good health. All borrowers are made to learn the organization’s “Sixteen Decisions,” among which are “We shall always be ready to help each other,” “We shall grow vegetables all the year round” and “We shall take part in all social activities collectively.” According to the Mises Institute, these vows “read like a party platform for collectivist regimentation.”

THE LIMITS OF MICROCREDIT

A closer examination of microcredit shows that it may not, in the end, be an ideal solution. First, the concept of microloans as a vehicle for women’s empowerment appears to have been oversold. Reporting on her field study of Bangladeshi borrowers, Lamia Karim of the University of Oregon wrote in 2008 that, although women were the formal recipients of microcredit, “I found that men used 95 percent of the loans… In my research area, rural men laughed when they were asked whether the money belonged to their wives. They pointedly remarked that ‘since their wives belong to them, the money rightfully belongs to them.’”

Nor is the money always used for the purposes for which it is loaned. An article in the Harvard Business Review stated in 2007, “Many heads of microfinance programs now privately acknowledge [that] 90 percent of micro-loans are used to finance current consumption rather than to fuel enterprise.”

In 1989, 60 Minutes profiled a borrower who had once been a beggar. With the help of a series of micro-loans from the Grameen Bank, taken and paid back in good faith, she was able to afford a large plot of land, a herd of seven cows, a new house with proper sanitation, education for her kids, and a small taxi for her husband to use in his own income-generating enterprise.

By 1996, however, her situation had reversed. Her husband “had contracted a stomach illness that was never properly diagnosed. To pay for his medical treatment, the couple had sold off their taxi, their land, and their cattle. She was so frail and tired, she did not trust herself to take a new loan. All they had left were four chickens.” Critics point to such instances as examples of how microcredit for the poor makes little sense absent health care, job training, and other services.

In fact, Yunus, often candid, self-critical and pragmatic, was the one who followed up on the 60 Minutes profile and included the woman’s full story in Banker to the Poor. He admits, “microcredit cannot solve society’s every problem.”

Then again, no social program can. For its part, the Grameen Bank has gone far beyond just issuing loans. It has endeavored to couple its microcredit with health insurance, pension accounts and emergency funds to provide relief in the event of natural disasters.

So what is the overall impact of microcredit? Economists who assess the available data tend to agree that it creates some genuine avenues for advancement by motivated individuals. It fosters a measure of social mobility, which in itself is a good. However, microcredit has not demonstrated an ability to reduce poverty levels on the whole.

Small loans are no substitute for the need to think big. Those countries that have significantly bettered their lot in the past century, from South Korea to Chile, have usually relied on aggressive macro-economic policymaking: state-directed development banking, subsidies for strategic industries, and public initiatives consciously designed to create decent jobs. As economist Robert Pollin notes, these policies “have all been closely associated with what used to be termed the ‘developmental state’ economic model” and have all been substantially dismantled through three decades of market fundamentalism. Developmentalist strategies encountered problems of their own, but neither microcredit nor neoliberalism can claim anything close to their successes in terms of creating growing economies and healthy middle classes.

In the end, macro-decisions can make a huge impact on micro-businesses. When millions of Mexican farmers are driven from their land in the wake of the North American Free Trade Agreement, loans for extra chickens appear futile. When a state enterprise is privatized, its union busted, and half of its employees fired, the micro-borrowers’ lunchtime taco stands no longer seem like such great investments.

MASS PROFIT

Today the real problem with micro-lending is that it has spawned a growing faction of practitioners who contend it must be profitable enough to attract private investment. Seeking to tap mainstream capital markets for their work, the bankers in this school prefer to use the term “microfinance” to describe their efforts.

Some predict that the number of microfinance lenders will soon dwarf the number of institutions operating on some version of the Grameen model. The Economist noted in 2005 that, “some of the world’s biggest and wealthiest banks, including Citigroup, Deutsche Bank, Commerzbank, HSBC, ING and ABN Amro, are dipping their toes into the water.”

While microcredit is relatively new, usury is very old. A legion of subprime mortgage brokers, credit card companies, payday lenders and pawnshops have made amply clear that there is nothing inherently beneficent about lending to those of limited means.

The Grameen Bank’s core loans, according to Yunus, are made at a relatively modest interest rate of 20 percent. Those who have looked critically at the issue argue that, after adding taxes, fees, and mandatory savings deductions and then measuring annual interest rates using the norms of U.S. banking, even Grameen and other socially driven microcredit bodies regularly deal in loans that charge between 30 and 50 percent interest. With for-profit microfinance institutions, the rates can be much higher. In recent years, reporters for Business Week and The New Yorker have pointed to microlenders in Mexico who charge interest rates between 110 and 120 percent.

When a borrower accumulates rapidly expanding debt, the threat of reprisal and repossession looms. It turns out that the Grameen Bank’s claim of having a 98.6 percent repayment rate is a bit of an overstatement. Yunus freely admits that when borrowers fall on hard times, Grameen is often willing to provide new funds to get them back on their feet and to reschedule old debt obligations. This makes Yunus’ institution a less successful business but a far more compassionate social institution.

However, the micro-loaning world is rife with stories of banking officers using coercive means to keep loans on schedule. Even within Grameen, women in a borrowing group who feel compelled to police one other can resort to extreme action. Lamia Karim notes that in her research it was routine to see what Yunus calls “positive social pressure” turn ugly:

“Women would march off together to scold the defaulting woman, shame her or her husband in a public place, and when she could not pay the full amount of the installment, go through her possessions and take away whatever they could sell off to recover the defaulted sum. … This ranged from taking away her gold nose-ring (a symbol of marital status for rural women …) to cows and chicks to trees that had been planted to be sold as timber to collecting rice and grains that the family had accumulated as food, very often leaving the family with no food whatsoever.”

‘SOCIAL BUSINESS’

Over the years, as the Grameen Bank expanded, Yunus launched several dozen sister organizations, each designed to provide additional services to the poor. These included an effort to promote traditional handwoven Bangladeshi fabrics; an initiative to develop abandoned fish farms; and, most notably, a plan to provide villages with cell phone service. Grameen Phone, founded in 1996, ultimately grew to become the biggest company in Bangladesh. Out of his experiences with these initiatives, Yunus formed his concept of “social business.”

In contrast to existing businesses, Yunus argues, “[e]ntrepreneurs will set up social businesses not to achieve limited personal gain but to pursue specific social goals” — such as creating sources of renewable energy for remote rural areas or recycling waste products. The economy, Yunus writes, will be transformed by a “new breed of businesspeople, empowered for the first time to express humanistic values through the companies they found.”

Yunus explains that, “when you are running a business, you think differently and work differently than when you are running a charity.” Social businesses make use of private sector know-how and values — except, of course, the paramount value: gleaning a profit for investors.

As a model of what a fully formed social business would look like, Yunus holds up a joint venture that he launched when the CE O of Groupe Danone (maker of Dannon yogurt) expressed a desire to collaborate. They created a self-sustaining enterprise that would provide low-cost, nutritionally fortified yogurt for malnourished children in Bangladesh. Their dream came to fruition. In 2007, the first Grameen Danone factory was scheduled to produce 6,600 pounds of yogurt a day — made in a new eco-friendly facility, using milk from local farmers and designed to sell for seven cents per container.

Yunus is insistent that he wants more “business” -— but he wants business that would produce no profit for investors, respect high environmental standards, pay living wages and produce quality goods at the lowest possible price to benefit the poor. To many, all this will sound decidedly socialistic. To Yunus, social business is the idea that will save capitalism, satisfying a deep human craving for “meaning” that is “totally ignored in the existing business world.”

Needless to say, there are significant barriers to making social business a reality. Yunus notes that the initial funding for the joint Grameen Danone yogurt project totaled $1.1 million. Meanwhile, in 2005, Groupe Danone had approximately $16 billion in sales. What would happen were the social business to ever grow large enough to truly affect the multinational corporation’s balance sheets? Here, Karl Marx, who described the dynamics by which exploitative businesses are consistently able to pull ahead in acquiring new technology, and thus are empowered over time to drive their kindhearted competitors into the ground, would seem to have the less rose-tinted perspective on how the business world functions.

And yet, Yunus may deserve more than an eye-rolling dismissal. Here is a person who speaks of building a world not based on greed and profit, a world where markets still function but do not control vital aspects of life, and where a different type of socially motivated, cooperatively minded enterprise flourishes. Is this not something of which the more calloused and incredulous revolutionary should take note?

Mark Engler is author of How to Rule the World: The Coming Battle Over the Global Economy. Research assistance for this article provided by Sean Nortz. This is an abridged version of an article that first appeared in the Fall 2009 issue of Dissent Magazine.