Microcredit is Still a “Buy a Subsistence Job” Program

Ruth Fremson/The New York Times Guadalupe Perez, center, took out a loan to expand her party supply store in Jackson Heights, Queens.

Ruth Fremson/The New York Times
Guadalupe Perez, center, took out a loan to expand her party supply store in Jackson Heights, Queens.

Little Rock    There was a long, hopeful report on the supposed growth of microcredit among lower income families in the United States in the New York Times, but no matter how much slipping and falling we might have endured around invisible statistics, there was no way to avoid the bottom line conclusion that microcredit was basically a “buy a subsistence loan with debt” program, plain and simple.

            Grameen America, modeled on the Grameen lending model in Bangladesh, the article said has five branches in New York City and additional outposts in Charlotte, Omaha, and Los Angeles.  They claim 18000 borrowers of small loans and say they have loaned out $100 million over the years. I can remember their time well 35 years or more ago in Eastern Arkansas where they are nevermore.   They say the loans are at 15% interest which is less than the over 20% interest figure claimed, but widely disputed, in Bangladesh, and they are made and paid in a group setting where peer pressures and benefits can help increase the loan pool.  There is no doubt there in the credit desert of low-and-moderate income communities, anything is better than nothing in the same way that a seeing soul can rule in the kingdom of the blind.

            The stories though were small scale “buy a job” stories about barely subsistent jobs in  informal operations like making empanadas, buying clothes to be shipped to the Dominican Republic to be sold by family members on the street, simply paying the loans back to establish credit, and so forth.   One woman featured with her small party store in Queens had used the loan to pay the rent and be able to handle two parties simultaneously, but her husband and she worked constantly to make $500 a week, $25000 a year, and, when asked if she would go the route of small business again, adamantly answered, “No.”  These were not happy stories, despite the claims of executives that they added jobs and might add income of up to $2500 per year on average, as they also apologized that there were no statistics to back up the claims.

            I would argue that this might be better than nothing and undoubtedly there are heartwarming tales of success, but as we have argued in ACORN International reports, this is absolutely NOT a poverty reduction strategy any more than paying an employment agency a couple of hundred to find you a job would be or for that matter running up your own credit cards, if you had them, to float your business or keep your job. These are desperation strategies for families that are drowning, not surfing over the tops of the waves.   When the spokespeople for Grameen are left defending their model in comparison to payday lending outlets and 400% interest, there’s really no question that we’re grasping at straws here to pretend this is path out for the poor.

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Going after Grameen Bank and Social Enterprises in Bangladesh

grammeenNew Orleans   I have sometimes been critical of the Grameen Bank, the microlending institution founded in Bangladesh, and am generally skeptical of claims that debt is an effective poverty reduction mechanism,  but the efforts of the Bangladesh government to take control of the institution, seemingly to seize all of its social enterprise assets is troubling. 

It’s hard to get the full story anywhere, but in Bangladesh, as we have all witnessed in the factory fire tragedy and their ham-handed handling of so-called “reforms” in the labor laws governing union organizing, the challenges are immense.  Nonetheless, it is hard to see how a financial institution with 8.4 million shareholders, who are the bank’s borrowers, can have its control diluted by the government’s increase of its share from 25 to 51% without any voice by the shareholders.  One board member quoted in the Wall Street Journal said, “How can the government, which is the minority shareholder, impose its will on us who own the majority?” That seems an excellent question.

            Make no mistake though.   If you visit Dhaka, when you notice the few skyscrapers in that huge city, you are equally surprised when you learn that many of them house microlending operations including Grameen.   These are big, big businesses, and no doubt have irked the government because they have also become the go-to vehicle for huge corporate foreign direct investments and the largesse of the donor community.  There’s no “mom-and-pop” here.

            Part of the problem for the government is precisely this far reaching economic empire built by Grameen, including 48 other businesses among them the nation’s largest mobile phone company.  In such a poor country the phone operation is a ripe plum.  According to the Journal:

Mobile operator Grameenphone, for example was started with a loan from the Soros Foundation.  The company a joint venture with Norwegian telecom company, Telenor, is now the country’s largest mobile operator, a listed company with a market capitalization of $2.6 billion and a 40% market share.  Telenor owns 58% of Grameenphone.  Grameen Telecom, a not-for-profit set up by Mr. Yunus, hold 34%, while the remaining 10% trades on the Dhaka Stock Exchange.

The government wants to break all of this up, but they may not fully appreciate that the financial model of the bank itself if is not sustainable, since it relies on a daily payment and collection system requiring thousands and thousands of paid collectors also leading to a significantly high interest rate of easily more than 20% per loan.  Yunus, who was pushed out of the bank in 2011, claims that no Bank money was used for these other social enterprises and that they are nonprofits, but it is unclear what relationship they have to the Bank and its sustainability.  The government claims that these additional businesses enriched Yunus’s family, but no details have been made public.   Some relatives may have jobs there, but in such a sprawling empire in such a poor country, it is reasonable that they would almost inevitably be employed somewhere.  

With the governing party seeking to control Grameen and the opposition party promising Grameen’s independence if they are elected, this all seems destined to end miserably for the poor and whatever benefits they are getting from Grameen.   The whole situation is of a piece with too many others around the world, where social enterprises seem good to governments and politicians if they are small and precious, but once large and robust, seem inviting targets for takeover and dissolution.  Businesses get reforms and reconstruction.  Social enterprises it seems get retribution and destruction.  

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