The spread of microcredit and the global South

Thousands of microfinance institutions serve tens of millions of the world’s poor, through massive operations in rural South Asia to fledgling enterprises in West African towns. In an excellent new series of reports, IPS News is following the spread of microcredit and its impact across the global South.

A beneficiary of the microfinance programme in Bangladesh. Photo: IPS News / Naimul Haq

This small-scale loan movement aimed at alleviating poverty can offer life-changing potential for people who would otherwise find it difficult to obtain loans from the traditional banking sector. But microcredit is not a miracle solution to ending global poverty. If high interest rates prevail, putting recipients at risk of repeat borrowing and cycles of debt, microfinance can also have unintended consequences.

IPS reportage examines the spread of microcredit and the wider debate surrounding the small-scale loan movement aimed at alleviating poverty as it has matured over time. As the 2011 November 14-17 Global Microcredit Summit approaches, sponsored by the Spanish Agency for International Development Cooperation (AECID), these reports follow this unique banking system and its impact from Bangladesh to Benin, Haiti to Honduras, and across the global South.

COLOMBIA – Microcredit Growing Steadily at 15 Percent a Year. The more than 1.2 million microenterprises operating in Colombia are responsible for around 50 percent of all employment. And many of these small businesses owe their existence to the microfinance system, according to a report by Visión Económica, a local business research group.

Street vendors are the main beneficiaries of micro-loans in Colombia. Photo: IPS News / Helda Martínez

GHANA – Guidelines for Unregulated Microfinance Sector. When Andrew Poku’s mother passed away he needed help to pay for her funeral. So the 35-year-old teacher from Accra turned to one of the country’s several loan companies for a 670-dollar loan.

CUBA – Dreams and Progress in a Rural Community. The day that electricity arrived in the Cuban village of Jova, there were shouts, laughter and tears of joy, even among the most incredulous, who had doubted it was possible. “I didn’t know what to do; it actually made me nervous,” Carmen Carvallosa confessed.

MEXICO – Microloans from Distant Lands a Mouse Click Away. Norma Isela from the city of Piedras Negras in the northern Mexican state of Coahuila needs 500 dollars to expand the merchandise inventory in her business selling shoes by catalogue and to broaden her offer of clothes and accessories. So far she has managed to raise 45 percent of that amount.

A cattle cooperative in Cuba. Photo: IPS News / Jorge Luis Baños

ARGENTINA – Worker Cooperatives Reduce “Hard-Core” Unemployment. During the social and economic collapse of 2002-2003, the Argentine state encouraged the formation of workers’ cooperatives, which helped mitigate the worst effects of the crisis, reduced hard-core unemployment, and now as independent, democratic, worker-controlled organisations are providing services to the public and private sectors.

BANGLADESH – Lessons in Microcredit Management. Phulo Rani Pal checks for loose dust around her open backyard kitchen. It’s time to prepare the sweets she supplies to vendors and it will not do for her products to be contaminated.

BANGLADESH – Women Raise Own Funds for Microfinance. Amidst despair and poverty, women in some remote villages of Bangladesh are raising money and lending it to each other through a unique microfinance programme launched by a local non-government organisation.

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Hasina 1, Yunus 0, Grameen retired hurt

Dhaka’s politicians have won this round. Muhammad Yunus has been forced to quit the institution he founded. Yunus and the Bank will appeal to the Supreme Court in Bangladesh, according to David Roodman at CGDev.

Just as the Board and the Bangladesh Bank (the central bank) have been adversaries in court, they could fight over the choice of successor. Each side has a veto. Nine of the 12 board members are still elected Grameen members. However they are chosen and however independent they are from Yunus (or not) they can expected to remain allies of the old guard.

Perhaps that will play in favor of Dipal Barua, Roodman has said. He is the deputy managing director who was let go last year. He is both a longtime insider, born in the village where it all started and working with Yunus since the beginning, and now a dissident outsider. If the government moved quickly to nominate someone like him, that would be very reassuring about its long-term intentions with regard to preserving the Bank.

An alternative scenario is a protracted struggle over succession. Uncertainty can be deadly for a financial institution. There has been plenty of reporting on the struggle. There is the New Age’s close, factual reporting;David Bergman, of New Age, in Himal has written about  Hasina vs Yunus (Roodman has reminded us that Bergman’s father-in-law is one of Yunus’s lawyers. The New York Times reported ‘ Microcredit Pioneer Ousted, Head of Bangladeshi Bank Says‘ and the Economist reported ‘You’re Fired, No I’m Not’. The Financial Times carried an editorial Dhaka’s spiteful attack on Yunus while Asif Nazrul in the Daily Star commented ‘When the target is Prof Yunus‘. Philanthrocapitalism said ‘ Leave Yunus Alone’ and NextBillion carried a personal statement from Yunus. Finally here is the Statement by Grameen Bank.

Earlier, the BBC and AFP reported that Muhammad Yunus was fired from the Grameen Bank. At a Monday meeting, the board failed to support a motion to fire Yunus.

India’s Reserve Bank puts the ‘micro’ back into microfinance

Protesters participate in Khammam, Andhra Pradesh, against microfinance. The MFIs have not been successful in staying the operation of the ordinance but the A.P. High Court has allowed them to continue with their business after registering themselves. Photo: The Hindu/G.N. Rao

From 2010 September, the microfinance sector in India and South Asia has been questioning the basis of ‘growth’ in the sector and suggesting (at times strenuously) that the fundamentals be re-examined. India-based social business advisory firms such as Intellecap had analysed the build-up to the microfinance crisis in Andhra Pradesh, India. Microfinance companies have had to balance their commercial interests with the social and moral expectations of a wide variety of stakeholders.

Muted before the crisis, the allegations became loud and threatening during – of coercive practices, lack of transparency, and usurious interest rates which had led to suicides by borrowers in Andhra Pradesh. The sector had advised against knee-jerk ordinances in response to the crisis as being more damaging to borrowers than punitive to irresponsible or criminal lenders. The solutions they sought are stronger ethical practices, reporting and compliance rules and transparency.

The new Reserve Bank of India measures – now heavily reported and commented on – are the first step towards those solutions. India’s Reserve Bank has released a report to study the issues and concerns in the microfinance sector, which has gone through a major crisis in 2010. The Report of the RBI Sub-Committee of its Central Board of Directors to study issues and concerns in the micro finance institutions (MFI) Sector is summarised here [pdf].

Victims of MFIs display their daily payment cards in Visakhapatnam, Andhra Pradesh. The Reserve Bank of India has appointed a sub-committee to look at governance issues. Photo: The Hindu/C.V. Subrahmanyam

The RBI said: “Credit Support to Micro Finance Institutions (MFIs). The Reserve Bank of India had held discussions with select banks on December 22, 2010 to get an assessment regarding the ground level situation in the microfinance sector in Andhra Pradesh and other States and the need for any interim measures. The banks informed that collections by MFIs in Andhra Pradesh had deteriorated considerably and there were some incipient signs of contagion spreading to other States. Subsequently, IBA based on the feedback received by them from banks had come up with a proposal that there is a need for extending certain relaxations in the restructuring guidelines of RBI for the MFI sector.” The Sub-Committee statement is here [pdf] and RBI’s credit statement is here [pdf].

The financial press has reported the RBI’s intervention extensively.

“S. Bhanu, 48, who runs a tiny textile business in Godavarikhani village in the Karimnagar district of Andhra Pradesh, doesn’t know much about the crisis that has gripped India’s `20,000 crore micro-lending industry,” reported The Mint. “But Bhanu can tell you about how much more she owes the local moneylender in the past two months.”

“India’s central bank Wednesday allowed a special relaxation to banks in restructuring loans to microlenders, a move that will give lenders temporary flexibility in providing credit support to the cash-strapped institutions,” reported the Wall Street Journal.

The Reserve Bank of India (RBI) has asked banks to go easy on microfinance institutions (MFIs) by relaxing certain norms regarding loan restructuring. Banks can now restructure loans extended to MFIs even if they are not fully secured, Business Standard reported.

The Economic Times reported that under the new rules, restructured loans to the microfinance sector, can be classified by banks as standard assets, even though such loans are typically unsecured. The temporary relaxation of asset classification rules for bank loans to the microfinance sector is a move that it said will allow them to continue lending to the industry.

The Hindu reported that to revive the crisis- ridden micro finance sector, a Reserve Bank of India Committee on Wednesday suggested that micro finance institutions (MFIs) be allowed to charge a maximum interest of 24 per cent on small loans which cannot exceed Rs.25,000.

Members of All India Democratic Womens' Association protest against MFIs in front of the Reserve Bank of India office in Hyderabad, Andhra Pradesh. Photo: The Hindu/G.Krishnaswamy

A year ago, in his study ‘Microfinance India: State of the Sector Report 2009′ (published by Sage Publications India, 2009), N Srinivasan of Access Development Services, wrote: “Micro finance sector seems to grow and with no full stop in sight. The sector performed creditably in a year that experienced a widespread liquidity crunch. The Self Help Group (SHG)–bank linkage programme made remarkable progress during the year; provisional data2 indicates that credit to more than 1.716 million SHGs would have been made available during the year. The outstanding SHG loan accounts were 4.14 million representing an estimated membership of 54 million.”

“The MFIs too have recorded an impressive increase of about 8.5 million clients during the year registering a growth of 60 per cent over the previous year. The data collected from 230 MFIs by Sa-Dhan reveals that despite liquidity constraints faced by some MFIs, expansion in client outreach and loan portfolio was vigorous. The MFIs reported a total client base of 22.6 million as at the end of March 2009. The overall coverage of the sector as narrowly defined (outstanding accounts of members of SHGs and clients of MFIs) is estimated to have reached 76.6 million against 59 million last year.”

There’s more on the RBI statements and longer extracts from the reportage here.

Floating candy, micro loans and Chinese tomatoes

One week of food for the Casales family in Mexico (Menzel and D'Aluisio, 2005)

This eclectic selection of reports does have one common theme. And that is a measure of desperation. The global triple crisis – that of finance and credit, of climate change, and of food and hunger – has pushed the poor to desperation, but it has also pushed companies and institutions to desperation. Desperate measures is what links the stories of a floating supermarket in Brazil, normally safe microloans going bad, fertiliser overuse in north India and Chinese tomatoes in Italy.

1. Nestlé’s ‘floating supermarket’ makes its voyages under Amazon skies. The ‘Terra Grande’ vessel is an investment by the Swiss food group designed to reach isolated riverside communities in the Amazon region. The vessel is designed to enhance Nestle’s reach among the lower income consumers that make up a core part of its market. The company has been in Brazil for 89 years and products like its powdered milk are staples among Brazil’s poorer consumers. As the economy continues to grow quickly, Nestlé is hoping that rising incomes among the poor will bring its higher priced goods within their reach, too.

2. Microfinance markets in Nicaragua, Morocco and Pakistan have seen default levels climb to more than 10 percent, the threshold that marks a “serious repayment crisis,” according to a February report from Washington, D.C.-based policy and research firm Consultative Group to Assist the Poor. Delinquencies in Bosnia and Herzegovina stayed below that level only because of “aggressive loan write-offs,” the report said. While there has been no evidence of a “widespread repayment crisis” in India, “a number of industry analysts have highlighted industry vulnerabilities,” the report said.

Here is a slice of Bloomberg’s reportage on the problem in India: “Savita Ramesh Rathore stood at the door to her dimly lit workshop in Mumbai’s Dharavi slum, filled floor-to-ceiling with bundles of old clothes, and tallied up the cost of her son’s wedding last year. ‘Jewels, clothes, food, the town hall,’ said Rathore, 50, who makes towels from discarded clothes. She borrowed 30,000 rupees ($645) from moneylenders charging 60 percent interest and took additional loans from friends to pay for the wedding. Three months ago, she got a 10,000 rupee loan from urban lender Hindusthan Microfinance Pvt. to repay some of that debt.”

One week of food for the Ayme family in Ecuador (Menzel and D'Aluisio, 2005)

3. A new study by Greenpeace Research Laboratories shows that agriculture in Punjab is on the brink of an ecological catastrophe, the result of the overuse of highly-subsidised synthetic nitrogen fertilisers by farmers striving to step up their output. Dr Reyes Tirado, a scientist from the University of Exeter, sampled wells in 50 villages in the areas of Muktsar, Bhatinda and Ludhiana, and found that 20 per cent had nitrate levels above the World Health Organisation recommended safety limit of 50 mg per litre.

Farmers are aggressively using the nitrate fertilisers with the aim of boosting their annual yield. But scientists warn that this overuse is gradually exhausting the soil, which will eventually leave it unfit for food production. PepsiCo, the cola company which also makes potato chips, sources potatoes from farms in Ludhiana, and lost no time in claiming fatuously that it encourages its agricultural suppliers to use less nitrogen-based fertilisers.

4. Italy’s agriculture minister declared “We will defend the Italian tomato” in response to reports by Coldiretti, an agricultural association, that Italian imports of Chinese tomatoes had soared by over 170 per cent in the past year and now made up 10 per cent of the country’s processed tomato market. Chinese tomatoes are being imported into Italy for processing into paste and then re-exported with an Italian label to countries like Ghana which buys about 28,000 tonnes from Italy each year. Chinese exports of food and drink to the EU have doubled over the past decade, reaching 3.2bn euros in 2009.