Small Loans, Big Claims

Development in Practice, Vol. 12, No. 2, May 2002, Oxford

In the world of development aid, few projects have engendered as much enthusiasm as microcredit, the practice of offering small, collateral-free loans to members of cooperatives who otherwise would not have access to the capital necessary to begin small businesses. By adopting microfinance as a core component in their aid programs for Africa, Asia, Latin America, and transitional economies, nongovernmental organizations (NGOs) and other development groups hope to reduce poverty in poor countries and also to raise the status of those countries’ women, who are the focus of many microcredit programs. True believers and, increasingly, critics have weighed in on the merits of microcredit, yet little academic literature exists on its drawbacks.

In a recent article in Development in Practice, a research journal for development professionals, consultant Ross Mallick reviews studies that have begun to fill this gap. Mallick takes on the mother of all microcredit programs, the Grameen Bank, a model developed in Bangladesh by economics professor Muhammad Yunus in the late 1970s and replicated by many subsequent organizations around the world. Grameen now boasts more than 2.4 million borrowers, 95 percent of whom are women, and it claims a loan recovery rate of 98 percent.

Mallick argues that Grameen does not succeed in empowering rural women in Bangladesh. Rather, the program incites domestic abuse and creates gender conflict, he says. "The meetings [of Grameen borrowers] are designed to develop peer pressure for compliance," Mallick writes. "For this women are found to be the most suitable. Not only are their neighbours and friends part of the borrower circle, but their husbands are there to enforce compliance through corporal punishment." Bank workers extend meetings until everyone has paid up, Mallick reports, a practice that delays dinner preparation and sometimes draws physical abuse from husbands.

He also says that women are sometimes conduits for loans to their husbands, and banks benefit from having women as intermediaries because male borrowers are more likely to physically threaten bank workers when pressed for payment. "The bank gains from the use of women borrowers," Mallick writes, "because the threat of physical violence is reversed."

Mallick also notes that most Grameen Bank employees are male. He cites a study that reports incidences of verbal humiliation from bank workers when installments were late. Such abuse was severe enough to drive one woman, who was reportedly locked in a bank room, to hang herself.

What Mallick’s study obscures is the fact that Bangladesh’s society, like those in many other parts of the developing world, is collectivist: The income of one family member is owned equally by all the family, regardless of gender. It does not seem reasonable that the increase in income from participation in a microcredit program would generally lead to domestic abuse and gender conflict or (even if empirical evidence supported this contention) that Grameen Bank ought to be blamed. And it is not at all clear that domestic abuse and gender conflict would be absent if Grameen Bank were not involved.

In addition, recent empirical studies that Mallick fails to cite — for example, work by development researcher Ware Newaz — claim that microcredit offers rural women social support networks and prestige, both in society and family groups, as well as fulfilling practical needs. Meanwhile, the status of women in Bangladesh has improved over the past 30 years. In particular, the number of female workers has substantially increased in the garment industry, banks, schools, and other service sectors.

Grameen has been criticized on other grounds, to which Mallick alludes. The bank’s 20 percent interest rate for income-generating loans is high compared with Bangladeshi commercial banks’ 8 to 10 percent rates. Yet Grameen’s rate is a bargain when compared with the traditional moneylenders’ rates in rural Bangladesh of 100 to 150 percent.

Perhaps the most important criticism of microcredit is that levels of poverty in Bangladesh remain unchanged since the 1970s. But there are few unmitigated success stories in international development. Furthermore, rural development models that succeeded in North Korea, Israel, and China have failed in Bangladesh. Despite the arguable limitations of Grameen’s microcredit program, it is the most successful game in town. Microcredit cannot do everything, but despite its flaws it can do some things quite well. Studies about what microcredit has failed to achieve should not be an excuse to scale back but an opportunity to refine its practice.