When Muhammed Yunus, winner of the 2006 Nobel peace prize jointly with Grameen Bank “for their efforts to create economic and social development from below,” pioneered microcredit to help those in poverty improve their lives, it wasn’t meant to end up like this. In an opinion piece in the New York Times entitled “Sacrificing microcredit for megaprofits,” Yunus sounds deeply saddened that the almost impossible challenges he and Grameen Bank have overcome are being derailed by increasing commercialization of microcredit. In India there have been large-scale problems of borrowers defaulting on microloans, closely linked to an increasing number of suicides amongst the poorest who have no ability to settle their debts, devastating families and communities. Yunus himself is also under pressure, particularly in his home country of Bangladesh, where there have been sharp attacks on him personally as well as on Grameen. What’s gone wrong? What’s the way forward? As businesses step up to the challenge of integrating social responsibility into their business models, how do we avoid making a killing in the completely wrong sense of the phrase?
Microcredit’s reason for being is to provide loans to low income clients, both individuals and micro-businesses, to help them move out of poverty (note: microcredit is part of microfinance which includes savings, fund transfers and more). People with little or no cash income or assets are not served by the traditional financial system – in our recent special report on Retail Banking we note that the “great unbanked” includes around 2.5 billion adults, more than half of the world’s adult population, who do not use (or have access to) any formal (or semi-formal) financial services. Without access to financial services, including credit, many of these people are at the mercy of local loan sharks and do not necessarily have the means to help lift themselves out of poverty.
The first microcredit services were not designed as charity. They were designed with the hope that small loans to people who could then start earning money would result in the loans being repaid, with interest, although at nowhere near the high levels demanded by local money lenders. Such loans could for example help small farmers to buy seed to grow crops for sale as well as subsistence, or traders to buy stock to earn cash from selling goods. Microcredit institutions such as Grameen Bank were initially nonprofit organizations. They needed to cover their costs of capital and operations and could even make a profit. Today, Grameen lends out US$100 million a month, is financially self-reliant and succeeds in returning its profits to its borrowers in the form of dividends. Microcredit has now spread around the world, including in developed countries, and has helped many millions move away from poverty.
So why have things gone so horribly wrong – since 2005 according to Yunus – and particularly in India in the last year? The profit motive is a key element: Increasing numbers of nonprofit organizations providing microcredit have become for profit financial institutions. Part of the rationale has been to widen the reach of microcredit and help more people. An unspoken motive has also been to cash in on the success of microcredit – the realization of the dream of serving the “bottom of the pyramid.” However, once such institutions have the profit incentive – plus shareholders demanding growing returns – it becomes much harder for them to commercially justify lending to the poor. If they do so, interest rates need to go up to cover the risks of default. Marketing and loan collection need to become more aggressive. Does this remind you of a property bubble somewhere in a developed country near you? Speaking of which, the now for profit microcredit lenders have been hit by the fall-out of the financial crisis, as high interest rates on risky debt, tight wholesale credit, market volatility and asset write-downs have increased the cost of capital and operations. All of which has led to a vicious spiral of increasing pressure and repayments for microcredit borrowers, defeating the fundamental purpose of the loans in the first place. In India, faced with these unintended consequences, many borrowers have simply stopped repaying loans, while some have taken their own lives in despair.
India, along with Bangladesh, is one of the more developed microcredit areas of the world. However, unlike Bangladesh, it does not have the regulatory authority or regulations that allow Bangladesh to cap interest rates on microcredit and oversee the market to ensure it delivers on its mission. Such regulatory authorities are, Yunus argues, one of the critical elements in ensuring that microcredit continues to deliver on its promise worldwide, in addition to governments stepping up to their role in preventing abuse of the vulnerable. This is a key message not only for India, but for other countries for example in Africa, where microcredit has the potential to expand a lot further, aiding socio-economic development.
But it is not just about governments or transnational organizations taking the lead. Banks and businesses can’t just sit on the sidelines. All commercial enterprises should probably take stock of how the profit incentive impacts the societies we are building and their development. How do we balance the drive to make money with the need to make lives better? It is not just the poor who are lacking access to finance or the means to make money. Individuals and small businesses have found it hard even in economic recovery to find loans, while unemployment remains high in the developed world. Governments have had to strong-arm financial institutions to lend, while the bankers’ bonus debate continues with little effect.
There is a rising consciousness and desire among consumers, as well as other stakeholders, to do good (or be seen to do so) in a world recovering from recession and facing pressing global challenges. Community models of financing are expanding globally including microfinance and peer-to-peer lending, as personal finance becomes democratized. In the context of these trends and the vision of microcredit being subverted, consider:
- What’s an appropriate level of profit for my organization – if we were not traded on public financial markets – that would allow us to sustain business success in future while contributing to societal success? (You can think about societal success as you wish, for example: Eliminating environmental impact, helping reduce poverty, or encouraging education.)
- How can we ensure it is not a zero-sum game and that benefits can be realized by business and society at the same time?
- For public companies, how would financial markets – and investor demands – have to change to allow us to achieve this balance between profitability and society? (For example, new measures of success, new time horizons for evaluating success, new types of investors, changes in regulation…)
- Even if we cannot make such changes immediately, what can we start to do now – or stop doing – that would move us in the right direction? What good ideas can we borrow or support?
Don’t get me wrong. It’s not all doom and gloom when it comes to balancing commercial and societal needs. We have already written on making the most of corporate social responsibility while our February GT Briefing is about social good. It has been exciting seeing the range of initiatives to make a positive difference across all industries and geographies – new ones are emerging daily. Businesses can play a significant role in figuring out the way forward, and we hope you will find some ideas in the briefing to inspire you. It also means we don’t have to place the challenge solely in government’s lap – where whether we like it or not issues such as microcredit may become a political football.
At the start, I mentioned that Yunus is under pressure in Bangladesh. It’s partly the result of a Norwegian documentary which exhumed a 1990s controversy over the use of funds from the Norwegian aid agency Norad by Grameen, a subsequent probe into which found no wrong-doing. But he has also clearly made enemies in the upper echelons of power: In December the Bangladesh government announced a “high-level investigation” into Grameen. Speculation suggests this may lead to the government taking it over eventually. Whatever the result, we need more pioneers with steady vision such as Muhammed Yunus to take on society’s biggest challenges, from poverty to climate change. And we – and governments – need to support them. Your thoughts are very welcome.