Muhammad Yunus Responds to Microcredit Loan Shark Claims

Posted by Alex Goldmark

Muhammad Yunus, Microfinance, microcredit, microfinance crisis,
There's a crisis in microfinance. In one state in India the government encouraged wide-spread default by borrowers in response to what it perceived as predatory lending. The ripple effects of that decision have undermined trust in the entire microfinance industry.

In Bangladesh, a once-supportive government has turned on the Nobel prize winning Grameen Bank and its founder Muhammad Yunus, seeking to increase government control over the bank. The prime mininster even said microlenders like him were "sucking blood from the poor in the name of poverty alleviation."

In the New York Times Muhammad Yunus responds to what he sees as the root cause of the crisis of trust facing his industry: for-profit microlending.

In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks. But it has. ...

Commercialization has been a terrible wrong turn for microfinance, and it indicates a worrying “mission drift” in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money-making opportunity.

There are serious practical problems with treating microcredit as an ordinary profit-maximizing business.

He says government regulation could help, and a cap on interest rates at cost—plus 15 percent—is reasonable. This op-ed is just one of many public cries from the father of microfinance defending his village banking model in contrast to the faster scaling model of Compartamos in Mexico or SKS Microfinance in India. Vikram Akula, founder of SKS wrote a short piece for GOOD recently on his motivations.

Yunus and Akula have debated the profit-versus-charity positions before, most notably at the Clinton Global Initiative. This debate is likely to continue for a while, but both sides desperately need to find a way to restore trust in borrowers, especially in India, regardless of business model.

Read Yunus' full piece here.