Tuesday, December 19, 2006

Yunus praised ... and slammed

The Time Magazine honours Muhammad Yunus as People Who Mattered: Muhammad Yunus, Banker to the Poor, while Countercurrents.org writer Omar Tarek Chowdhury finds Yunus in secret collusion with all the ugly capitalists of the world and is all set to sell Bangladesh's poor cheaply to the global finance capital. Take your pick.

Vandana Shiva debates with Susan Davies of Grameen Foundation in Democracy Now! (also available in video) about microcredit and obliquely refers to Yunus at one time wanting to work out a joint venture with Monsanto. Shiva doesn't seem to like microcredit - it is so capitalistic, and worse that it appears to help the poor. That would rob the entire platform of the left.

While at it, you can also look at (or read) Vandana Shiva's take on farmer's suicides in India, Indo-US nuclear deal, foreign investment in retail trading in India and several other of her pet subjects.

At the other end, Jon Entine writes in American Enterprise Institute on Public Policy Research that microfinance at best can take the daily income of people from $2 to $3, whereas massive investment in building factories that can provide thousands of jobs is the way to go - because that is what happened in developed countries once upon a time.

Monday, December 11, 2006

Yunus on BBC HardTalk

I couldn't find the video or transcript of this in BBC HardTalk site at this stage. This was telecast in India on Sunday (10th Dec 2006).

Stephen Sackur queried Yunus on some uncomfortable questions. One was about Yunus joining politics. Yunus was categorical in stating that he will not be joining the politics, that he understands the problems faced by his country in the political space but he doesn't know the answers. He said he is better at his current job but could be a total failure if he goes to politics. It was however clear that Yunus felt uncomfortable in dealing with this question.

Yunus found himself weak again dealing with questions on whether credit should be considered a 'human right'. Sackur quoted another economist and former microcredit proponent who now believes that education and training are far more important that microcredit. Yunus did not deal with this question as good as he should have.

I missed the early part of this interview, so need to wait until the transcript comes up in the BBC site.

Nobel Acceptance Speech by Yunus

Muhammad Yunus spoke in detail about how to tackle poverty, setting up social businesses, a mild critique of capitalism and globalization during his acceptance speech after receiving the Nobel Peace Prize yesterday.

The complete text of the speech is here.

There is also a video (somewhat funny because half the time the picture is turned upside down, though you would only want to listen to the audio!) at the Nobel site.

Yunus ensured that he mentioned about Telenor of Norway and his intention to convert GrameenPhones to a company owned by the poor people in Bangladesh.

Saturday, December 09, 2006

Chirag Terminals of N-logue

N-logue is a rural Internet service provider in India which has been struggling for a long time in establishing a working business model.

N-logue, along with designated Local Service Providers (LSPs) sets up Internet nodes connected by leased lines and fibre. The LSPs provide connectivity to nearby villages through WiLL towers and receivers. In each village there will be a kiosk operator (KO) who has a single computer, a printer and a WiLL connectivity kit. The kiosks are named Chiraag.

N-logue expected local villagers to throng the Chiraag and pay money to send/receive emails, video chat and other services. However the revenue generated was not sufficient for the KOs and LSPs. Several people just closed down their businesses.

However, recently, there has been substantial rethink. The approach now is to convert the KO as outlet for a whole bunch of offline services resulting in footfalls, and possibly some Internet usage as a result of this.

In addition to offline services to the villagers, there is an attempt at creating revenue generating opportunities for the KOs.

One such is data entry/BPO job. I visited couple of such locations yesterday. Standard forms -> data input work was going on in one location. Another project happening was ITC's Mangaldeep Agarbathis. Using an information system organized by ILFS, ITC sends out the raw material required for making the Agarbathis and picks up the finished products.

Recharging of prepaid mobile phones is another interesting activity that is happening at the KOs. However the margins earned in the process is very limited (max of 3.5% of the recharge value).

If it can be demonstrated that rural kiosks can generate profits (after all costs) of about Rs. 5,000+ per month, there will be a resurgence in N-logue's operations. More prospective rural entreprenuers will join in. The investment required will be around Rs. 30,000-40,000 which can be funded partly by Government grants and rest by microcredit with monthly installments.

Internet access alone is not bringing money to the kiosk operator.

Grameen Foundation launches IT system for microcredit providers

Grameen Foundation, the pioneering organisation providing micro-credit facilities in developing countries, has launched Mifos, a new initiative designed to "address the significant technology challenges facing microfinance practitioners worldwide by revolutionising the way they access and use technology to run their operations."

According to Grameen, "With Mifos, a single technology 'backbone' that all microfinance institutions can access and adapt is now available. Its innovative open source model allows microfinance institutions to engage local IT specialists to customise Mifos and to provide ongoing support at local, affordable rates rather than being dependent on one vendor that may sit on the other side of the world." Beta-testing is already underway in India and Tunisia.

Thursday, December 07, 2006

Telenor says no quarrel with Yunus

Telenor of Norway and Grameen Bank of Bangladesh are joint venture partners in GrameenPhone, the dominant mobile phone company in Bangladesh. Telenor owns 62% and Grameen 38% in GrameenPhone.

CNNMoney.com | Reuter News

Yunus, Nobel Laureate and founder of Grameen Bank has apparently claimed that Telenor had agreed to transfer majority shares in GrameenPhone to Grameen Bank "within six years". But Telenor claims no such agreement ever took place.

Yunus has also been quoted by Fortune as saying "they're [Telenor] oriented towards profit maximisation. We're oriented towards social objectives."

Telenor has retorted by saying that "this undertaking [GrameenPhone], which was set up as a business project from day one, has probably helped more people than all other development aid programmes together."

Thursday, November 23, 2006

Jobs, not microcredit, is the solution

Aneel Karnani, Professor at Ross School of Business, University of Michigan writes in today's Business Standard that rather than hyping microcredit, India should focus on job creation through "labour-intensive, low-skill sectors such as light manufacturing, garments and tourism." Some excerpts from his article:
The Economist magazine concluded that while “heart-warming case studies abound, rigorous empirical analyses are rare”. A few studies have even found that micro-credit has a negative impact on poverty; poor households simply become poorer through the additional burden of debt.


The United Nations’ declaration that microentrepreneurs use loans to grow thriving businesses leading to flourishing economies is hype.


In an insightful survey on the economic lives of the poor, Abhijit Banerjee writes that the self-employed poor usually have no specialised skills and often practise multiple occupations. Many of these businesses operate at too small a scale. Banerjee points out that the median business operated by the poor has no paid staff; most of these businesses have very few assets as well. With low skills, little capital and no scale economies, these businesses operate in arenas with low entry barriers and too much competition; they have low productivity and lead to meagre earnings that cannot lift their owners out of poverty.


Even in developed countries with high levels of education and infrastructure, about 90 per cent of the labour force are employees rather than entrepreneurs.


Rather than lending $200 to 500 women so that each can buy a sowing machine and set up a microenterprise manufacturing garments, it is much better to lend $100,000 to an entrepreneur with managerial capabilities and business acumen and help her to set up a garment-manufacturing business employing 500 people.
My comments:

It is understandable that a lot of people are upset about the extraordinary hype surrounding microcredit. I would agree with Karnani's statement that "The United Nations’ declaration that microentrepreneurs use loans to grow thriving businesses leading to flourishing economies is hype" at the present stage.

It is also regrettable that some Governments now look at abdicating their responsibility in job creation and poverty alleviation by simply encouraging nationalised banks or private bankers to offer microcredits and hoping that somehow microcredits will solve the problem of poverty and grow the economy.

Not all microcredit banks have succeeded yet. It is however an experiment worth continuing, even if it has only partial results, as long as no one becomes worse off than before because of taking microcredit.

Karnani argues that rather than offering microcredit of $200 to 500 people, offer larger loans ($100,000) to an entrepreneur who can create 500 jobs. In a country like India, one does not have to look at "either/or". Those who are capable of setting up $100,000 enterprises continue to do so. But such enterprises cannot be set up in rural areas, because of lack of transportation, quality power and other facilities. The microcredit and SHGs operate predominantly in rural and semi-urban areas. So these two models are mutually exclusive.

In rural India, most people are employed in agriculture as low daily wage earners. They all have jobs but very uncertain jobs paying very little. The Indian Government has just introduced a National Rural Employment Guarantee Act (NREGA), which assures a certain days of manual labour (of mostly unproductive and useless work, in my opinion), for which the workers will be paid minimum wages (of about Rs. 75-100 a day, I think). This money could simply have been given to the rural poor as dole. This will still leave them in poverty and the government has no idea of creating large scale jobs anyway.

I can't see very many entrepreneurs rushing to the rural areas to start enterprises that can give jobs to 500 people - or even 100 people - since the opportunities available in urban centres are more.

In this scenario microcredit in rural areas can at least help in one person micro-enterprises which can help in poverty alleviation. There are plenty of micro-enterprises possible in rural India, just like in rural Bangladesh. However, under extreme stress, a lot of micro-debtors use the money they get for consumption rather than investing that in their enterprise. This is, as Karnani says, a major problem. But this problem cannot be solved by microcredit institutions on their own. While the government works to ensure that there is at least enough money given to the poor people to find their food, the microcredit can then help in lifting them from their poverty.

In Bangladesh, the government is incapable of feeding the poor directly. But in India, if the government has the will, it can certainly provide the poor with food. Microcredit can then take these people to the next level.

Micro-entrepreneurs need not necessary have to have huge skills. Nor is their productivity or profits affected by competition. There is still a huge market for handicrafts (both utilitarian and decorative products), hand woven fancy fabrics, embroidery works and other traditional products. Each micro-entrepreneur learns these skills quickly and easily. Nor are they working towards wiping out the competition. You can see tens of women in most such villages engaged in much the same work (of say weaving a bamboo basket). They are merely looking to earn a little cash that can help in getting better nutrition for the family, the much coveted education for the children, some decent clothes, slightly better housing etc.

Microcredit doesn't need too much hype, but not this kind of onslaught either.

Tuesday, November 14, 2006

A right winger's criticism of Yunus and Grameen

Yunus is getting it from right and left. Now, Jeffrey Tucker at Von Mises Institute says Microcredit is basically bunkum, and won't work at all without the help of massive grants, and also believes Yunus has most probably been swindling money! Further criticisms include lack of transperancy, phony shareholder set up and so on.

For a full read: Microcredit or Macrowelfare: The Myth of Grameen

Thursday, November 02, 2006

Lalita Gupte says she will get involved in Microcredit

Lalita Gupte, who retired just a couple of days back as the Joint Managing Director and Chief Operations Officer of ICICI Bank, says the following:
What are your post-retirement plans?

I cannot move away from the financial sector and, hence, would like to do some work in the area of microcredit. I may end up working with an NGO. I will continue to remain very active and will try to cultivate a few hobbies. I will continue to remain in India. The India story is happening and I can’t see myself staying anywhere else other than in India.

Ila Patnaik explains microfinance in India

Now that there is a lot of buzz about microfinance because of Yunus' Nobel Prize, Ila Patnaik, who herself was involved in SEWA in Gujarat, answers some commonly asked questions about microfinance and its practice in India in this piece in The Indian Express.

Friday, October 27, 2006

An interview with Malcolm Harper on micro credit in India

Malcolm Harper worked was the chairman of Basix, a livelihood promotion institution based in India. Basix does a lot more than just providing micro credit.

Harper is not anymore with Basix, and is currently the chairman of M-CRIL, a rating agency for micro credit institutions.

In a detailed interview, Harper talks about Baisx' experience in providing livelihood services in India, the general micro credit scenario in India and more.

Grameen Bank comes to India

Grameen Bank has completed formalities to start a liaison office in Mumbai. The operation will commence from January 2007, repots The Financial Express.
Some of its functions will include assisting those adopting the GB model in India, preparing project proposals, meeting training requirements, and creating awareness to make micro-credit at the ground level more effective.


GB proposes to implement its BOT model in India, too. Using this model, the bank will deploy its expertise for a fixed time until local staff recruited for the purpose acquire the necessary skills. Once the local staff is trained, GB will exit the project.

Grameen model vs Self-Help Groups - a comparison

Grameen model of microfinance has evolved in Bangladesh and is the most dominant model prevalent there. Centrally managed, dedicated microfinance institution, groups of five, highly disciplined organizational structure - that is Grameen model. The focus is primarily on lending, but every group member must save a certain amount.

In contrast, in India, the most popular model is Self-help groups. SHGs are groups of between 15-20 people. Scheduled banks provide the loans and manage the savings for the group. But the banks do not directly interact with the SHGs. Instead, non-governmental organizations (NGOs) get involved, help in forming groups, but then empower the groups to manage their own affairs. The focus is primarily on saving. Lending to group members is first sought from within the group savings, and then from the bank.

I had learnt about both the methods - about Grameen model by reading various books on the subject, and the SHG from a person who is the administrative manager of an NGO, organizing SHGs in Chennai.

SHGs are more popular in India. The Grameen replicators are very few in India.

I was wondering why these two methods are so starkly different and how two distinct methods developed in these two countries independently.

I have now found an excellent article

Grameen Bank Groups and Self-help Groups; what are the differences? Malcolm Harper (2002)

which describes the two schemes in detail, compares the two, and explains possible reasons on why Grameen model developed in Bangladesh while SHGs are more popular in India.

Thursday, October 26, 2006

Microcredit in China

Like India, China also has regulatory problems which is preventing growth of Microfinance.

There are two articles of interest. One, an article by You Nuo in The Brunei Times on how there was a state controlled experiment in microcredit in China in the 11th century which failed resulting in the Prime Minister Wang Anshi who introduced it almost destroying the dynasty he was working for.
Wang Anshi (1021-86), the reform-minded prime minister of the Northern Song Dynasty (960-1127), practised it when he began to tinker with the imperial financial system and render credit to all farmers.

Wang had a plan of changing his office into some sort of a national agricultural bank. What a good thing, he thought, if the empire could, by rendering credit to its subjects, reap a healthy inflow of interest income to finance the defence and the endless need for luxury by the court.

He failed, of course, and the failure shattered both his career and, to some extent, the empire. The idea was noble. Farmers or any other grassroots-level business owners deserved financial support. However the failure occurred in converting a clumsy bureaucracy into a direct service to millions of farmers and small business owners. It was mission impossible. By the logic of bureaucracy, there can be a banker of the poor but never a finance minister of the poor.
Cut back to modern times. Muhammad Yunus is on a touring spree and was in Beijing, China to attend the Grameen International Conference on Microcredit in China.
Some pioneering institutions, mostly domestic or overseas non-government organizations, have experimented with microcredit in China for 10 years.

But they are not sustainable because of policy and legal restriction, and insufficient funds, said Du Xiaoshan, a pioneer of microfinance research and practice in China, and also deputy director of the Rural Development Institute affiliated to the Chinese Academy of Social Sciences.

Seven private microcredit companies in China also face the same problem, as they are only allowed to provide loans but cannot accept deposits.

Yunus said not allowing micro credit companies to take deposits would greatly hinder their development, and stressed the importance of a clear and proper legal environment and supervision mechanism. Currently, China has no laws or regulations in this field.

Jiao Jinpu, deputy director of the research bureau of the People's Bank of China, said the central bank is working closely with the China Banking Regulatory Commission, the Ministry of Finance and the Ministry of Commerce to give microfinance providers a clear legal environment to boost the development of microcredit in China.

Yunus suggested that under the current circumstances, establishing a fund from which microcredit companies could draw money might be a more practical choice.

Microfinance Fund raises second round funding

The Bellwether Microfinance Fund, a fund that invests in Microfinance Institutions in India has raised a second round financing of $10 million, reports The Financial Express.

The fund was originally set up with $10 million equity.
"The fund was set up with $10 million with contributions from our investors like Triodos, Gray Ghost Arun Duggal and Kishore Munjani. We have now firmed up another $10 million, out of which $5 million is coming from our existing promoters, while FMO, the Dutch government-owned financial institution, has provided $2.5 million in equity capital. Another $3.5-5 million is being negotiated with a major US-based financial institution," Viswanatha Prasad, one of Bellwether’s promoters, told FE.

Saturday, October 21, 2006

West Bengal Govt. claims better micro credit implementation

If you are in micro credit, you have to now compare yourself with what Yunus has achieved.

The West Bengal minister for self-help groups Rekha Goswami claims the following:
"We have been stressing micro-credit since the nineties, but have been able to make it work very successfully for the past two or three years," she said.

The West Bengal model, she claimed, was far superior to the one created by Mohammad Yunus and his Grameen Bank in Bangladesh. "In Bangladesh, the government does not support Yunus," she said.
I have no idea what they have achieved in West Bengal. They are inviting Yunus to come to Kolkata for some awards and celebrations! I hope the minister can teach a trick or two to Yunus!

Micro loans, Macro racket

Alexander Cockburn, thundering left winger, must take a dig at micro loans, since IMF and World Bank are praising micro loans.

Yunus has been given a Nobel Prize for his work in Bangladesh. Cockburn dismisses the three decade long work put in by Yunus and his bank with one big sweep:
In the statistical tables of human development Bangladesh ranks 139th, worse than India, with 49.8 percent of its population of 150 million below the official poverty line. In the homeland of the Grameen Bank, about 80 percent of the people live on less than $2 a day.
Yes, Yunus should be punished for this. Next, let us demolish the entire micro credit concept itself, having done the same to Yunus.
As the economist Robert Pollin put it pithily when I asked him what he thought of the award to Yunus, "Bangladesh and Bolivia are two countries widely recognized for having the most successful micro credit programs in the world. They also remain two of the poorest countries in the world."
Cockburn's primary source describing in detail the ills of micro loans is P.Sainath of The Hindu. It is unfortunate to compare the micro credit implementation in India with that of Bangladesh. In India, there is no single entity that comes anywhere close to Grameen in size and implementation. Sainath has well covered the rural problems in India, and frankly none of the problems is the doing of micro credit organizations. The blame is entirely on the governments, local moneylenders, drought and famine, and perhaps lack of good micro credit organizations. Thus, quotes from Sainath about Indian experience is taken, transformed into the failure of micro credit in the world, Bangladesh's chronic poverty and pathetic political situation and in the end we get the ultimate left wing mumbo jumbo:
The trouble with publicly subsidized credit programs is that they're public, they're large and run contrary to the neoliberal creed. That's why Yunus got his Nobel macro-prize of $1.4 million, whereas radical land reformers get a bullet in the bank of the head.
Since Yunus has powerful friends, he must also get powerful enemies. His work is irrelevent to these enemies.

Neither Yunus, nor any major proponent of micro credit has presented micro credit as the only development tool, and in oppostition to land reforms, larger government spending on poverty alleviation, publicly subsidized credit program etc. Rather than merely theorising, the micro credit people have gone about transforming the lives of people in a positive manner. The left wing theorists must now demonstrate that micro loans are actually bad, and will result in increased poverty. They have a lot of work in their hands.

Muhammad Yunus and Bangladeshi politics

It appears that the vicious political atmosphere in Bangladesh may be impacting the performance of Muhammad Yunus and Grameen Bank in the days to come.

Yunus has, over the last three decades, stayed away from politics. Bangladesh has had a very difficult political set up so far. When it was part of Pakistan, the region remained underdeveloped. After 1971 war of independence, Bangladesh's father of the nation Mujibur Rehman could not solve the problems or set the tone for progress for the country. He was assassinated in a military putsch. Whoever was the instigator of the putsch, the real power subsequently descended on Major General Zia-ur-Rahman. Zia-ur-Rahman himself was later murdered in a failed coup, which subsequently resulted in another period of military rule by General Ershad. Ershad was later overthrown by popular revolt, which resulted in reinstating of democracy from 1990 onwards.

However the period of democracy has been quite traumatic as well. Mujibur Rehman's daughter Sheikh Hasina (Awami League) and Zia-ur Rahman's wife Begum Khaleda Zia (Bangladesh Nationalist Party) run the two main parties. Khaleda Zia won her first term in 1991, lost power to Sheikh Hasina in 1996 but recaptured power in 2001. The elections are coming up again now in 2006.

These two parties fight pitched roadside battles. It is common to have country made bombs thrown on opposition rallies. Vengeful ruling party throws the opposition leaders (most of them ex-ministers) in jail on trivial charges. Corruption is rampant. Around the election time, at least few thousand people are killed in violence.

There is a constitutional tradition that when elections draw near, a neutral person is brought in to manage the country and oversee the elections. This change-over process is to happen on October 28th, but the opposition Awami League is not confident of the designated neutral person. They believe the upcoming elections may be rigged, and are threatening to boycott the elections. This has caused a great amount of instability now in the country.

All of this is frustrating to the development-minded people, including Muhammad Yunus.

Yunus had learnt to live with the military rulers. Grameen experiment was going on with the help of Government owned banks during Maj. General Zia's time. It was during General Ershad's period that Grameen Bank was incorporated with the Government holding 60% equity and 40% with the customers of the Bank. Then, through a series of clever maneuvering, Grameen has become 6% owned by Govt. and 94% with the customers.

While Yunus kept quiet during the military rule, with his growing stature and mounting frustration, he is critical of the two leaders. Reported in The New York Times:
"There's no ideological fight between them," Mr. Yunus said of the leaders in an interview here this week. "They go back to what your husband did, what your father did. They have to fight because they came into politics because of their legacy. There's no substance in the politics.
In a country like Bangladesh, that is a very strong reaction. Though true, neither leader will take this lightly. Sheikh Hasina hates Khaleda Zia's husband Major General Zia because Zia exhonerated a lot of people suspected of involved in killing Sheikh Mujibur Rehman. Some may even go so far as to say Zia himself was involved in Mujib's assassination. Khaleda Zia responds back with her own hate of Sheikh Hasina.

This kind of family feud spilling into the administration of country is not good. Such a state of affairs will frustrate any development-oriented person. Frustrated by all this, Yunus has apparently hinted starting a political party himself.

Whether that is good news for Bangladesh or not, it is bad news for Sheikh Hasina and Khaleda Zia. They will both come together to cut Yunus to size. They will realise that Yunus draws his power from Grameen Bank and its millions of members - that is millions of votes. So the politicians will work towards destroying Grameen Bank. Clinging to power is far more important for them than the development of their country.

The Nobel prize has probably made Yunus stronger and bolder. But he has to now constantly watch his back.

Friday, October 20, 2006

Bangladesh Finance Minister criticises Yunus

This had to happen. Politicians do not like non-politicians becming larger than life. The Daily Star of Bangladesh reports that the minister for Finance and Planning Saifur Rahman has criticised Muhammad Yunus, the Nobel Prize winner and his scheme of microcredit with some choice words:
  1. ... true development of the country will be achieved through establishing large-scale industries and modernising agriculture, not by running microcredit programmes.
  2. ... the people of Sylhet region demonstrated against the Grameen Bank during the previous term of the BNP government and he (Saifur) had to go to the spot himself to sort the situation out.
  3. ... the current government has distributed more microcredit loans than the Grameen Bank.
  4. ... none was able to relieve themselves of poverty with the help of microcredit only and they failed to become self-reliant.
  5. ... Yunus was able to win the Nobel Peace Prize only because he has good relations with former US president Bill Clinton and New York Senator Hillary Clinton, who helped Yunus in this regard.
But we get to the bottom of the string of accusations, because apparently Yunus has said that he is likely to start a political party. I hope Yunus stays away from the political mess, because he has to do much more in the microfinance industry, and he is the most visible face championing micro credit.

Manmohan Singh on credit and agriculture

From The Hindu

Indian Prime Minister Manmohan Singh acknowledged that Indian agriculture is in deep trouble, there is a huge rural-urban divide and rural farmers are suffering from four deficits: (1) public investment and credit (2) infrastructure (3) market economy (4) knowledge. He said:
We cannot deny that there is a crisis in agriculture in many regions of the country ... In many parts of the country, agriculture is being carried out in adverse conditions ... There are large tracts where farmers seem to be in acute distress. In many other parts, agriculture is seeing a major transformation and farmers in these parts are reaping the benefits of technology, irrigation, better infrastructure, improved marketing facilities and advanced risk management strategies. It is this duality that we need to tackle.
The Prime Minister further ruminated:
Answers must be found to questions such as: do the farmers need a lower rate of interest or reliable access to credit at reasonable rates? Is our existing institutional framework adequate for meeting the requirements of our farmers who are a diverse lot? Do we need to create new institutional structures such as self-help groups and micro-finance institutions to provide improved and reliable access to credit? Or do we need to bring in money lenders under some form of regulation?
It is unclear to me where micro-finance institutions or self-help groups come into the picture here. The microcredit amounts are considerably smaller than what land owning farmers need. Farmers across the country have been borrowing money from (1) Nationalised banks (2) Agriculturual co-operative banks managed by State Governments (3) Private Money-lenders.

Agricultural co-operative banks are politicised institutions where writing-off loans is quite common. The recently elected Tamil Nadu state government wrote off close to Rs. 7,000 crores of agriculture loans, most of the money to well-off land owners and even fresh loans made just a few months back to buy tractors. Nationalised banks have not indulged in loan write-offs in the recent times. Private money-lenders on the other hand charge exhorbitant interest.

Indian agriculture is in distress because of lack of market economy. The state governments and Food Corporation of India are the major buyers, and the governments fix the price for the staple food. When the governments allow private players to buy the produce, the farmers invariably get better price. But the government cannot allow this to happen since its food reserves have come to the lowest position in the last decade, forcing them to import wheat for the first time in several years. So this depresses the income farmers get. A few droughts here and there, few floods there and here and the farmers lose everything.

Farmers are traditionally male, in India. As such, the Yunus school of micro-credit won't lend to such males. Like Grameen, the micro-credit institutions can demand that the land be transferred in the name of the woman of the household, and then lend money to women. Farming does not generate monthly or weekly income. After 4-8 months of hard work, you get the money only after the harvest. In Tamil Nadu, several farmers were waiting several months for money from the state government after they had sold rice to the government. So the turn-around time could be more than an year. Such farmers cannot pay monthly or weekly installments on micro-credit payments.

Micro-credit survival is based on fortnightly or monthly micro collections. As such what the Indian farm sector needs is credit against produce, combined with insurance against drought and floods. The lending institution should team up with FCI or private players such as ITC/Reliance/Bharti etc. and insurance companies to lend money to the farmers. Through the four-way contract, the farmer agrees to sell his produce to FCI or private companies at a specific price (subject to quality) and the buyer pays the loans off to the lending institutions and pays excess money to the farmer. A portion of the money lent to the farmer goes to the insurance company. Insurance company will compensate the lender and the farmer in case of adverse impact on the produce.

Farmers need reliable credit, but not loan write-off. Farmers need better training, better access to market and Government help in better flood/drought management.

Thursday, October 19, 2006

Another skeptic reviews micro credit

Counter arguments are good. It helps you clarify your views better. So we welcome Daniel Davies, commenting in Guardian Unlimited, where he says "Microcredit is a good thing, but it is nowhere near a panacea for global poverty." The strap line may be similar to that of Walden Bello, but the arguments are somewhat different.

Davies says
The main effect of the microfinance revolution has been the rebranding of agricultural development banks as "Microlenders". This has happened because although a loan to buy a tractor or provide working capital for a harvest season isn't microcredit, calling it microcredit will bring in a lot more grant money. That's probably good news, because agricultural development banks usually do good work.
This is not true. True micro credit institutions do not give tractor loans. Tractor loans are in lakhs of rupees (or millions of rupees) - that is about USD 5,000-8,000. The micro credit amounts are rarely more than ten thousand or twenty thousand rupees (or takas), and mostly in thousands of Rs/Tk - which in dollar terms is USD 200-500 at best. Agricultural banks are not renamed as micro lenders. In places like India and Bangladesh, all agricultural banks are owned by the Government, and it is a known fact that the Government messes with the banks, gives loans to party sympathisers and keep writing off loans. In any case, most such loans are never paid back. Yunus, right through his autobiography, disapproves of the Governement owned agricultural banks and their practices.

If the agri banks rename themselves as micro lenders for getting better access to grants, that is someone else's problem. Aid agencies beware!

Back to Davies. He says micro credit cannot help the poorest, and says micro credit organizations themselves know this. Quite true. It can only help those who can repay the money back, because for the banks' own survival, they need to get the money back, to relend, and to pay for the administrative costs. Until Yunus (and a few others elsewhere) started micro lending institutions, this particular segment of poor got nothing. Yunus is not providing a solution for every poor person out there, but most poor. For solving the real bottom poor, Governments have to step in, even if it means there is a lot of corruption and wastage. Or, someone else may have to come up with even more interesting models.

Yunus has never said anywhere that microfinance is a replacement for development policies. Grameen Bank's impact is real for all of us to see, even if the impact is not what some of the western writers want it to be - that is conversion of Bangladesh into France. That will take perhaps another 200 years and Grameen has been there only for 30 years or so.

Davies gives a neat introduction to JK Galbraith's (least-known but best book) The Nature Of Mass Poverty. I will note that down to read it.

Philippines House Speaker to start a microlending bank

The Manila Bulletin says Philippines House Speaker Jose C. de Venecia Jr. is starting a microfinance bank patterned after Yunus’ multi-awarded Grameen Bank in Pangasinan.
De Venecia made the announcement as he urged President Arroyo and provincial business and political leaders to help build a national network of micro-finance banks as "weapons against poverty."

The Speaker said the First Dagupan Micro-finance Bank will be launched next month with him and more than 3,000 residents from Dagupan City and other areas in Pangasinan as stockholders.
This is probably the best Nobel prize given out, as more people are looking at debating issues on poverty, micro credit etc. They are not stopping with debates and discussions but are going ahead and doing something as well.

Nobel for Yunus Is Not a Defeat for Adam Smith

Andy Mukherjee writing for Bloomberg says "Nobel for Yunus Is Not a Defeat for Adam Smith". It is not very clear who said moderate success of micro credit is somehow equivalent to repudiation of Adam Smith's theories. Leaving the provocative title, the article is quite good and it explains why micro credit model is robust in certain countries.
Micro-credit is a coping device. It is a big help in countries where legal contracts with individual borrowers may not be worth the paper they are written on, where the judicial systems are slow and overburdened, where the poor have little legally acceptable collateral to offer, and where credit history is worthless because no one is recording or disseminating it.

In such a situation, as Yunus has so successfully demonstrated over the past three decades, creditor rights can be profitably protected by transferring the liability from individual borrowers to a group.
However, Mukherjee doesn't think group lending "is the best way".

Yunus had to come up with a working model for lending to the poor. Poor across the world tend to be mostly illiterate, because in most countries in the world, getting an education costs money. Even if education is free, food and other needs or not, so poor have to go to work as early in their lives as possible, rather than going to school. Poorly educated people invariably get low paying jobs and that is how poor remain poor throughout.

Poor can be given free or subsidised food, education, training and good job opportunities so that they come out of their current state. But this calls for lots of spending, very active Government intervention and sustained monitoring. In the absense of money and a functional Government (example: Bangladesh, India), the next best thing is to work bottom up and provide minimal credit to poor people, educate them of the need to pay that money back in small installments, and also provide them guidance, social values etc. Grameen Bank has done this and more. For example, Grameen teaches people to drink clean water and supplies them with Aluminium Sulphate tablets to purify the ground water. Diarrhea, which is a major killer in Bangladesh - more than TB or AIDS or any other (The Week, UK, Oct 16 issue) - does not impact the Grameen members as much.

Grameen teaches its women members family planning and use of contraceptive devices, dignity for women, transfer of property for women (only such families are given the housing loan), and general healthcare and discipline for women etc. In poor countries and poor families, women empowerment is the best way of providing nutrition for the children and education for the children. More of Grameen member's children go to school than the national average in Bangladesh. That generation is more likely to come out of property, faster.

All these benefits will not be available if, as Mukherjee says, countries take a relook at their "contract laws" and banks start lending only to individuals. Most western writers do not understand poverty, or ways of resolving poverty. They think if laws are framed whereby "contracts are respected" and "creditor rights" are firmly established.

The trouble is in looking at micro credit as purely businesses run by cold individuals. Yunus and a few others have to sell micro credit as "sustainable business" because otherwise, the scheme will be dismissed as dole by investors and lenders. Micro credit is a sustainable business, but it can be made a sustainable business only by organizations which are sympathetic to the poor and work towards uplifting the poor. After all, the poor are their customers, and in case of Grameen, the poor are also 94% shareholders of the company.

Asian countries have to work towards improving the laws and law enforcement. But that will not solve the problem of poor people. Micro credit and responsible social organizations that offer micro credit can at least go far in achieving poverty eradication and wealth creation amongst the currently poor.

Muhammad Yunus does not seem to be proposing anything against Adam Smith. He seems to have simply enhanced the theory to conditions prevalent in his country. Others can take the same model and tweak it to their needs.

Wednesday, October 18, 2006

A counterpoint from Walden Bello

Everyone is praising micro credit. Muhammad Yunus is the hero. Surely there must be dissenters? Walden Bello, whose blurb says "Professor of Sociology at the University of the Philippines and executive director of Focus on the Global South, Walden Bello was the recipient of the Right Livelihood Award -- also known as the Alternative Nobel Prize -- in 2003", dissents, but carefully and without openly trashing Yunus here. A friend forwarded this as email, and I replied to him disagreeing with Bello's views. The crux of Bello's argument is
In other words, microcredit is a great tool as a survival strategy, but it is not the key to development, which involves not only massive capital-intensive, state-directed investments to build industries but also an assault on the structures of inequality such as concentrated land ownership that systematically deprive the poor of resources to escape
poverty. Microcredit schemes end up coexisting with these entrenched structures, serving as a safety net for people excluded and marginalized by them, but not transforming them.
Good that Bello does not call microcredit as bourgoise invention created by counter-revolutionaries to keep the poor as poor, but opiated poor so that they don't storm the ramparts of rich and powerful.

"Massive capital-intensive, state-directed investments to build industries" will solve the problems of the poor? Did he mean "industries" or basic infrastructure? There is no doubt that in most developing countries, only the state has the ability to build massive infrastructure. They are expected to do that. But "industries"? Like bread making and soap making industries? Steel making behemoths? Telecom monoliths? This is simple, extreme left wing lunacy.

Bello thinks China has solved the problem of poor, better. However China thinks it has not solved its problem yet, and certainly not going to solve them by building big industries. Instead, it thinks it needs to do the following (from Xinhua, but also quoted widely in various news sources in the last few days):
  1. Equal opportunity of education should be guaranteed. The government should invest more in education and ensure equal distribution of the limited educational resources.
  2. The public service function of the government should be enhanced. The government should provide more public services and goods.
  3. The construction of social security system should be speeded up.
One can't fault China's reasoning. Only Bello's.

India may create legislation to start microcredit banks

Muhammad Yunus says he has talked to the Indian Prime Minister Manmohan Singh and the result may be that India may enact a legislation allowing creation of microcredit banks and a regulatory body that can regulate this sector.
He said if necessary India would have to create an independent regulatory body to monitor the micro-finance sector and "it will also perhaps bring in legislation for formation of a microcredit bank."
As of now, a microcredit organization can at best create a Non-banking Finance Corporation (called NBFC). The legislation governing banks are very different and benefits available to banks are not available for NBFCs. In fact, around the world, there aren't many that are in micro finance and notified as a bank. Grameen Bank in Bangladesh and a Chicago based small bank are probably the only ones, if I am not mistaken.

We must thank Muhammad Yunus for bringing this rather simple idea to Manmohan Singh's notice. One would have thought an accomplished economist such as Singh would have realised this all by himself by now.

There are laws passed in Indian Parliament in a hurry when it comes to saving their seats by the Indian lawmakers ("The Office of Profit bill") but they won't normally press the pedal on for things like micro credit. But since this is the Nobel year of micro credit, we may still see a draft bill presented over the next 12 months or so, and if we are lucky, the bill may get passed over the next three years or so. That is, if someone in RBI does not come up with strong opposition to such a move.

As to EU type economic union in SAARC countries, we are far away from it. Sri Lanka has a crumbling economy, Pakistan does not have a robust economy and a common market may not necessarly offer much to Nepal or Bangladesh in the medium term. First step will have to be heightened bilateral trade relationship and preferred investment opportunities within member countries.

More encomiums for Yunus

William Pesek, Bloomberg News columnist writes:
Finding a happy medium between profit and altruism will leave hundreds of millions of people -- if not billions -- better off. Hats off to the Nobel Committee for shining a spotlight where it's badly needed.

Praise for Yunus pouring in

Former New Zealand Prime Minister Mike Moore writes about Yunus in The Gulf News:
Three cheers for the Nobel committee for awarding this year's Peace Prize to Mohammad Younus. The Bangladeshi economist won the prestigious award for his pioneering and successful idea of micro-credit that helped millions of his countrymen to avail of loans without any collateral.


Hernando De Soto, who should get the next Nobel Prize, is a Peruvian economist and his splendid work on why capitalism works in some countries and not others, offers another profound insight. Poor countries have enormous assets but lack capital. Those assets cannot be unlocked because of poor legal titles, assets cannot be bought, sold or borrowed against.
However, he also makes a mistake on statistics when he says "Mobile phones are growing at 1.5 million a month in India which now has more mobile phones than China". Indian mobile penetration growth rate is higher than that of China, but for sheer numbers, China is way ahead of India. India has a long way to reach China in mobile phone penetration. The average Chinese is more well off than the average Indian at this moment.

Tuesday, October 17, 2006

Jobra village and Chittagong City honour Nobel laureate Yunus

From The Daily Star
Nobel Peace Prize winner Prof Muhammad Yunus was all ecstatic and full of emotion as he visited his birthplace Chittagong and Jobra village, now a familiar name across the globe, yesterday.

The whole Port City--from Engineers Institute to the economics department at Chittagong University to Jobra village where Prof Yunus' revolutionary concept of microcredit kicked off--was vibrant with people from all strata heartily greeting the Nobel laureate.

The scene was extraordinary in Jobra village in the afternoon as a few of the first borrowers of Grameen Bank loans thronged the Nabajug Tebhaga Khamar premises and accorded a hearty reception to the lone Nobel laureate of the country.

Prof Yunus said he has come first to Jobra after being awarded the Nobel Peace Prize to convey gratitude and honour on behalf of all Bangladeshis to the people of this great village.

"It is you who actually deserve the honour," he told the residents of Jobra village. "You did a wonderful act of honour for the whole country.

"I am very happy today to be here among you...I have come here to breathe fresh air of Jobra to my heart's content," the microcredit pioneer said.

Mohammad Yunus wins Nobel Peace Prize

Mohammad Yunus and his creation Grameen Bank of Bangladesh have together won the Nobel Peace Prize for 2006.

From Nobel Prize site

He is the first Bangladeshi to win the Nobel Prize.

Monday, September 25, 2006

Microfinance - the next stage

There is a very good, detailed, yet simple, research paper at the website of American Enterprise Institute for Public Policy Research, titled Building on Success: The Next Challenges for Microfinance, by Robert Eichfeld and Henry Wendt.

Tracing this history of Microfinance, from Muhammad Yunus' Grameen Bank story in Bangladesh, the paper talks about the challenges facing the Microfinance industry and how commercial funding can help in growing the microfinance sector and helping 100 million poor families by 2007.
An important turning point in the history of MFIs took place in 1997, when 2,900 delegates from 137 countries met at the first Microcredit Summit and set the goal of providing microcredit to 100 million of the poorest families in the world by the end of 2005. At that time fewer than 8 million families were being reached. As of the end of 2004, by contrast, 92 million poor and 62 million of the poorest were being helped. If the program continues to grow at its historic rate of 39 percent annually, the Microcredit Summit goal will be reached as early as 2007.
The paper talks about two key methods by which commercial funds can come into microfinance institutions, and quotes two examples. In both cases, Grameen Foundation has helped make things work.

First is loan-portfolio purchase agreement in which ICICI Bank of India purchased a portfolio of 42,500 small loans with SHARE Microfin Ltd. for $4.3 million, in January 2004. This deal was facilitated by a first-loss, collateral deposit by Grameen Foundation of $325,000 (about 8% of 4.3 million).

This money will be used by SHARE as new capital and will help provide loans to more poor people. This helps ICICI Bank to reach poorer people who it can never reach directly. SHARE will be responsible for the collection and servicing of this loan portfolio as well. The risk on non-payment is however not imposed on SHARE, but on Grameen Foundation (8%) and ICICI Bank (92%). The paper quotes Economist as saying:
Grameen [Foundation] sees its cash deposit multiply twelvefold on its way to the poverty stricken borrower.
Second scheme, developed by Grameen Foundation in partnership with Citigroup is called Grameen Foundation Microfinance Growth Guarantees. Wealthy individuals can pledge their money not as donations or grants but as guarantees to banks of their choice, which "in turn will provide letter of credit hrough Citigroup to local microcredit institutions for the specific purpose of raising leveraged local currency financing for microfinance institutions." This can help in microcredit institutions getting capital at a considerably reduced interest rate, which in turn can be used to (a) offer loans at lower interest rate to poor people (b) enable microfinance institutions to reach breakeven.

As of October 2005, Grameen Foundation Growth Guarantees has reached $31 million.

While commercial borrowing is the best way of growing the microfinance sector, Government grants and risk capital in the form of venture capital would still be the best way of starting up microfinance institutions in India (and around the world).

There will have to be dedicated micro banks for women (like SEWA Bank) across the country, which goes a little farther than a standard MFI, and perhaps possibly Dalit Banks, started with grants and VC money. After 2-3 years of performance, they should be able to tap into commercial money through loan-portfolio sale to larger banks and raise money through Grameen Foundation Growth Guarantees or similar schemes.

Friday, September 22, 2006

Alleviating poverty – while making money

Christian Seelos writes in "Ethical Corporation" about how Telenor of Norway teemed up with Grameen Bank of Bangladesh to set up a super efficient telecom setup, made money and at the same time created thousands of jobs for the poor.
For example, Bangladesh has become one of the most profitable growth markets for Norwegian telecommunications company Telenor, which has cornered 60% of the Bangladeshi market through its collaboration with Grameen Bank (the micro-credit network – "bank of the villages" in Bangla – founded by Muhammad Yunus). Three other companies that entered the market without such partnerships share the remaining 40% between them.

Traditional corporate structures are perhaps not best suited to delivering multiple social and economic objectives at the bottom of the pyramid.

Telenor and Grameen set up two separate structures. One, run by Telenor managers, aimed to create financial returns, but the other, GrameenTelecom, run by Grameen managers, had a very different objective: maximise job creation while being financially viable.

The symbiosis turned out to be incredibly efficient: GrameenTelecom created more than 100,000 jobs in one of the world’s poorest countries, while Telenor created fewer than 1,000 jobs but achieved impressive economic returns and contributes significant tax revenues in Bangladesh.

Grameen Bank model ideal for middle east

Muhammad Yunus thinks the Grameen Bank model of microcredit can help alleviate poverty in Middle East.

From Gulf News

Death by microcredit

Times of India has a story, the date of which is not clear to me, by Sudhirendar Sharma on how microfinance institutions are fleecing poor people and driving them to suicides. The writer is with Ecological Foundation.

I feel that the writer is entirely off the mark. He is shocked by the fact that MFIs charge over 20% interest rate. I have taken personal loans from Citibank at 24% interest. Today, all Indian credit card companies offer convertion of large single payments through credit card into EMIs with effective interest rate of 2% per month. The outstandings on credit cards are generally charged at as much as 36% in India.

The neighbourhood usurer in Chennai and across Tamil Nadu charges as much as 10% per month simple interest! It is never lower than 5% per month. (It is called anju vatti - 5% per month, paththu vatti - 10% per month in Tamil.) Then there are kandhu vatti, speed vatti and so on, where the interest rates of at least 1% or more charged per day - effectively 30% interest per month, or 360% interest per year!

The poor, if they cannot get loans from Government, will have to depend on such atrocious interest rates.

If MFIs come and offer 20% or 24% per year, Sudhirendar Sharma and others come crying, asking for regulating this sector.

Regulation is one thing, but fiats controlling the upper limit on the interest rates that can be charged is another thing. A regulator can certainly provide a greater degree of transparency, stopping of harassment/physical threat by a lender and so on.

A while back, Tamil Nadu Govt. came up with an act that set the ceiling on what interest can be charged by the private money lenders. If I amnot mistaken, the ceiling was 15%. Obviously, despite being passed as a law, no one is following it. Not even the Nationalised banks (whose personal loan interests generally hover around 16% onwards), though the law was only impacting the private pawn brokers and moneylenders.

The MFIs have to be kind to the borrowers. It does not help driving the borrower to committing suicide. If proven, it is an illegal act, and the directors or trustees of the MFI can be locked up behind the bars.

A state government has all the powers to prosecute the baddies. But they better not muck around with a budding financial sector. The poor needs more credit than stupid regulation.

Friday, September 15, 2006

Microcredit and women's empowerment

From a letter to the editor in The Daily Star:
The MFIs consider the women as potential borrowers as the commercial banks are unwilling to lend to women or mobilise deposits from them, as they perceive that women are unable to control the household income. The women face cultural barriers that often restrict them to home, making it difficult for them to have access to financial services. The women have more traditional role in economy and disproportionately large household obligations. Their property right is limited, which is given importance for collateral by commercial banks.

The women generally have a high sense of responsibility. They are good savers as well as good re-payers of the loan and attend the meetings regularly. Any increase in women's income benefits the household to a greater extent, as they take better care of children. No matter who uses the loan, it benefits the household.

It also facilitates the effective utilisation of the hidden economy of women.

Thursday, September 07, 2006

Muhammad Yunus wins Seoul Peace Prize

Grameen Bank founder and microcredit evangelist Yunus has been awarded the Seoul Peace Prize - a prize given to "an individual or organization that makes a significant contribution to international peace and harmony." The press release issued says:
Chairman of the Seoul Peace Prize Selection Committee Lee Chul-seung said Dr. Yunus had been selected from a wide spectrum of candidates worldwide, including heads of state, peace movement activists, humanitarian workers, international relief organizations, and human rights groups.

Friday, September 01, 2006

Two stories on Grameen and Microcredit

In Times (UK), Andrew Mitchell, MP who is the Shadow Secretary of State for International Development writes about his trip to Bangladesh and Grameen Bank, and what he saw there.

CNN is doing a special called "The Poverty Trap", "which airs Saturday and Sunday at 8 p.m. ET, former U.S. President Bill Clinton sat down with CNN's Dr. Sanjay Gupta to discuss micro-credit and other potential solutions for eradicating global poverty."

In Chennai, I won't get to see it, as I don't subscribe to CNN. It is not clear whether CNN broadcasts this program in India anyway. Perhaps, there will eventually be an archive online.

Thursday, August 31, 2006

Profile of Muhammad Yunus

An old article from BusinessWeek Online on Muhammad Yunus, founder of Grameen Bank, Bangladesh.

Muhammad Yunus: Microcredit Missionary

Gates Foundation Awards $1.5 Million to Grameen Foundation

From Grameen Foundation, USA
Grameen Foundation, a leading global microfinance organization, today announced it has received a $1.5 million grant from the Bill and Melinda Gates Foundation to support its work worldwide. The three-year grant will support Grameen Foundation’s strategic plan to reach five million additional new families, ensure that 50 percent of them permanently escape poverty within five years of becoming a microfinance client, and champion innovations that transform the microfinance industry. The unrestricted grant is GF’s third largest grant in support of this five-year plan launched in 2004.

Monday, August 28, 2006

Person-to-Person micro-lending

I chanced upon a brilliant model implemented at Kiva through a news article in Voice of America.

While organizations are being set up to provide microlending across the world, Kiva has a unique model.

It brings individual lenders and micro-lending organizations together. Kiva's partner microcredit organizations upload profiles of people who are looking for loan in their markets. Individuals anywhere in the world can then decide whether they want to fund any of these folks. You can transfer the money via Paypal and hence is instantaneous. The lending can be as low as $25, going upto $2,000.

The microcredit intermediary takes this money and lends the same to the end users, and charge an interest. Kiva does not charge any interest and I suppose the Internet lender also may not get any interest, but will get his principal back, and will also get an update of what the business is doing.

There is, of course, the risk of not getting your money back, but Kiva says its payback rate is 100%. Kiva's partner microcredit organizations have an average payback rate of over 96%. In the worse case scenario, you would have still helped poor folks across the world possible growth opportunities. Compared to giving your money to charity, this is a far better method.

We need a model similar to this in India!

Sunday, August 27, 2006

ASA Bangladesh - Another major microcredit force

Besides Grameen and BRAC, ASA Bangladesh is another fast growing microcredit enterprise. From their website
Up to December 2005, ASA's Cumulative Loan Disbursement was Taka 148,197 million. Loans outstanding Taka 19,379 million among 4.18 million borrowers. At the end of 2005 ASA's Operational Self Sufficiency (OSS) is 275.24%, Financial Self-sufficiency 169.73% and rate of loan recovery 99.88%. Upto 2005 ASA operation expanded over 2,291 branches under 64 administrative areas all over in Bangladesh. ASA continues to perfect the role of financial intermediation by developing a variety of savings products that are quite successful at generating the necessary funds from local sources. ASA now offers customers liquid, semi-liquid and high return savings options that have attracted around Taka 3,036 millions.

ASA plans for 2006 to reach 2.741 Branches, 6.01 million borrowers with loan disbursement of Tk 45,183 and 6.88 million savings accounts by the year 2006 in Bangladesh alone, but also committed to sharing its successes in other countries. ASA is currently involved in several countries world-wide providing ASA experts to develop financial sectors elsewhere that are inclusive of low income groups. It will surely not be long before skeptics are convinced that a financial sector providing high quality products to all is achievable.

Thursday, August 24, 2006

Is ICICI Bank providing microfinance directly?

An article in BusinessWeek Online seems to indicate that a whole bunch of commercial banks in India are directly into microcredit, providing loans as low as $130 (Rs. 6,000) to rural people.
Mor signed off on a one-year, $130 loan that will allow the family to buy a buffalo and sell its milk. And written into this loan contract is a most unusual clause. If the animal isn't milking, the family gets a moratorium on its monthly loan repayment. "The client would need to find other money to service the loan or even sell the buffalo to pay us, which would be counterproductive for both of us," explains Mor, deputy managing director at ICICI.
I think this may at best be a publicity stunt. I can't see Nachiket Mor signing a $130 loan with any of his customers except for a photo op. To my knowledge, ICICI Bank is only lending through other microfinance institutions. To quote from The Wall Street Journal article found at Echoing Green site,
ICICI Bank Ltd., India's largest private-sector bank in capital, has gone so far as to give Mr. Akula an open line of credit. The bank says its more than $10 million in loans to SKS have been low-risk and give it a slightly higher return on capital than it gets from its corporate borrowers. "This could be bigger than any other business that we have got," says Nachiket Mor, executive director at ICICI Bank in Mumbai, the city formerly known as Bombay. ICICI Bank teams up with about 100 microfinance institutions, through which it plans to hand out loans and sell insurance.
With the exception of The State Bank of India, I can't see any of the Indian banks or foreign banks based in India going into the rural areas. We really need models like SKS Microfinance come up across the country.

Wednesday, August 23, 2006

BRAC - more than Microcredit

From BRAC's history
Yet another one of BRAC’s innovations that has been replicated in about a dozen countries is the Non Formal Primary Education programme set up in 1985. The programme started with 22 one-room schools and has grown to about 49,000 schools in 2004, accounting for about 11% of the primary school children in Bangladesh. It fulfills BRAC’s goal of poverty reduction through access to education for those traditionally outside formal schooling. The BRAC schools teach the same competencies as the government schools. However, they enroll and retain a higher proportion of hard-to-reach children, such as girls who make up 65% of the student body. The importance of maintaining literacy outside the school setting has been addressed with BRAC’s 878 rural community based libraries (Gonokendras) and 8,811 KIshori Kendras that give members access to a variety of reading materials. The Adolescent Development Programme (ADP) trains adolescent BRAC school graduates, both girls and boys, in vocational skills, health awareness including reproductive health, and leadership.

Sunday, August 20, 2006

What is a fair interest rate for microcredit?

Business Standard, 16th August 2006, has an article quoting a study by the Washington-based Consultative Group to Assist the Poor (CGAP) that even a 40% interest rate is helpful to the end customer.

Of course, the microfinance interest rates have to be seen in the backdrop of the prevailing bank interest rate in the country, credit card APRs and informal interest rates charges by village moneylenders etc.

In India, the personal loan (consumption loans) interest rates are currently between 14% - 24%. The credit card interest rates are upwards of 24% going all the way to 36% and more. Considering this, the microfinance interest rates in India are probably well below this - about 12% - 28%.

Quoting the BS article (which quotes the study):
According to the agency, attempts by governments to regulate this industry by capping the rate of interest in various countries have resulted in denial of access and withdrawal of players from offering these products and services thus forcing these very poor people to return to money lenders. There is no evidence of it actually having reduced the effective cost of financing for small borrowers.

The best way for governments and donors to lower interest rates without making microcredit unsustainable is to promote competition and innovation, both of which improve efficiency and lower prices, it says.

Interview with Vikram Akula of SKS Microfinance

The Tribune (12th August 2006) has a detailed interview of Vikram Akula, CEO of SKS Microfinance.

SKS is headquartered in Hyderabad and operates in 5 states of India. It operates on a model similar to that of Grameen Bank of Bangladesh. It started as a non-profit organization and then became a NBFC (Non-banking finance corporation). It has received venture funding from several people, notably from Vinod Khosla, SIDBI and Unitus.

SKS has branches in India as follows:
  • 44 branches in 7 districts in Telengana region of Andhra Pradesh
  • 19 branches in 5 districts in North-Eastern Karnataka
  • 10 branches in 3 districts of Maharashtra (bordering AP)
  • 10 branches in 4 districts of Orissa (bordering AP)
  • 3 branches in 3 districts of Madhya Pradesh
They have currently priovided loans worth Rs. 320 crores to over 2.6 lakh customers. They have close to 98% repayment rate.

Read the detailed interview here.

Yunus demands private initiative to resolve problems

From The Daily Star (5th August 2006)

Muhammad Yunus, founder of Grameen Bank wants his countrymen to stop criticising their Government and start doing something positive by themselves.

While commenting on the lack of airservice between Chittagong and Dhaka, he said:
"A shuttle air service between Dhaka and Chittagong is very necessary, and I think instead of pressing the government to initiate it, the private sector can do it," he said, adding, "Money will not be a problem as it is easy to collect it by floating shares."

The ability of government is very limited comparing to collective power of people, Younus said mentioning the collective efforts of his Grameen Bank.

"We started operation of Grameen Bank 30 years ago allocating Tk 856 among 42 women, but last year our bank allocated Tk 4500 crore among 65 lakh woman members across the country," he said.

He said it had been possible only for the collective effort and inner spirit of the members of the bank, Younus said, adding that the bank could not do so if it had wasted time demanding government or other external support.
Grameen Bank

'Lending Promise' to fund Nepali women with microcredit

Press Release from SocialFunds.com (8th August 2006)

New Nonprofit, Lending Promise, to Lend Poor Women Dignity as Well as Money
Microcredit comprises tiny loans – often less than $25 per person – to people too poor to qualify for traditional financing. A loan goes to a group of co-signers, typically women. Although each one forms her own business such as a snack shop, farm, tour guide or handicrafts business, the women repay the loans as a group. Later, the groups often pool savings, making loans themselves to members who expand their businesses, Taylor explained.

According to Grameen Bank, the Bangladesh-based forebear of microcredit, although banks view poor people as bad credit risks, microloan borrowers have achieved an average repayment rate of 98 percent. That’s significantly higher than the 85 percent rate guaranteed by the U.S. Small Business Administration.


Lending Promise will give its first loans this fall to Nepali women. The world’s fifth poorest nation, Nepal is ravaged by a Maoist conflict that has caused an estimated 12,000 deaths and a decline in tourism – a major revenue source. Taylor, who traveled there in March, met over 75 mothers whose homes are without electricity or running water. "I asked children what they want to be when they grow up," she said. "Because villagers spend their time on tasks like hauling water jugs, most kids don’t think about the future. I want them to have dreams – and live them."

Gates Foundation to put money into Microfinancing

From Seattlepi.com (2nd August 2006):

Seattle reaching out with loans. Gates Foundation puts new energy in microfinancing
Microfinance or microcredit refers to the practice of granting very small loans to poor people (usually in developing countries) for business projects aimed at helping them escape poverty. The approach, born of necessity in poor nations, has been around since the 1970s, largely because of the efforts of Bangladeshi economist Muhammad Yunus.

Perhaps the biggest thing going on now with microfinance is that the Bill & Melinda Gates Foundation is exploring getting into it in a big way.


"There are 550 million households that live on less than $2 a day," said Dr. Raj Shah, the Gates Foundation's point man on the microfinance front. The philanthropy, which met Tuesday with Daley-Harris, has made a few small donations in this area but plans to get much more involved in the near future.

Women in poor communities have been the focus of most microfinance programs, Shah said, and for good reason.
Bill and Melinda Gates Foundation

Thursday, August 17, 2006

Microcredit in India

Right from the time I read about Muhammad Yunus and his Grameen Bank experiment, I have been fascinated by the idea of micro credit and how it could possibly help in resolving the problem of poverty in India. I intend to blog about this topic here.

Grameen Bank
Muhammad Yunus (Wikipedia)
Microcredit (Wikipedia)
Microfinance Industry Exchange