By Devangana  Kuthari

Grameen Bank is a banking institution founded by Mohammad Yunus in 1976, which is functional in Bangladesh. His idea was premised on the concept of microcredit as a source of poverty alleviation and women empowerment. Where the borrowers would be the major stakeholders. It sought to do so by focusing on the need of the borrowers instead of profit. 

They provide short loans for a one-year duration which are payable in weekly installments and are backed with joint liability; which essentially is a form of collective responsibility where the payment of a loan taken by an individual is guaranteed by members of a group. Moreover, the need for collateral has been removed from this banking model by joint liability being a replacement of sorts, the paperwork to get loans has been further simplified for the largely illiterate borrowers. Ninety-seven percent of its borrowers are women, furthering the cause of empowerment of these purdah practicing women through access to money, acting as a safety net. Lastly, it has been vital in an overall improvement and development of the villages of Bangladesh.

Unlike the claims of the Grameen Bank, the paper seeks to argue that through various fallouts, microcredit does not lead to poverty alleviation per se, neither has it substantially improved the condition of women in Bangladesh. It would also discuss various issues with the model of banking proposed by the Grameen Banks.

STRUCTURAL PROBLEMS

The model of banking used by Grameen Banks is fraught with limitations which arise due to some assumptions it is premised on. The first assumption is that the poorest definitely wish to be self-employed according to Muhammad Yunus when the reality is that the majority of them require steady wage-employment. Self-employment in relation to activities like small farming, manufacturing is always used as supplements to their main source of income that is most often through wages. The second is that credit is the main financial service the poor need. Mahajan argues instead for the importance of savings that act as self-insurance, to protect the poor in case of a crisis. A focus on microcredit alone is myopic as it leaves out micro-insurance micro-savings and money transfers which are equally important to alleviate poverty. The third assumption is that access to credit translates instantly into successful microenterprises. Microfinance is important and necessary, but it is not enough as other factors like training, identifying opportunities, the establishment of market linkages are also important for success. Lastly, those who are just above the poverty line do not require microcredit, is incorrect according to Mahajan as it causes mistargeting, as microcredit benefits those above the poverty line more. 

Mahajan emphasizes on shifting from microfinance to Livelihood Finance as an approach to alleviate poverty. This would include three components. The first being, Agricultural and business development services like alternate market linkages. The second would be financial services like providing credit both long and short-term, for investment in natural resources like water, land, livestock, energy, along with insurance for the livelihoods and lives of the poor, covering crops, livestock, and health. The third being, Institutional development services like establishing systems for performance measurement and accounting. Both livelihood finance and microcredit are fundamentally different because one envisions larger and longer loans while the second practices an opposite system, respectively.

The loans have a one-year duration which means that the lump sum interest usually has to be paid off in the 51st or 52nd week, however, in practice the interest rates were only paid when the borrower required to take another loan. This has created a unique problem where the borrower is forced to take informal loans to pay the current loan with the Grameen Bank, further they take a new loan from the Grameen Bank to pay off the informal loan. They thus enter into a vicious cycle of loan taking as the interest are rarely paid out of their own savings. The money keeps circulating between “bad” lenders to “good” lenders.

These loans, instead of being maintained by collaterals are reinforced by joint liability, wherein there is a sense of collective responsibility for the repayment of a loan. This instead of making society more cohesive has economic limitations. It instead of denying a loan to the other members increases the transaction cost, delays the sanctioning of new loans. This requirement of the bank that the group fund balance to be brought an ‘acceptable level’ after disbursement of a group fund loan before another group fund loan is distributed. Creates major access barrier to the group fund, wherein large portions of the fund remain unused, even though according to the mainstream conception, that poor always require credit.

With the microcredit program the poor face a double disaster as it can lead to an overall reduction of resource allocation for poverty alleviation by the government, as there might be a cut on Government spending on issues like sanitization, education and public health. It can be used as a powerful excuse for making the poor responsible for bootstrapping themselves out of the cycle of poverty. However for it to be effective it can never work alone without welfare support, state assistance and strong subsidies. 

Jason Hickel suggests that direct cash transfers deliver success where microfinance fails. It involves basic income grants to the poor and has been successful in many countries. They not only smooth out consumption deficits but also improve health indicators, allowing people to start small businesses. Microcredit ends up acting just as a consumption stabilizer, helping the poor by giving money at hand, to buy basic necessities, reducing the adverse effects of seasonal fluctuations or natural calamities. It results in a mere redistribution of income between the relatively poor than an overall increase in the income of the poor. This often causes the poor to be in a state of “microcredit dependency” for consumption than productive use. 

Though micro-credit has had positive developmental effects like better housing, improved nutrition, lower child mortality rate, better access to primary education, better healthcare, and so on. There is a common dissonance on the issue that microcredit only can’t bring the poor out of poverty. It at its best helps in reduction of the member’s vulnerability thus preventing them to fall even further in poverty. For microcredit to be able to have a positive impact on the reduction of poverty, it is needed to be supported by other complementary factors.

CONCLUSION

Thus Grameen Banks are premised on faulty assumptions these banks thus providing a myopic solution to the problem of poverty. As the recycling of debts instead causes a mere redistribution of income between the relatively poor than an overall absolute increase in the income of all poor.  Microcredit further has an inverse effect on governmental spending as the increase in microcredit leads to a direct fall in the amount of Government Spending. Thus microcredit helps in removing some vulnerability of the poor by acting as a consumption stabilizer, however, does not alleviate poverty per se.  

Devangana Kuthari is a 4th year Law student at Jindal Global Law School.

References:

1. Muhammad Yunus, Credit for the Poor: Poverty as Distant History, http://www.jstor.org/stable/43650208 .
2. Imran Matin, Repayment Performance of Grameen Bank Borrowers: The ‘Unzipped’ State, http://www.jstor.org/stable/25830635 .
3.  Grameen Bank official website, http://www.grameen-info.org/about-us/.
4.  Vijay Mahajan, From Microcredit to Livelihood Finance, http://www.jstor.org/stable/4417256 .
5. Imran Matin, Repayment Performance of Grameen Bank Borrowers: The ‘Unzipped’ State, http://www.jstor.org/stable/25830635: To be eligible for membership, a borrower has to be from the target group defined by the Grameen Bank as those households who have less than or equal to 50 decimal of owned land at the time of membership.
6. Salil Tripathi,  Microcredit won’t make poverty history, https://www.theguardian.com/business/2006/oct/17/businesscomment.internationalaidanddevelopment.
7. Jason Hickel, The microfinance delusion: who really wins?, https://www.theguardian.com/global-development-professionals-network/2015/jun/10/the-microfinance-delusion-who-really-wins,
8. Evan Selinger, Does Microcredit “Empower”? Reflections on the Grameen Bank Debate, http://www.jstor.org/stable/40270639.
9. Abu N. M. Wahid, The Grameen Bank and Poverty Alleviation in Bangladesh: Theory, Evidence and Limitations.
10.  Anis Chowdhury, Microfinance as a Poverty Reduction Tool— A Critical Assessment.
11. Image source: ET