Microfinance - Grameen Bank under Threat

VSL meeting in a suburb of Accra, Ghana/Fjona Hill

Writing about development and humanitarian issues, I am well aware of the importance of microloans and how non-profit lenders and savings and loans associations can help change lives (see my recent post and article in the Economist on Village Savings and Loans Associations. Also, if you want a clear explanation of how microcredit works, see the excellent graphic at the end of this post).

So, I was alarmed reading this recent appeal from the global campaigning group Avaaz that the Grameen Bank is under threat.

The Grameen Bank is very different from traditional banks. They loan money to 8.4 million people, mostly women from the poorest villages in Bangladesh, so they can buy assets like cows or sewing machines and start earning money. These women borrowers also run the bank -- they are not only the majority shareholders, 9 out of 12 seats on the board are held by village women in saris.

I haven’t had time to verify Avaaz’s claims and I know that the Grameen Bank has come under criticism over the past few years for tax evasion. There were also accusations that microcredit can bring communities into debt from which they cannot escape and that the Grameen Bank was linked to exploitation and pressures on poor families to sell their belongings.  (That’s why I prefer the Village Savings and Loans model in which the money comes from the community itself.)

I don’t know what is behind the Bangladeshi government’s decision regarding the bank, but here is what Avaaz says:   “Prime Minister, Sheikh Hasina wants to end Grameen Bank as we know it.  She first stripped Dr. Yunus’ position as the bank’s managing director, and now just passed a law that would allow the government to bypass the people-elected board and handpick his successor. We fear that the government may use its newfound power to manipulate millions of members for votes in next year’s election.

“Grameen's downfall would be a disaster for Bangladesh and the larger microcredit movement that is working to improve lives across the globe.”  Avaaz is asking people to sign their urgent petition to PM Hasina.

Here is a very good graphic, which explains clearly the process of microloans and how microlending, if done correctly, can help millions of people around the world. The graphic is produced by CreditScore.net, a personal finance blog by a team of experts focusing on all things credit and debt related.

 

Savings revolution - a new form of microfinance for the very poor is spreading like wildfire

Microcredit - providing credit to the poor (who can usually offer little or no collateral in return) -   was introduced and popularised by Nobel Laureate Muhammad Yunus in the 1970s as a way to lift poor people in the developing world out of poverty and help them start small businesses.  It has been very successful in Bangladesh, for example. 

But recently the practice has attracted mounting criticism. Behind success stories are disturbing reports of debts dependency and microcredit institutions hounding their debtors.

When I was in Ghana recently, Plan International took me to see a very exciting new model of microfinance in action in a poor suburb of Accra.  The system, called Village Savings and Loans Associations (VSLA), is based on savings rather than debts and is managed in the community by the people themselves rather than by professionals. 

Freedom savings group in Accra/Fjona Hill

It is a very simple, flexible and transparent system that is particularly attractive to poor women because it emphasizes small, regular savings, social insurance, participatory management, lack of pressure to borrow frequently or in large amounts and access to lump sums to meet household obligations and emergencies.

 

The scheme was initiated in 1991 in Niger by Care International, and since then was further developed by various NGOs. It is now attracting a lot of attention and rapidly spreading across the developing world, changing lives in the process. Savings groups now have 4.6 million members in 54 countries. 

 

I have written a story for the Economist about it. Here it is: 

Helping the poor to save

Small Wonder

A new model of microfinance for the very poor is spreading

Dec 10th 2011 | ACCRA | from the print edition

“MY GROUP has rescued me and my children from poverty,” says Faustina Kwei, rearranging baskets piled high with cassavas and plantains around her market stall in a poor suburb of Accra, Ghana’s capital. She used a combination of savings, dividends and loans from a savings group to rent her stall and buy stock. For the first time, she can feed her two children well and send them to school.

Ms Kwei (pictured) is one of millions of poor people to have benefited from the hottest trend in microfinance: village savings and loans associations. Millions of people like her survive on meagre and erratic earnings. Access to the simplest financial services can help stabilise their incomes, which in turn makes them less vulnerable to diseases and natural disasters. An unexpected flood or fever can push a poor family into utter destitution, or the muscular arms of loan sharks.

To read the full story, click here.