Poor man's game

Microlending programs have been hailed as a silver bullet for combating poverty in countries across the globe. They've also been criticized as a form of predatory lending that can lead poor people deeply into debt.

Criticism of the scheme has been mounting since the dismissal and humiliation of its inventor, the Bangladeshi economist and banker Muhammad Yunus, who was honored with a Nobel Peace Prize for his work in 2006.

In March, government officials fired Yunus as director of the bank that he founded, claiming he was too old for the post.

From little things, big things grow

The microfinance system for which Yunus is famous offers credit to poor individuals who would otherwise have trouble securing loans. The goal is to help borrowers conquer poverty and achieve self-sufficiency, for example by giving them the start up money they need – perhaps only a few hundred dollars – for a small business.

One enthusiastic supporter of microlending is Imtiaz Ahmed, an international relations professor at the University of Dhaka in the capital of Bangladesh.

"The success of these programs is clear. Millions of disadvantaged people in developing countries have been able to start small businesses thanks to microcredit, and it's made them more independent," Ahmed said.

Yunus and his followers don't just view microlending in terms of money - they see it as capable of advancing many social goals.

"The microlending system in Bangladesh has had a positive impact on women's rights, development in rural areas, and on awareness of health and educational issues," Ahmed explained.

High interest, high returns?

Ahmed is convinced that microlending has had a positive influence on Bangladesh, but he's also aware of the mounting criticism directed against such financing projects.

Skeptics point to exorbitant interest rates among some microlenders as evidence that many are out to exploit rather than help their empoversihed customers. Others argue that despite the billions of dollars that have gone to microfinancing projects, the profits accruing to poor borrowers have been marginal.

But Ahmed sees little reason to view microfinance in Bangladesh as exploitative.

"The criticism that Mohammad Yunus' Grameen Bank and other credit institutes got for their high interest rates isn't entirely fair," said Ahmed. "First of all, you have to recognize that these people are getting loans at all - that used to be unthinkable. Other lenders wouldn't offer them anything because the recipients have no possessions or anything to offer as security."

Although the market in Bangladesh offers other options for poor individuals to borrow money, the alternatives generally carry interest rates much higher than those offered by microlenders. Supporters stress that microloans are often much fairer to the borrower.

"If this form of credit were exploiting people, then there wouldn't have been millions who have already taken on microloans," said Ahmed.

Mohammad Yunus' bank alone has offered loans to more than eight million microcredit borrowers in Bangladesh - around five percent of the current total population.

Into a debt trap?

It was formerly the case that commercial loans in Bangladesh could carry up to 120 percent annual interest rates, but government regulations have now set the limit at 28 percent.

Grameen Bank is well under this limit with their rates of 21 percent, points out Binayak Sen, a Research Director at the Bangladesh Institute of Development Studies, but he also admits that problems with microlending have gradually surfaced.

"For example, we've discovered that nearly a third of borrowers took on loans from multiple creditors," Sen said.

"Of course, if one credit institute doesn't give the client as much money as he needs for his project, then the client will turn to other institutions, but it needs to be researched whether that's leading people to fall into a debt trap."

Subjecting the already poor to a cycle of debt and the intimidation of microloan sharks has also offered fodder to critics of the lending programs.

State cooperation needed

"But it bears repeating that hundreds of thousands of people in Bangladesh have been able to build up a livelihood thanks to microlending," said Binayak Sen.

On the other hand, he believes it's clear that microlending can't solve all of the problems that the world's impoverished face.

"Even if I were to take on microloans as a poor person, I could still lack access to good health care. And if I were to become sick, I might end up having to give out the money I borrowed for treatment," Binayak Sen noted.

"When the state doesn't provide for the basics like health, transportation and education, then microfinancing can't be the only solution."

Instead, Binayak Sen believes efforts by microlenders should complement development work undertaken by the state - that's how the poor would truly be able to profit from microcredit systems.

Author: Sanjiv Burman / gsw
Editor: Anke Rasper