Altruism or Exploitation? Big Finance Muscles In on Microlending
Part 2: 'The Problem with Charity is that You Get Lazy'
Begum adjusted to the market and eventually got out of the telephone business. Nowadays there are too many competitors in the country -- about 250,000 -- which has pushed average incomes down to between 1 and 2 a day. Besides, mobile phones have become more widespread. Twenty-seven percent of adult Bangladeshis now own a mobile phone. This has led some phone ladies to switch from selling minutes to ring tones. But that requires a computer and software. Laily Begum would rather build more apartments.
Yunus liberated many poor people from usurers and proved that a new, third way to fight poverty exists. Before Yunus, there was a system of humanitarian feudalism, which provided funding to projects it approved and addressed problems it considered worth addressing. Or there was the United Nations' and World Bank's bureaucratic approach to saving humanity. After Yunus, there was suddenly an alternative that no longer treated the poor as more or less passive recipients of charity, but as people in command of their own lives -- people who, with relatively minor startup financing, are easily capable of helping themselves.
This model was a good fit for a world that, after the end of socialism, was forced to come to terms with capitalism, and was searching for evidence to show that capitalism could be tamed.
There are countless stories like Laily Begum's, in many villages and in many countries. An estimated 10,000 microlending organizations operate in 93 countries worldwide, issuing loans to 60 million poor people. Some organizations, like Grameen Bank, were founded by dedicated individuals, while others are the continuation of former aid projects. For a long time, many founders adhered to Yunus's principles and rules, but now a new class of poverty eliminator is entering the picture. It includes people like Choudhury who, unlike Yunus, are no longer interested in reforming capitalism, but instead intend to fight poverty and make a good living at the same time.
"The problem with charity is that you get lazy and begin to lose transparency. You spend money instead of saving it," says Choudhury. He is sitting in his office, a hyperactive man with dark circles under his eyes and the unique ability to talk seemingly without pausing to catch his breath. "People accuse me of turning my employees into robots. They're right. For the work I do, I don't need a bunch of creative people. A single person invented the telephone, not a group. What I need is reliability and predictability. I'm creative enough myself."
He takes out a pad of paper and draws two rectangles that form a T, then a circle. "This is what it looks like in my branches," says Choudhury, tapping dots onto the paper with the tip of his pen. "Two tables with employees sitting at them. One fan. No extras, no guards at night. Two employees who are required to sleep in the office at night. That's how you save money and that's how you remain effective." Choudhury is fond of short, military sentences, and even when speaking in large rooms he dispenses with a microphone. He has a degree in sociology.
Perfecting the System -- or Destroying It?
Choudhury is the man who is perfecting Yunus' system -- or destroying it, depending on one's perspective.
He is famous in the microcredit industry for the manner in which he transformed the ASA business model from one day to the next. In the 1980s, ASA was an aid organization that issued microloans as a secondary activity. When Choudhury concluded that the poor needed money most of all, and not seminars, he made it clear to the men in the villages that if they wanted anything from ASA they could stay at home and send their wives instead.
Choudhury also told the women working at ASA that from then on, they could stay at home. Effective immediately, he said, ASA was only going to lend money, and the loans would be issued exclusively by men. This assignment of roles -- women receiving the loans and men collecting on them -- guarantees Choudhury's high repayment rates. The emancipation of women has its limits in Bangladesh.
Choudhury is in the same business as Yunus, but he doesn't conduct it like a missionary who is familiar with human weaknesses. Instead, Choudhury conducts his business like a staff sergeant.
He prides himself on running the world's most effective microlending organization. The business magazine Forbes supports his claim. In a comparative study conducted last year, ASA was ranked first among more than 600 microlending organizations. Grameen Bank was in 17th place. A framed copy of the Forbes list hangs in a glass cabinet on the wall outside Choudhury's office. He is the epitome of the student eager to oust his master from the throne. Like many others, Choudhury copied the principles of Yunus's bank, but he also made some important changes. It was these changes that led Ratna Akhtar to take out her loan with ASA instead of Grameen.
Akhtar lives in the country, in Bhaturia, where Dhaka is merely a dark line on the horizon. Flat lakes surround the village, and the soil is heavy and fertile. Akhtar owns a few cows and some fields, which she and her husband bought using loans. They sell the milk and the vegetables they grow to a wholesaler at a nearby market, which in turn supplies the market vendors. Their business has been sufficiently profitable for a two-room house, a television set, a mobile phone and a savings account with a balance of 60 ($93).
Akhtar and about 20 other women meet in a courtyard once a week. They squat on the ground, holding money and their account books in their hands. An ASA employee sits in front of them on a chair, collecting the money and recording the amounts into the account books.
As with Grameen, there are groups, but for Choudhury they merely help to facilitate the collection of payments. They are not designed to discipline borrowers. Choudhury uses his employees to apply pressure to late-paying borrowers. They are instructed to camp out in front of the respective borrower's door until the person pays up. Choudhury also boasts a 95-percent repayment rate. He charges 23 percent interest.
Choudhury is also opposed to the practice of underlings sending their superiors reports on loan issuance and repayment rates. Reports, he says, can be sugarcoated. Choudhury requires his managers to visit the branches in his territory regularly. This increases pressure on employees and managers, forcing them to complete their work in a day, because overnight expenses are not paid. Choudhury himself is proud of running an almost paperless office.
Enlisting the Help of Egoists
But the biggest difference between the two men is that Yunus wants to convert people, while Choudhury does not. Choudhury wants to fight poverty by enlisting the help of egoists. In the last two-and-a-half years, he has traveled around the world, visiting investment bankers and pension fund managers, hoping to convince them to invest in ASA. When the people he met with asked the hyperactive Bangladeshi "What does ASA do?," Choudhury would reply: "We lend money to the poor." In many cases, the next word he heard was "Goodbye."
But not all investors turned him away. A few listened to him as he explained the system and told them about his repayment rates, and they asked him for more information. Then they offered Choudhury money, sums like $100,000 or $200,000. Choudhury was outraged. "What do you want me to do with that?" he would ask. "I want to establish a fund that's worth $125 million (80 million). With that much financial backing, I will set up ASA branches in China, Pakistan, India, Nepal and Sri Lanka. I can promise a 10-percent annual yield over 10 years."
Choudhury got his money. His investors now include major pension funds, like ABP in the Netherlands and the American TIAA-CREF mutual funds, together worth 500 billion ($775 billion). But they are not the only ones that consider an investment in the poor to be worthwhile.
In the last four years, the amount of foreign investment in microlending organizations has tripled, from more than $1 billion (650 million) to $4 billion (2.6 billion).
New entrants to the business include Credit Suisse, Morgan Stanley, the French insurance group AXA, the Blackstone and the Carlyle Group. All are attracted to the idea of helping the poor while turning a profit.
Exploitation Behind a Humanitarian Facade
Many of these companies use the combination of capitalism and altruism for promotional purposes. But in some cases it is difficult to detect any altruism at all.
Compartamos is a case in point. For Yunus, this Mexican microlending bank is the epitome of modern exploitation hidden behind a humanitarian façade.
Compartamos, which translates as "Let us Divide," was founded in 1990 as a classic microlending organization, funded by donations. In 2006, the two CEOs, Carlos Danel and Carlos Labarthe, converted Compartamos into a bank, and on April 20, 2007 they took the company public. Their shares were oversubscribed by a factor of 13. The IPO brought in 330 million ($512 million) in fresh capital, most of which went to the bank's owners.
Today Compartamos is Mexico's most profitable bank, and it still specializes in issuing microloans to the poor. But Compartamos charges annual interest rates of close to 90 percent. About 850,000 Mexican women are paying off the loans they received from Compartamos. The bank, a darling of investors, boasts returns of 55 percent.
The two CEOs say that their bank's growth would not have been possible without the commercialization of their business or the IPO. They justify their profit margin by noting that they serve both sides, investors and the poor, and that both sides benefit.
Since Compartamos went public, a heated discussion has erupted in the microlending industry over the limits of decency. How high can a microlending bank's profit margin be? Five percent? Ten percent? Twenty percent?
Worldwide, microlending organizations earn an average return of 7.5 percent. Choudhury, thanks to his obsession with effectiveness, achieves a 14-percent average return with ASA, even though he charges only 3 percent more for his loans than Yunus. He recruits his customers from among those Bangladeshis who want to buy their way out of the forced collective Yunus imposes on them.
Choudhury finds his proponents and executives among young economists, often in the United States, who have a first-class education and see the tie between profit-oriented thinking and social action as a desirable symbiosis. They could be the daughters and sons of 68-year-old Yunus. They discuss their ideas on the Internet and publish them in blogs.
Usurers Disguised as Do-Gooders
These people are not egoists. They want to help and are searching for a way to do good with the aid of capitalism. Many of them are not familiar with any other economic system. For them, Yunus is a pioneer, and yet for many he is no longer a role model. In forums like nextbillion.net, they rarely discuss questions such as whether it makes sense to collaborate with profit-oriented investors. For them, the answer to this question is obvious: yes.
Instead, their discussions today revolve around other things. For example, does it make sense to limit the poor's options to opening their own micro-businesses? Shouldn't there be more investment in micro-franchising? Or perhaps in the development of small and mid-sized businesses that create jobs?
Muhammad Yunus is unhappy about the development. He fears that the microlending industry will pay more attention in the future to investors' returns than to fighting poverty. "Our goal was to force out the usurers," says Yunus. "Now they're coming back, disguised as do-gooders."
Yunus sits in an office that has been described often over the years. Little inside has changed -- the desk is worn, the furniture is simple and there is still no air-conditioner.
This room was once a place of progress and vision, at a time when solidarity was defined as voluntary renunciation.
Much has changed since then. Nowadays, everything revolves around more, not less: more for the poor, and more for the investors. Yunus' office seems outdated today. In fact, it could soon be a museum.
Translated from the German by Christopher Sultan
- Part 1: Big Finance Muscles In on Microlending
- Part 2: 'The Problem with Charity is that You Get Lazy'