Altruism or Exploitation? Big Finance Muscles In on Microlending

Microloans were invented to help the poorest of the poor help themselves. Now major banks and pension funds are getting into the business, as they discover that the interest paid by the poor can produce high returns. Is it aid or exploitation?

Muhammad Yunus is one of the good ones, on a par with Nelson Mandela, Martin Luther King and Mother Teresa. Like them, he won the Nobel Peace Prize and, like them, Yunus believes in man's inherent ability to be reformed.

Yunus is a good speaker, whether he is speaking one-on-one, as he is now in his office, or in front of an audience, as he did less than two years ago when he was awarded the Nobel Prize at the city hall in Oslo. Yunus has a relaxed and easygoing way about him. Public appearances are part of his daily life, and he is used to winning awards. He already holds the World Food Prize, the Planetary Consciousness Prize and the Sydney Peace Prize.

Yunus has an opinion on almost everything, and he is quick to express it. But when it comes to Shafiqual Haque Choudhury, Yunus suddenly becomes a man of few words, barely able to choke out "we'll see."

Like Yunus, Shafiqual Haque Choudhury is also involved in the business of eliminating poverty. Choudhury, too, is eloquent, and clearly loves speaking to large audiences, but when he is asked about Yunus, he says, tersely: "He has his achievements."

Yunus and Choudhury both live in Dhaka, the capital of Bangladesh, a densely packed metropolis that expands farther into the surrounding countryside everyday. Both Yunus and Choudhury have built skyscrapers among the city's run-down shacks. And there is another similarity: Both manage banks. Yunus is permitted to use the word bank to refer to his organization, Grameen Bank. But for legal reasons Choudhury's organization, ASA, cannot call itself a bank. It is formally a non-governmental organization (NGO).

The two men ought to be able to work together rather effectively, and yet they avoid each other. They are competitors in many respects, and if Choudhury's latest project is successful, they will likely become adversaries. Their dispute revolves around a single, but fundamental question: Should one be able to make money at the expense of the poor, if that means liberating them from poverty at the same time?

Choudhury says yes.

Yunus says no.

Yunus is the banker of the poor, the godfather of the microloans. He secured his spot on the Mt. Olympus of humanitarians with an experiment: He took a risk and transformed a bank, the most important tool of capitalists, into an instrument to fight poverty. And he turned the loan, for centuries a privilege of the affluent to increase their wealth, into a human right.

Yunus' Most Famous Client

Yunus changed the lives of millions of people, people like Laily Begum. In fact, he has been so successful that his idea is now in jeopardy and could soon become irrelevant.

The visit to Begum takes us to the outskirts of Dhaka, to a narrow, dim path that eventually expands into a courtyard. The first people to appear in this scene are children, playing naked in the sand. Laundry is hanging out to dry, chickens are scratching, a rooster is strutting and a calf, tied to a wooden post, is dozing in the midday heat, slapping at flies with its tail.

There is a hearth in a corner on the right, under a narrow overhang. Next to it is a door, and in the door stands Laily Begum.

She raises her hand in greeting, and flashes an easy-going and genuine smile. She is used to visitors, both Bangladeshi and foreign, because Begum is Yunus' most famous client here in Bangladesh. Her photograph is on posters, in brochures, in government offices, apartments and markets. Her husband, a Muslim like his wife, and like 90 percent of the population here in Bangladesh, stands next to her. He is also her press spokesman. He says that much has changed in recent years.

In their former life, Atiqullah Begum was a day laborer and Laily was a housewife. They lived in a mud hut, which they shared with their children, their livestock and, occasionally, the nearby lake when it flooded during the monsoon.

They lived on the food they grew in their garden and from their earnings as manual laborers. On many an evening, they had to decide who should be allowed to eat his fill -- the children or the husband.

Today they face different decisions. Should the eldest study abroad after finishing high school? Should they buy a new television set? Are three mobile phones enough for a family of six?

The source of their affluence is a row of five shops on the main road, each of them around half the size of a garage, protected against burglars with metal shutters. The shops belong to Laily Begum. She had them built, then rented them out. Her tenants sell food, motor oil and various services. There is a hair salon in the first shop, a laundry in the second one and a snack bar in the third.

Begum also owns a small apartment building next to the row of shops. There are nine apartments, and she rents them unfurnished. Behind her house is a stable with cows in it. The milk, the calves and the rent for the apartments and shops provide Laily Begum, her husband and their three children with a daily income of about €15 ($23), or €450 ($698) a month. This puts the Begums squarely in the ranks of the affluent middle class in Bangladesh.

The Begum family has Yunus to thank for its success. More than 30 years ago, he recognized that an important cause of poverty was the fact that the poor are excluded from the services the financial sector offers. Banks don't lend money to poor people, because they can provide no collateral. In the average banker's opinion, lending them money is tantamount to "gradual suicide."

Yunus, a professor of economics at the University of Chittagong at the time, disagreed. He issued his first loan to 42 female basket weavers. The total loan amounted to €33 ($51). All of the women repaid their shares of the loan in full.

'Women Handle Money More Responsibly'

That was the beginning of Grameen Bank. To this day, it issues small loans to the poor, and to this day its repayment rates remain phenomenal: above 98 percent, according to the bank. This is possible because Yunus cleverly combines individual liability with collective pressure. The loans are issued to individual borrowers, who are also liable to the bank. But in addition to the loan agreement, the community of borrowers also exerts pressure on individual borrowers. The borrowers are organized into groups, with membership in one of these groups being mandatory for each borrower. The members ensure that loans are repaid on time. This method has been profitable for Grameen Bank, which has reported average annual earnings of €4.7 million ($7.3 million) in the last 10 years. The money is distributed to the owners of Grameen Bank. The owners are the bank's borrowers.

Grameen Bank charges interest rates of up to 20 percent. "That's extortion," say Yunus' critics. His response is that they understand nothing about his business. His employees travel out into the villages on bicycles or mopeds and collect the loan payments during the borrower groups' weekly meetings. This personal form of collection costs money.

Laily Begum felt that the terms were acceptable, and she received her first loan in 1997. It was for about €20 ($31), and was repayable in one year. She used the money to buy a mobile phone, a black Nokia 1610. It sits in a cabinet today. Her husband fetches it. A few keys are missing, and the phone has become a toy for the children.

It was no accident that it was Laily Begum who received the loan, not her husband. Grameen Bank issues loans almost exclusively to women. "They handle money more responsibly than men," says Yunus. In Bangladesh, the emancipation of women is a byproduct of the emancipation of the poor.

Begum used the telephone to transform her hut into a call shop. Anyone who wanted to call friends or relatives paid 7 Taka a minute, or about €0.14 ($0.22). Begum kept 4.4 Taka, and the rest went to the telephone company. It was a good business -- and a brilliant idea. With the telephone, Laily earned an average of €800 ($1,240) a month.

Both Begum and the villagers benefited from her new business. Farmers could call the owners of market stands to negotiate prices before setting out for the market. The sick could call to find out if their doctor was available before spending hours on a bus. Day laborers could call companies to find out if there was any work available.

Begum bought her Nokia mobile phone from Grameenphone, which developed the first nationwide mobile phone network in Bangladesh. The company is a joint venture between Grameen Telecom, another firm founded by Yunus, and Telenor, a Norwegian telecommunications group. For Grameenphone, Laily Begum was advertising. She was the first so-called village phone lady at the time, more than 10 years ago now. Her present-day wealth and fame are based on this circumstance.

'The Problem with Charity is that You Get Lazy'

Grameen Bank currently has microloans issued to more than 7.5 million women in Bangladesh. This is an astonished success, but not all women are capable handling their new power and opportunities. Some entered the village phone business too late in the game, others unwittingly bought sick or old cows and yet others had to look on as their husbands drank away the money. According to estimates, roughly one in two borrowers has been able to pull her family out of poverty with the help of microloans.

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, 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

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