As I blogged before, one of the last articles Daniel Pearl wrote for the Wall Street Journal before he was abducted and murdered---coauthored with Michael Phillips---exposed financial woes at the Grameen Bank. Appearing on page 1 on November 27, 2001, under the headline Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag, the piece described how some Bangladeshis were juggling loans from several microcreditors at once, how others had banded together to protest and resist the Bank's policies, and how the Bank's loose accounting standards and slow disclosure hid a decline in loan repayments.
This post shares new data that suggest that history is repeating itself in important ways. The Grameen Bank, indeed all big microcreditors in Bangladesh, may be finding it harder to collect on loans. As far as the evidence goes, there has been no epidemic of default. But the combination of years of rapid growth and accelerating declines in key indicators of delinquency are so reminiscent of the lead-up to the global financial crisis that the broad implications hardly need explaining. A partial meltdown in the Mecca of microcredit would not sow the same economic destruction---microfinance is not the heart of Bangladesh's economy in Schumpeter's sense---but it could have lasting implications for microcredit worldwide.
In his autobiography, Banker to the Poor, Muhammad Yunus describes how Grameen grew from an idea, to a project with his students, to a formal branch of a state bank, to an independent bank. By the mid-1990s, the Grameen Bank was a national operation with a global reputation. However, growth then slowed and the Bank ran into trouble persuading its borrowers to pay back. Stuart Rutherford:
Arrears on loan repayments began to grow, and more and more clients stopped attending the village-level weekly meetings where bank business is conducted. Then in 1998 Bangladesh suffered its worst floods in living memory, disrupting the bank’s work in almost two thirds of the country and dealing its balance sheet another severe blow.
The system consisted of a set of well-defined standardised rules. No departure from these rules was allowed. Once a borrower fell off the track, she found it very difficult to move back on, since the rules which allowed her to return, were not easy for her to fulfill. More and more borrowers fell off the track. Then there was the multiplier effect. If one borrower stopped payments, it encouraged others to follow.
Pearl and Phillips:
Grameen's performance in recent years hasn't lived up to the bank's own hype. In two northern districts of Bangladesh that have been used to highlight Grameen's success, half the loan portfolio is overdue by at least a year, according to monthly figures supplied by Grameen. For the whole bank, 19% of loans are one year overdue. Grameen itself defines a loan as delinquent if it still isn't paid off two years after its due date. Under those terms, 10% of all the bank's loans are overdue, giving it a delinquency rate more than twice the often-cited level of less than 5%.
Some of Grameen's troubles stem from a 1998 flood, and others from the bank's own success. Imitators have brought more competition, making it harder for Grameen to control its borrowers.
...microlending has lost its novelty. In Tangail, signboards for rival microlenders dot a landscape of gravel roads, jute fields and ponds with simple fishing nets. Shopkeepers playing cards in the village of Bagil Bazar can cite from memory the terms being offered by seven competing microlenders....Surveys have estimated that 23% to 40% of families borrowing from microlenders in Tangail borrow from more than one.
Borrowers have also become more rebellious. "The experience was good in the beginning," says Munjurani Sharkan, who became leader of a Grameen group in Tangail's Khatuajugnie village in 1986. To put pressure on "lazy" group members who were slow making payments, she says she used to start removing the tin roofs of their homes. But one day, the whole group decided to stop making payments.
They were protesting Grameen's handling of a fund it created for each group, using 5% of each loan and additional mandatory deposits. The "group fund" was meant for emergencies, but many borrowers wanted to withdraw money from the group fund. After a protest movement, complete with placards and amplified speeches, Grameen finally agreed to give borrowers easier access to the fund.
The troubles and the exposé left several legacies. First, even before Pearl and Phillips got onto the story, Grameen embarked upon a program of transformation eventually called "Grameen II." Its hallmarks were simplification (of the various loan products), computerization, flexibility, and the taking of voluntary savings deposits. In response to the article, Yunus publicly regretted the Journal's failure to tell this story of positive change (and published all his e-mail exchanges with Pearl and Phillips!). He lacked credibility since Grameen's forthrightness had just been called into question; yet he was substantially right. Grameen II confounded the critics. Today, the icon of tiny loans for the poor does more microsavings than microcredit. Portfolios of the Poor extols the flexible new "topping up" system that lets people borrow back loan balances after 26 weeks of on-time payment.
A second legacy: Grameen overhauled its metrics of loan delinquency and began posting them monthly on its web site. It thus set a standard of transparency that its main rivals, ASA and BRAC, are far from matching.
Third, and far less important, when I started at the Center for Global Development in early 2002 and listed topics I could work on, my new boss Nancy Birdsall lit on "microfinance"; I think the recent Pearl and Phillips article was in the back of her mind. So it's one reason I am writing this today.
Grameen II also confounded the critics in embarking upon a new round of growth---from 2.4 million Grameen members at the end of 2001 to a stunning 6.9 million at end-2006 and just under 8.0 million today. ASA and BRAC kept pace---in fact, closed the gap---so that that all the big three clustered around 6 million borrowers at end-2008. So strong is the convergence that one wonders whether the three are lending to the same 6 million households. (Not all 8 million Grameen members borrow at a time.)
Indeed, multiple borrowing is widespread in Bangladesh now, and it has raised concerns that some Bangladeshis are juggling microcredit loans the way some Americans juggle credit card debt, in a merry-go-round that must one day stop. The worry, in other words, is that there is a microcredit bubble. In 2007, Shafiqual Haque Choudhury, founder and head of ASA, which is known as the most commercially savvy of the big three, worried aloud about a "train crash." And that was before the global financial crisis, which has probably been transmitted into poor Bangladeshi households via lower exports of clothing made in Bangladeshi factories and fewer construction jobs in the Middle East for Bangladeshi workers.
Yet so far, at least from afar, tranquility seems to prevail. Repayment rates, to the extent they are reported, have remained high. In the last year, Portfolios of the Poor has depicted microcredit as a source of stability for Bangladeshi families more than instability. And Rich Rosenberg implicitly leaned on the high repayment rates in microcredit's exemplar nation in arguing that since people keep repaying loans over many years, and there have been only scattered credit meltdowns, most poor people must be avoiding gross over-borrowing.
If Bangladeshi microcredit was approaching a train wreck---or at least a bumpy stretch---where would we see it first? On the website of the most transparent large microcreditor in the country. A few days ago, I visited Grameen's site, and was surprised to find this trend (full spreadsheet):
I think about this graph in two ways. One is by focusing on the ending level of 96.54%. That seems high in absolute terms. But it is low by historical standards. And Rich Rosenberg, in his authoritative field guide to delinquency metrics (quoted by Pearl and Phillips) and in a recent post, explains that a 95% collection rate can spell disaster. On a one-year loan with weekly repayments, lent taka (the Bangladeshi currency) return to the microcreditor over 0--12 months, so the average taka makes a lender-borrower round trip in 6 months, and can be immediately relent. Thus a 95% collection rate can lose 5% of capital in 6 months, and 10% in a year---maybe manageable if interest rates are high enough, but not trivial. In addition, non-payment is contagious, as Yunus noted. Once delinquency starts feeding on itself, the costs of cajoling and pressuring for repayment can skyrocket.
Another way to analyze the graph is by focusing on the recent change. Whether or not Grameen Bank is yet in the red zone, it seems likely that something bad is happening. In Rosenberg's language, the on-time collection rate graphed above is an excellent red flag indicator because it plummets as soon as borrowers start struggling. It is a leading indicator of trouble, a canary in the coal mine.
The on-time collection rate does have a weakness, though: paying late is not paying never. Delinquencies do not automatically harm a creditor greatly in the long run. This is why Rosenberg recommends the microlenders also compile indicators of more protracted difficulties---and why Grameen does so. Its monthly tables list total amounts owed by people that have missed 5--9 consecutive payments (1--2 months of weekly installments). By this measure, if you miss the first 5 payments on a $100,000 mortgage, the entire $100,000 is counted as at risk. Grameen does the same for those missing 10 or more payments.
This graph shows all three of Grameen's delinquency indicators. The blue line is the same as that above, but flipped for comparability from a collection to a non-collection rate. The two added indicators are for Grameen's core credit product, the basic loan, which can last from 3 months to 3 years and has weekly payments. These too point to degradation:
So what is the story behind the numbers? I imagine two main possibilities. One is that the global financial crisis is mainly to blame and little is fundamentally wrong with microfinance in Bangladesh. The other is that a "train crash" is indeed occurring, however mild or severe. The global crisis may merely have popped the bubble. Both of these stories are about Bangladeshi microcredit in general, not just the Grameen Bank. I focus on the Bank only because it does such a good job of publishing delinquency indicators. [Update: a bit more analysis in this post.]
I spoke last night with the leading foreign observer of Bangladeshi microfinance, Stuart Rutherford, and he strongly favored the second explanation. More than 650 microcreditors operate in Bangladesh. Multiple borrowing is widespread. At least until very recently, there has been no national ID system, so creditors have been unable to share information in order to track how much debt people are juggling, the way creditors in rich countries do through credit bureaus. The microcreditors are flying blind. Some winnowing seems inevitable and healthy.
How will the big three fare? ASA, according to Rutherford's Pledge has more money than it knows what to do with. It is lean and mean, financially strong. It stopped opening new branches in 2007 and went into reverse, closing or amalgamating some. BRAC borrows its capital more than the others, which may make it vulnerable, but also receives more support from donors for the way it integrates microcredit with other activities to help the poor.
Finally, Grameen holds 45.4 billion taka in savings for its members, against 56.1 billion in outstanding loans. To the (unclear) extent that the individuals who owe the bank the most are those who save the most with it, Grameen should be in reasonable shape: defaulters will lose their savings. (That said, I wonder whether recent drops in Bangladesh's commercial interest rates will place another strain on the Grameen. It has committed to paying 12%/year over 10 years (10% over 5) on its Grameen Pension Scheme savings plan. Adding the 38.4 billion taka in savings of non-members puts Grameen in a net savings position, and the earnings on its net savings are going down. See the bottom of the "Monthly data" tab in my spreadsheet.)
More graphs may shed more light. This one shows what may be a problematic pattern in the evolution of the Bank, and perhaps microcredit generally in the country. Whenever the Bank has stopped growing, delinquency has flared:
This graph shows that despite the current plateau in membership, the Bank has maintained growth in taka terms by increasing lending per member:
I tried to ask the Grameen Bank about the story behind the statistics. But the phone number on its Contact Us page has yet to answer, messages to the posted e-mail address bounce, and the web-based e-mail form produces an error message. I hope that this post will elicit an informative response.
- I do not know whether Bangladesh's microcreditors are in major trouble. But if they are, the denouement will manifest much as in the graphs above.
- It is tempting to link the degradation in the Bank's portfolio to the mysterious dismissal of Deputy Managing Director Dipal Barua in December. I have no evidence for a link. However, when a financial institution forces out its head of operations while key indicators are going south, it raises questions. Shareholders---mainly the Bank's members---donors, and other stakeholders deserve an explanation.
- A crisis in Bangladesh, akin to recent ones in Bosnia, Morocco, Pakistan, and India, would tarnish the image of microcredit worldwide, perhaps permanently.
- Other microcreditors should quickly match Grameen's standards of financial disclosure so that we can get a better read on the extent of trouble.
- The Grameen Bank has repeatedly defied the skeptics and flourished for 34 years. This history should instill humility in any who would declare Grameen compromised now.
- Yet the Bank and its competitors have not quite proved that they can thrive without growth, as they must for permanence. A history of ending lending problems by outgrowing them is not entirely reassuring.