Mohammed Yunus Forced Out –Whither Microcredit? David Roodman

5/24/11
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Mohammed Yunus has been forced by a Bangladesh court to step down as the head of the Grameen Bank, leaving the world to wonder what will become of the institution that helped inspire the microfinance revolution. On this week’s Wonkcast, we consider the rise and uncertain future of microcredit, not so long ago the darling of development experts and activists alike, and discuss whether or not the arc of Yunus’s remarkable life serves as an apt metaphor for the microfinance movement.

My guest is CGD senior fellow David Roodman, who has been tracking the Yunus trial since it began as part of his Microfinance Open Book Blog. The book in public on the blog, Due Diligence: An Impertinent Inquiry into Microfinance, is nearing completion and will be published before the end of the year.

David tells me that when he traveled to Bangladesh in 2008, soon after he began research for the book, he was impressed by the size and strength of the country’s growing microfinance sector. Over the years, microcredit had developed robust institutions that not only provided loans and savings accounts to millions of poor people, mostly women, but also employed thousands. David sees the institutions, not only Grameen but also its largest competitor, BRAC, as transformative development achievements in their own right.

“Services like microfinance do not reduce poverty,” says David. “It’s this very disruptive, often uncomfortable process of economic transformation—industrialization—that does. By helping build these financial institutions, microfinance is fostering that kind of transformation in the financial sectors of developing countries.”

Unfortunately for Yunus, this transformative process challenged the status quo in Bangladesh. Yunus ventured briefly into politics and was ultimately forced out of the leadership of the institution he founded (for exceeding a mandatory retirement age of dubious validity) in a politically motivated effort to reduce his influence. Since then, the government has cracked down on Yunus’ supporters. David tells me that there is growing concern about possible human rights violations, including the abduction and torture of the leader of the Grameen employees’ union.

All this is a long fall from 2006, when Yunus and the Grameen Bank won the Nobel Peace Prize, attracting a storm of international attention and a destabilizing flood of public and private capital. David recounts the roller coaster ride that was the microfinance revolution and explains how over-reliance on lending (as opposed to other financial services, such as savings and insurance), the resulting credit bubble, and randomized control trials results that called into doubt the core belief that microcredit lifts families out of poverty all combined to tarnish the reputation of the movement.

Nevertheless, David ends by reiterating his support for microcredit, even if it has not proven a successful intervention for reducing poverty.

“The strength of microfinance is in building robust, durable financial institutions to bring useful services to millions of people in need,” says David. “That’s still a rather remarkable achievement within the world of foreign aid and philanthropy.”

Listen to this week’s Wonkcast to learn more about microfinance and to hear David’s recommendations for policymakers on how to improve micro-lending and micro-saving practices.

If you have iTunes, you can subscribe to get new episodes delivered straight to your computer every week. My thanks to Will McKitterick for his production assistance on the Wonkcast recording and for assistance in drafting this blog post.