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Micro Man

From the May/June 2007 Issue

Everyone, from free-market conservatives to socialists, loves Muhammad Yunus and the Grameen Bank, which has been lending tiny sums to millions of women in Bangladesh. Yunus won the Nobel Peace Prize last year, but Tom Bethell wondered if the story was too good to be true.

YunusSomething about the Grameen Bank story didn’t seem quite right, but I couldn’t put my finger on it. Muhammad Yunus is the apostle of microcredit who won the Nobel Peace Prize last year. The Grameen Bank itself shared the prize. In the oft-told story, Yunus lent $27 to basket weavers in Bangladesh, rescuing them from the professional moneylenders and their sky-high interest rates. The women repaid the loan as promised, and Yunus founded Grameen in 1983.

Since then it has greatly expanded. In a speech at the National Press Club in November (about which more later), Yunus summarized the Grameen Bank’s operations today: it has 2,300 branches, and 21,000 staff with “very decent salaries” and good retirement benefits; nearly $1 billion a year is lent to 7 million borrowers, 97 percent of whom are women; average loan: $130. Borrowers are also owners of the bank, and when he was told that the bank shared in the Nobel Peace Prize, Yunus joked that maybe 7 million people would have to go to Norway to collect it. (He settled on the nine members of the board.)

Microcredit is simply the lending of tiny amounts of money to small entrepreneurs who probably couldn’t borrow otherwise. Grameen has made loans to millions of women in 62,000 villages in Bangladesh, and Grameen is also helping similar institutions in 37 countries, including Nigeria and the Philippines.[1] The Grameen Bank itself requires no collateral, and borrowers don’t have to “sign any legal instrument,” Yunus says. He claims a repayment rate of 99 percent, but The Wall Street Journal questioned that figure on the day after his Nobel Prize was announced, noting that it “ignores the clients who are far behind in their loan payments. The bank reports a loan as overdue only if the borrower has missed 10 or more consecutive payments. And the bank has often provided new loans to allow borrowers to keep current on old ones. The problem came to a head early this decade, when 19% of Grameen loans were at least one year overdue.”[2]

Whatever the true condition of his balance sheets, Yunus has pulled off the remarkable feat of appealing to policymakers across the political spectrum. There has been hardly a murmur of dissent. Yunus must be the most widely admired moneylender in history. Praise pours in—from free-market enthusiasts like Mark Skousen and Henry Hyde; from Bill and Hillary Clinton, and Jane Fonda; from Queen Sofia of Spain. And from Israeli-born actress Natalie Portman (“Star Wars III: Revenge of the Sith”), who was spokesperson for the International Year of Microcredit (2005, by the way). And, of course, the Nobel Prize committee itself was no mean catch.

Think, for a moment, about the improbability. The Nobel Peace Prize was shared with a bank—a bank that has claimed to be profitable for most of its existence. Since when did they give the prize to bankers who lend money at 20 percent interest? Asked about interest rates at his Press Club speech, Yunus rather obscurely said that the bank’s formula was “cost of funds plus 10 percent.” Several uncontradicted accounts, however, put the figure at about 20 percent.

So, has the world’s intelligentsia quietly gone capitalist without telling us? I don’t think so. Nobel committee members “wanted to highlight a peaceful export from the Muslim world and to send a message,” The Wall Street Journal said by way of explaining the award. Somehow, though, the skepticism lingers.

Grameen has 2,300 branches, 21,000 employees, and 7 million borrowers. Average loan: $130.

By the way, I am not one who has difficulty accepting the idea that easing the burdens of the poor merits a prize for peace. The Economist was sniffy about that, worrying that the Nobel is “losing its lustre.”[3] But Doctor Johnson surely had it right when he said that there is no occupation in which a man can be more innocently engaged than the making of money.” If Yunus really is helping the poor make money for the first time in their lives, let us give him not just the peace but the economics prize as well.

He’s a “mesmerizing salesman,” wrote Connie Bruck in The New Yorker, a “highly gifted interlocutor between the extremely poor in the developing world and the West.” No argument there. The big jackpot winners of high-tech can’t get enough of Dr. Yunus, who was born in a Bangladesh village in 1940 and obtained his Ph.D. in economics from Vanderbilt University. In November 2004, he spent a “weekend session” at the San Francisco home of venture capitalist John Doerr, along with Pierre Omidyar, a founder of eBay, and the fabled cofounders of Google, Sergey Brin and Larry Page.[4] In May, Yunus attended a three-day Bill and Melinda Gates microfinance summit in Seattle, and was rewarded with a $1.5 million grant.[5]

His claim that women are more reliable than men with money ensures his popularity with progressives the world over—and the claim may even be true. In an Islamic country such as Bangladesh, women certainly have been excluded from economic decision making. “Conventional banks are owned by the rich, generally men. Grameen Bank is owned by poor women,” Yunus says, claiming both to be a revolutionary and to have revolutionized banking.

At the same time, yes, he does seem to be expanding market opportunities in a country where they are badly needed. Government-to-government foreign aid has for so long been the only model for Third World development that anyone who takes a different route is bound to attract free-market and conservative admirers.

So where’s the catch?

Yunus is said to have political ambitions, but so what? More power to him. He keeps saying that credit is a human right, but no one really buys that. It’s just salesmanship. But also harmless. The same goes for his talk of abolishing poverty worldwide. We know it won’t happen, but if it appeals to the Left, no harm saying it. His claim to have expanded his lending program to 81,000 beggars (so that they can sell door-to-door while they beg) is not credible either. “There’s no interest and no payment schedule,” said Carlos Labarthe, the CEO of a microfinance institution in Latin America. “It’s a local grant.”[6]

The Grameen Bank is very un-bank-like in that it disciplines borrowers by peer pressure rather than legal liability. Debtors are lumped into collectives of five people, who accept some responsibility for each other’s loans. A World Bank working paper criticizes this idea because group liability puts responsible customers at the mercy of the irresponsible.[7] The conscientious have an incentive to drop out lest the profligate undermine their creditworthiness. The criticism is serious, but a more recent Grameen model reduces reliance on collectivism.

Vijay Mahajan, executive of Basix, an Indian firm that provides support to entrepreneurs in poor rural villages, says that Grameen labors under several false assumptions, among them the belief that the poor want to be self-employed rather than earn wages. He also criticizes the claim that what the poor need is debt, when what they really need is savings.

If Yunus really is helping the poor make money for the first time in their lives, let us give him not just the peace but the economics prize as well.

Thomas Dichter, who has worked in international development since 1964, agrees. In a February paper titled “A Second Look at Microfinance,” for the Cato Institute, he concludes that the advantages of microcredit are overstated, writing, “History seems to be telling us that economic development and its consequent massive poverty reduction did not depend on microcredit being made more accessible for income production or asset acquisition by the poor. Instead, it was the process of development that created jobs, which in turn made the working poor an attractive target for financial services, beginning with savings and then moving toward consumption.” Dichter quotes the late British economist Peter Bauer: “To have money is the result of economic achievement, not its precondition.”

Dichter calls himself a member of the “microfinance movement,” but he is skeptical of the Grameen Bank approach, instead favoring institutions like the Bank Rakyat Indonesia’s Unit Desa system, which, he writes, uses “hardly any outside resources” and instead operates as a thrift society, depending on the savings of its members.

Dichter, however, is not an all-out critic of Grameen. One of the few to fall into that camp is Jeffrey Tucker of the Ludwig Von Mises Institute, who finds the Grameen literature to be “an echo chamber of hurrahs.” By 1999, he said, the bank never had turned a profit. “In fact, it is not a bank at all. It is more correct to view Grameen as a conduit for international aid dollars.”[8]

Jonathan Morduch, a professor of public policy and economics at New York University, writing in the Journal of Economic Literature, said in 1999 that “most [Grameen] programs continue to be subsidized directly through grants and indirectly through soft terms on loans from donors.” The best-known microcredit programs “cover only about 70 percent of their full cost.” Grameen, he wrote, “is in fact subsidized on a continuing basis.”

So I guess that was what was on my mind. If you lend money at 20 percent and everyone repays, you don’t need guilt-edged money from the West Coast. Microcredit is such a fashionable cause that maybe Yunus has all along been a high-class beggar himself, taking his bowl around to Bill Gates, Sergey Brin, and Larry Page, and using the proceeds to pretty up his balance sheets.

WorkingA curious feature of the Grameen Bank is its “16 Decisions,” a kind of parade-ground indoctrination of borrowers, illustrated on the bank’s website. Ranks of semi-militarized women, arms outstretched, are depicted intoning their homegrown propaganda. Here are four of the 16 Decisions: “We shall plan to keep our families small”; “we shall take part in all social activities collectively”; “we shall collectively undertake bigger investments for higher incomes”; “we shall always keep our children and the environment clean.”

It has a United Nations feel to it, and as Jeffrey Tucker pointed out, the UN International Fund for Agricultural Development provided Grameen with its first major loan and “has consistently pumped money in ever since.”[9] When Yunus won his prize, the UN agency boasted in a press release that from 1981 to 1995 it had “provided capital to the Grameen Bank through three projects.” I began to harbor dark suspicions that the Grameen Bank was a UN front, or at least may have started out that way.

I decided to go and hear Yunus at the Press Club even though it was billed as “sold out.” I could watch the proceedings on a TV monitor in the First Amendment Lounge. As it happened, they let me into the dining room, where I was allowed to sit in the back behind a bank of TV cameras. A public relations man even gave me a copy of The Poor Always Pay Back: The Grameen II Story.

Grameen II? I could hardly keep all this straight. In addition to the Grameen Bank, there was the Grameen Trust, Grameen Foundation, Grameen Capital Management, Grameen Phone, Grameen Telecom—untold Grameens, Grameens galore. And now, Grameen II. It would take a Mother Jones reporter to expose all the interlocking directorates—except I was beginning to suspect that the bloodhounds were already in front of the cameras, honored guests at the luncheon tables; perhaps even sitting at the head table itself.

There, at any rate, sat Muhammad Yunus, wearing his sleeveless chocolate-brown Nehru number and looking relaxed and candid and open and absolutely delighted to see anyone who came up to say hello. Also up there with the high and mighty: representatives from The Washington Post, The Washington Times, Bloomberg News, Reuters; and the Ambassador of Bangladesh to the United States. Plus Yunus’s daughter, Monica, who is a singer at the Metropolitan Opera.

The announcement said Yunus would respond to “individual news queries” during a question-and-answer session, but it turned out that written questions had to be passed up from the tables (where many of his friends and colleagues were sitting). I wasn’t sure what to ask, anyway. I had tried to decipher the bank’s balance sheets online, but somehow it was discouraging to read that the statements there had been verified “in accordance with Bangladesh Standard [sic] on Auditing.” So, peering between the cameras, I listened to Yunus’s remarks. He is an accomplished speaker. Here is one thing he said: the Grameen Bank “has enough money for itself. It’s not a bank that needs money from outside. So all money comes from the depositors, and borrowers themselves are very strong depositors; 67 percent of the deposits come from the borrowers. But all these deposits of money go into lending.”

'Why is there poverty in rich countries?' Now, Yunus sounded rather like Charles Murray and George Gilder rolled into one, blaming welfare. 'It sounds harsh,' he said, 'but the welfare system created a human zoo.'

His answers were often interesting. Asked about the role of government in microfinance, for example, he implied that the Grameen Bank enjoyed a legal monopoly in Bangladesh, contrary to his own wishes. “The only legal entity of microcredit is Grameen Bank,” he said. Nongovernmental organizations also do microcredit, but there is a problem: “It is not legal for them to lend money, get into the banking business.” The government turns a blind eye, “but why don’t they make it legal? Give them a legal home. Design a law. In addition, give them the facility to take deposits.”

I didn’t quite know what to make of this, but it seemed characteristic of Yunus to be making an argument that appeared to be in opposition to his own interest. He then asked, “Why is there poverty in rich countries?” Now, he sounded like Charles Murray and George Gilder rolled into one, blaming welfare. “It sounds harsh,” he said, “but the welfare system created a human zoo: ‘Put them on welfare and forget about them.’ They’re just trying to keep them happy.”

When asked if the World Bank had shown any interest in microcredit, he was very nonchalant in his criticism. “We tried our best. Didn’t do a good job. Not even 1 percent of their total lending, which is $20 billion, goes into microcredit.” The World Bank keeps building more infrastructure, bridges, and then more bridges. “O.K., one more bridge, who cares?” He even recommended that the next bridge should be “owned by the poor people.” He definitely favors an expansion of ownership for the poor, but I also had a feeling, in view of the 16 Decisions, that he might have communal ownership in mind rather than private. Nonetheless, he said a lot of good things in the course of the hour, and somehow I found myself rooting for him, like everyone else in the room. I was hoping that he was right. Even if his bank’s balance sheets are a bit murky, he seems to represent an emerging consensus that government-to-government aid enriches only the rulers. That is progress.

I decided to make my way to the podium after the event was over. Yunus remained standing there, greeting a crowd of well-wishers. I wasn’t sure what to ask him, but those in front of me in the line had abruptly melted away, and now I was center stage with my tape recorder. I knew I would have no more than a few seconds with the great man.

“If you have 95 percent—”

“97 percent.” (He was thinking of the female borrowers.)

“97 percent repayment rate…”

“99 percent.”

“99 percent. So, you must be making tons of money. Why do you need to go to the Bill and Melinda Gates Foundation?”

“We don’t. That is what I was saying. We don’t go to anybody. We have our own money.”

“There have been these articles saying you get a lot of foundation money.”

“We don’t.”

“Where does that money go to?”

“That you have to ask them. Because we don’t…”

“Ask whom?”

“Those who give them.”


“Because I don’t take it.”

“It doesn’t go to the Grameen Bank?”

“Not at all. Not a penny.”

“What about the foundation, the Grameen Foundation?”

Here there was the tiniest hesitation.

“You would have to ask them, what they do with their money.”

More and more people were pressing in close, and my time was up. As you can see, I had missed my opportunity, because I failed to distinguish clearly between the bank and the foundation, and he capitalized on that (although I am sure he knows perfectly well what the Grameen Foundation does with its money).

The foundation definitely does get money from socially conscious philanthropists, but the question, still not fully resolved in our colloquy, is whether that money then finds a way to move across into the bank’s own accounts. He clearly denied it in his speech, however.

After the event was over, I asked Sameer P. Sheikh whether the foundation funds the bank. An assistant to the president of the Grameen Foundation, he happened to be sitting next to me. He said no, the foundation money doesn’t go to the bank. “We are completely separate from the bank financially,” he said. The foundation money is spent “replicating the program elsewhere, in other countries.”

I know nothing to the contrary. But still, when I asked Sameer, at the beginning of the event, if the bank was “profitable,” he replied that it was “self-sustainable.” I carefully wrote that down. So now I ask myself: “If those Yunus figures are correct, why isn’t it profitable?”

I had not even begun to sort out all these things in my mind when I saw, out of the corner of my eye, Muhammad Yunus sweeping out of the room, surrounded by a cluster of aides and admirers who proceeded directly into a waiting elevator. Next stop, Oslo.

Tom Bethell wrote about New Orleans in the March/April issue of The American. He is the author of four books.

Illustrations by Pamela Hobbs

[1]Grameen Bank in 2006,” Grameen Dialogue, no. 63, (April 2006).  

[2] Michael M. Phillips, Marcus Walker, and Mark Whitehouse, “‘Microloan’ Father Yunus Is Awarded Nobel Peace Prize,” Wall Street Journal, October 14–15, 2006.

[3]Losing its Lustre,”, October 13, 2006.

[4] Connie Bruck, “Millions for Millions,” The New Yorker, October 30, 2006, pp. 62, 72.

[5] Paul Watson and Nurul Alam, “Peace Prize Winner Sees Every Cent as a Seed,” Los Angeles Times, October 14, 2006.

[6] Bruck, “Millions for Millions,” p. 69.

[7] Xavier GinĂ© and Dean S. Karlan, “Group Versus Individual Liability: A Field Experiment in the Philippines,” World Bank Policy Research Working Paper 4008, September 2006.

[8] Jeffrey Tucker, “Microcredit Meltdown,” Ludwig von Mises Institute, November 19, 1999.

[9] Jeffrey Tucker, “The Micro-Credit Cult,” The Free Market 13, no. 11 (November 1995).

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