Further Dissent on Grameen

15 October 2006 at 10:19 pm 5 comments

| Peter Klein |

The econo-blogosphere continues to heap adulation on Nobel Laureate Muhammad Yunus and the Grameen Bank. I keep waiting for someone to join me in expressing reservations. Economists and bloggers alike excel at challenging the conventional wisdom, especially when press coverage of an individual or event is completely one-sided. But so far no takers.

Much of the information circulating about Grameen doesn’t pass the “smell test.” For instance, we’re told that 90 percent of Grameen’s borrowers are women. Yunus says poor Bangladeshi women are better credit risks than poor Bangladeshi men, and that such women are historically underserved by credit institutions. Fair enough, but 90 percent? If that number is accurate, then we’re talking about a political statement, not a development strategy.

The number that puzzles me the most, though, is Grameen’s repayment rate, variously described at 98 or 99 percent. To begin with, this is an odd statistic to tout. Banks do not measure their performance by the repayment rate, but by profitability or the efficiency with which deposits are converted into loans. OK, you say, Grameen is not chasing profits, but broader social objectives. Fine, but then the appropriate performance measure is the number of new businesses created with Grameen credit, the change in the poverty rate, or some other measure of social welfare.

In any case, the point is moot, because the number is bogus. As reported in the October 14 WSJ:

Mr. Yunus often says the bank has a loan-recovery rate as high as 98.5%. Yet that figure 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.

Entry filed under: - Klein -, Entrepreneurship, Institutions, Myths and Realities.

Politically Incorrect Entrepreneur of the Year Vanderbilt PhD Program in Law and Economics

5 Comments Add your own

  • 1. Jüri Saar  |  16 October 2006 at 2:56 am

    Well, there seems to be at least one person, who seems to question the peace prize:


  • 2. Andy  |  16 October 2006 at 2:28 pm

    I have heard (third hand) that ethnographic research doesn’t support the finding that women’s lives are “much improved” by the loans. I have heard that women continue to have the same status, same family duties as before – they just run a company/shop/enterprise/owe money, too. This was dissertation research, not published that I know of.

  • 3. Rajiv Krishnan KOZHIKODE  |  18 October 2006 at 7:54 am

    Klein’s skepticism on the grameen model ignores ground realities. The grameen bank model is more of a socially driven model than an economicaly driven one. Its always easy to say, “there is something up the sleeve”, what is not easy is to actually pull a rabbit out of the hat.

    Poverty motivates the poor to indulge in criminal behavior for a living. To demotivate such criminal behavior, it would be important to provide the poor with alternate source of living. There are two option here, either spoon feed the poor with a pittance of poverty allowances, as is done in the west, or, to provide a slightly higher amount in the form of low cost loans. The first option only allows status quo to the poor, whereas the second option gives the poor an opportunity to self-sustenance. Morover the first option makes the poor more lazy to do hard labor, while the second option gives them the motivation to work. Of course there would be exceptions and there would be loan defaults, but, it would breed a better society which is more self reliant.

    Thus, it is more important to take initiatives than to find fault with initiatives.

  • 4. Peter Klein  |  18 October 2006 at 9:12 am

    Rajiv, can you point us to some evidence that the Grameen approach does, in fact, accomplish these objectives? What is the estimated magnitude of the effect?

    Incidentally, you’re of course right that it is easier to criticize existing programs than to create new ones. Then again, when someone wins a Nobel Prize and is a rock star of the international development world — not to mention an aggressive self-promoter — holding his claims up to scrutiny hardly seems out of bounds.

  • 5. Rajiv Krishnan KOZHIKODE  |  20 October 2006 at 12:08 pm

    I guess this blog is accept my comments. I have tried to give a lengthy to Klein’s comment, but, it appears that the blog doesnt supports external links(to which I had referred to). Anyway, in short this is what I have to say…

    Although my knowledge about the grameen system’s effectivness and magnitude is more from archival sources, I think that the informations that I have from diverse sources are very consistent – Grameen has changed the lives of thousands of poor and downtrodden. The system has changes the way the poor have been looking at life, women have been highly empowered, education level of girls have risen and standards of living have improved substantially. Over and above, people have gained faith in the banking system.

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