The Economy of Shame

Microfinance and Its Discontents: Women in Debt in Bangladesh
By Lamia Karim
Minneapolis: University of Minnesota, 2011, 255 pp., $25.00, paperback

Reviewed by Ghazal Zulfiqar

In the late 1990s Muhammad Yunus, the founder of the Grameen Bank in Bangladesh and the winner of the 2006 Nobel Peace Prize, proudly claimed that thanks to microfinance, by the year 2030, poverty would be relegated to a museum. Microfinance has since been referred to as a panacea, a magic bullet, and a critical turning point in development history. Unlike other antipoverty interventions, microfinance institutions can graduate from relying heavily on donor support to being completely financially sustainable. Moreover, its proponents argue that the poor are more entrepreneurial and financially savvier than the nonpoor: even when commercial banks refuse to deal with them, they borrow, lend, and save informally. Microfinance institutions help, proponents say, by offering loans at rates that are lower than those of usurious village moneylenders—although still, admittedly, very high, since the banks have to cover the cost of operating in remote rural areas and catering to the very poor, who often require unusual lending arrangements. In fact, microfinance interest rates easily run into double digits and may rise to as high as 100 percent, as in the case of the Mexican microfinance giant, Banco Compartamos.

Recently, sobering news from Andhra Pradesh, India, about dozens of microfinance-related suicides of overindebted, poor borrowers, has rocked the development boat somewhat. The suicides have occurred at nearly the same time that the Indian capital market made a billionaire out of Vikram Akula, the founder of SKS Microfinance, the first microfinance institution to go public in India, with an initial public offering of nearly $350 million. SKS had been expanding rapidly in India since the late 1990s, and Andhra Pradesh was one of its main markets. Following the news of the suicides, in early 2011, Yunus was implicated in a much talked-about corruption scandal, which eventually led to his forced retirement from the Grameen Bank. Nevertheless, microfinance is still considered a development innovation that has brought relief to millions living in poverty. The Economist, in its November 2010 issue, referred to it as a “rare” antipoverty tool, since it breaks even: those who receive the loans nearly always pay them back.

In sharp contrast to such praise, Lamia Karim has produced an alarmingly critical account of microfinance and its impact on communities, especially in her home country of Bangladesh, known as the Mecca of microfinance. There, microfinance has an impressive market penetration rate of 25 percent, meaning that one in four poor Bangladeshis are active microfinance clients. Countries in South Asia and Africa look toward Bangladesh as the world-class “best practices” model when setting up their own microfinance institutions.

Karim describes what she calls an “economy of shame” in Bangladesh, where loan officers threaten delinquent borrowers with flogging and “house breaking”: home invasions during which they confiscate beds, pots, pans, and other small assets. While house breaking results in a severe economic burden on the borrower, the worst part of it is the loss of face. The borrower may be shamed so deeply that she can no longer walk about in public without being taunted and laughed at. Some delinquent borrowers have abandoned their ancestral villages for the nearest city, in order to escape the humiliation, along with the debt they never had the capacity to take on in the first place.

Indeed, in my own research on the impact of microfinance in Pakistan, I heard the phrases, “the client was afraid of losing face,” or in contrast, “the client felt she had risen in everyone’s eyes because of her economic success” in interview after interview with microfinance lenders. I soon realized that being honored in the community meant as much if not more to the clients than sending their children to school or paying their medical bills. Economic utilitarians claim that happiness and satisfaction emanate from the consumption of material goods, but Karim’s research as well as my own show that one of the main desires of the poor is to gain their community’s respect. This is not an end in itself; respected individuals obtain better marriage proposals for their daughters, are able to expand their networks, and improve their business prospects in informal economies where success depends on reputation.

Karim’s book is an important addition to the growing critical literature about microfinance, but not because it highlights what microfinance promised and failed to deliver. Numerous studies have already examined the links between microfinance and health, education, and empowerment outcomes for women and found that it has little or no effect. Karim, however, breaks new ground by providing a deep and rich ethnographic account of the changes brought about in rural Bangladesh by the rapid, unfettered expansion of microfinance. Her narrative is detailed, convincing, and clear, making it difficult to wave it aside as just another study pointing out microfinance’s impotence.

In fact, Karim argues, microfinance is far from impotent. In Bangladesh and elsewhere, it is based on the group lending principle, which requires the group to enforce financial discipline on its members. This ends up polluting social relations with economic interests. Friends are now involved in breaking one another’s homes and publicly shaming one another’s families. Karim presents damning evidence that group lending has broken down the public-private distinction that organizes rural life in Bangladesh and weakened the bonds of community solidarity.

Moreover, in Bangladesh as in other developing countries, microfinance is no longer only for the poorest of the poor. Microfinance institutions now actively seek nonpoor borrowers, especially from the middle class, because they happen to be the best enforcers of group responsibility. This is a natural outcome of the new global emphasis on financial sustainability, which has forced the principle of profit maximization on this new-age development intervention.

In the 1980s, Bangladeshi nongovernmental organizations (NGOs) led the way for microfinance institutions everywhere in claiming that they were providing an important empowerment tool for women. Even now, more than eighty percent of global microborrowers are women. However, Karim finds that extending credit to women has not changed family dynamics in Bangladesh, because men end up using the loans that have been taken out in women’s names. In my research in Pakistan, I found exactly the same pattern of loan usage. Women are used as “postboxes”: they receive and repay the loans but do not have a say in how the loans are used. Alarmingly, this makes women more vulnerable than ever. Karim describes how rural women’s honor is used as collateral in group-lending arrangements. Repayment is enforced through constant reminders of how the women borrowers might be humiliated in case of nonpayment.

Karim’s account of how microfinance has transformed rural Bangladesh is nested within a larger narrative about the expansion of the economic, social, and political power of NGOs. She refers to the country’s NGOs as a “shadow state,” explaining that they have largely replaced the public sector in terms of social-service delivery. This pattern is not unique to Bangladesh but rather exists in most developing countries that depend on global aid institutions. For the past two or three decades, these institutions have worked to develop the NGO sector as an alternative to weak and corrupt governments that have misused donor funds. However, the NGOs are accountable neither to the people they serve nor to any regulatory authority, which has led to more of the corrupt practices the NGOs were originally supposed to curtail.

All the NGOs Karim studied produce vast amounts of research on microfinance and its impact on poverty. However, Karim argues, this knowledge is not disinterested: it seeks to establish the NGOs’ legitimacy, in order to maintain funding for current projects and future programs. The research is so prolific that it effectively obscures new ideas about social and economic development.

In 2009, researchers from the Jameel Abdul Latif Poverty Action Lab at the Massachusetts Institute of Technology published the results of the first randomized trial, in Hyderabad, India, of microcredit. They found that beneficiaries differed little from nonbeneficiaries in terms of income, health, education, and gender empowerment. Suddenly, the success of microfinance was seriously under question, which eventually led to a shift in the previously euphoric rhetoric. Rather than emphasizing poverty alleviation, microcredit institutions have now begun promoting financial access for the so-called unbanked poor. Thus, while their practices have remained largely intact, concern for poverty has taken  a back seat.

It remains to be seen how microfinance institutions will deal with the challenge posed by Karim’s book and the corroborating studies that are sure to follow in its wake. Will we see merely another round of rhetorical reinvention, or will the world finally awaken to the dangers of an intervention that empowers institutions rather than people, ultimately deepening the misery of the poor and the disenfranchised?

Ghazal Zulfiqar has international corporate finance experience in various countries in Africa and South Asia. Subsequently, she studied development finance at the University of London and is currently writing her dissertation on microfinance and its influence on poverty in Pakistan at the University of Massachusetts Boston.