A Critical Analysis of Muhammad Yunus and Microcredit
For a summary of Banker to the Poor: Micro-Lending and the Battle Against World Poverty, Muhammad Yunus’s autobiography, please check out my article here.
Microcredit is the extension of small loans to poor borrowers without collateral or credit history in order to promote entrepreneurship and attenuate poverty. The concept was invented by Dr. Muhammad Yunus, a Nobel Peace prize-winning economist and founder of the Grameen Bank, who argues that credit is a human right. To contextualize his stance on the issue, it is necessary to discuss Yunus’s unique political stance.
Yunus holds several interesting and seemingly inconsistent political values, and so it’s difficult to place him on the political spectrum. For instance, he advocates for a smaller government, increase employment opportunities, is committed to a free market economy, and promotes entrepreneurship, while simultaneously wishing to eliminate poverty, provide education and healthcare to all, and achieve gender equality.
In his autobiography, he says that he would like to “see all barriers and protections around the world markets disappear.” However, he claims that this is not in the spirit of market capitalism but rather because “protectionism is built up in each nation in the name of the poor, but its real beneficiaries are the rich and clever people who know how to manipulate the system”. Interestingly, however, he believes that the provision of services such as education and healthcare are best done by private companies. In fact, he claims that “the public sector has failed. Or at least it is on the way out despite our best efforts”. In support of this, he argues that “government, as we know it, should pull out of most things except for law enforcement, the justice system, national defense, and foreign policy, and let… a social-consciousness-driven private sector… take over its other functions”.
This approach — which combines Leftist ideals of social-consciousness with the Rightist call for small government — places him in a unique position. He claims that a new private sector is necessary, and that legislation and the stock market need to accommodate it. Microcredit is one such service that he believes should be spearheaded by the private sector. He notes that government agencies that have tried to provide this service could not compete with the efficiency of the private sector and were thus only harming the poor.
Yunus has been criticized on many fronts with respect to his ideas on microcredit, particularly on moral and religious grounds. For instance, many Muslims view conventional microfinance principles as not compliant with the principles set forth in Islamic finance law. Charging interest on loans is generally regarded as a major sin, akin to waging war on God. The Quran (2:278) states:
“O believers! Fear Allah! If you are of the believers relinquish what remains (due) from usury. If you do not do it, then you are in war with Allah and His Messenger.”
It has been argued that this incompatibility with the Sharia is one of the reasons that that about 72% of people in Muslim-majority countries avoid financial institutions (Mansori et al., 2015). Upon reflecting on the potential religious impermissibility of microcredit, Yunus recounts that his father was a devout Muslim who was completely against charging interest and that most of Grameen’s borrowers are devout Muslims, praying 5 times a day. However, he was told by multiple scholars that since the borrowers owned the vast majority of the bank, these loans were Islamically valid.
Furthermore, over 98% of Grameen’s loans are paid back in full, which allows Grameen to outcompete many traditional banks. Yunus attempts to explain this extraordinarily high repayment rate by suggesting that while those that are a bit more well off can afford to default on a loan, the microcredit he is offering the poor is the only mechanism by which they are able to pull themselves out of poverty. Defaulting on a loan can mean not qualifying for another loan, which may mean going without food. Therefore, the very lives of the borrowers may be seen as collateral. Yunus’s analysis here, which is so fundamental to the success of the Bank, may be seen as particularly harsh and dehumanizing, and is certainly not an example of Islam’s general teaching of showing mercy to the less fortunate.
Finally, Yunus has been criticized for his strong stance on loan repayments in the case of disasters. Yunus does not forgive loans despite any natural disasters. The Quran speaks to this (2:280):
“If the debtor is in difficulty, then let there be postponement until he is in ease. And it is better for you to that you remit (it) as gifts. Only if you knew!”.
While Yunus does sometimes grant the borrower an extension on the loan term in the event of a disaster, he does not ever remit loans as gifts.
Many economic analysts have also called into question the efficacy of microcredit. Milford Bateman, one of the most avid opponents of micro-finance claims that microfinance-funded enterprises simply displace other businesses that lack funding, thus resulting in a net zero effect in alleviating poverty (Bateman, 2014). He explains that these businesses have embraced a fallacy known as Say’s Law, which states that an increase in supply generates an increase in demand, which is simply not true. Therefore, as more microenterprises are sprung up in a given locality, the profits generated by each one diminishes.
Bateman goes onto claim that in the modern day, there is no empirical evidence showing microcredit cuts poverty as a result. He explains that greed on the part of the lenders has resulted in the downturn of the microfinance industry. The success of microcredit has resulted in several replication projects in more than 64 countries around the world. Unfortunately, it has also sprung up several microloan sharks that charge very high interest rates — bordering on 100% — on microloans, thus propagating the problem of essential enslavement to moneylenders, which was common throughout the country of Bangladesh before Grameen Bank.
What are your thoughts on Muhammad Yunus or microcredit? Have we found a solution to poverty or is it simply just another failed attempt? Let me know below.
