Microlenders, Honored With Nobel, Are Struggling

Microcredit was once extolled by world leaders like Bill Clinton and Tony Blair as a powerful tool that could help eliminate poverty, through loans as small as $50 to cowherds, basket weavers and other poor people for starting or expanding businesses. But now microloans have prompted political hostility in Bangladesh, India, Nicaragua and other developing countries.

In December, the prime minister of Bangladesh, Sheik Hasina Wazed, who had championed microloans alongside President Clinton at talks in Washington in 1997, turned her back on them. She said microlenders were “sucking blood from the poor in the name of poverty alleviation,” and she ordered an investigation into Grameen Bank, which had pioneered microcredit and, with its founder, was awarded the Nobel Peace Prize in 2006.

Here in India, until recently home to the world’s fastest-growing microcredit businesses, lending has slowed sharply since the state with the most microloans adopted a strict law restricting lending. In Nicaragua, Pakistan and Bolivia, activists and politicians have urged borrowers not to repay their loans.

The hostility toward microfinance is a sharp reversal from the praise and good will that politicians, social workers and bankers showered on the sector in the last decade. Philanthropists and investors poured billions of dollars into nonprofit and profit-making microlenders, who were considered vital players in achieving the United Nations’ ambitious Millennium Development Goals for 2015 that world leaders set in 2000. One of the goals was to reduce by half the number of people in extreme poverty.

The attention lavished on microcredit helped the sector reach more than 91 million customers, most of them women, with loans totaling more than $70 billion by the end of 2009. India and Bangladesh together account for half of all borrowers.

But as with other trumpeted development initiatives that have promised to lift hundreds of millions from poverty, microcredit has struggled to turn rhetoric into tangible success.

Done right, these loans have shown promise in allowing some borrowers to build sustainable livelihoods. But it has also become clear that the rapid growth of microcredit — in India some lending firms were growing at 60 percent to 100 percent a year — has made the loans much less effective.

Most borrowers do not appear to be climbing out of poverty, and a sizable minority is getting trapped in a spiral of debt, according to studies and analysts.

“Credit is both the source of possibilities and it’s a bond,” said David Roodman, a senior fellow at the Center for Global Development, a research organization in Washington. “Credit is often operating at this knife’s edge, and that gets forgotten.”

Even as the results for borrowers have been mixed, some lenders have minted profits that might make Wall Street bankers envious. For instance, investors in India’s largest microcredit firm, SKS Microfinance, sold shares last year for as much as 95 times what they paid for them a few years earlier.

Meanwhile, politicians in developing nations, some of whom had long resented microlenders as competitors for the hearts and minds of the poor, have taken to depicting lenders as profiteering at the expense of borrowers.

Nicaragua’s president, Daniel Ortega, for example, supported “movimiento no pago,” or the no-pay movement, which was started in 2008 by farmers after some borrowers could not pay their debts. Partly as a result of that campaign, a judge recently ordered the liquidation of one of the country’s leading microlenders, Banco del Exito, or Success Bank.

“These crises happen when the microfinance sector gets saturated, when it grows too fast, and the mechanisms for controlling overindebtedness is not very well developed,” said Elisabeth Rhyne, a senior official at Accion International, a organization in Boston that invests in microlenders. “On the political side, politicians or political actors take advantage of an opportunity. When they see grievances, they go, ‘Wow, we can make some hay with this.’ ”

While a broad thread of resentment and disenchantment runs across the globe, the hostility toward microcredit stems from different circumstances in each nation.

In Bangladesh, Ms. Hasina appears to have become embittered with Grameen after its founder, Muhammad Yunus, who shared the Nobel, announced in 2007 that he would start a political party. At that time, the country was ruled by a caretaker government appointed by the military. Though Mr. Yunus later gave up on the idea, analysts say Ms. Hasina and Mr. Yunus have not made amends.

Ms. Hasina’s recent comments about microcredit were prompted by a Norwegian documentary that accused Grameen of improperly transferring to an affiliate $100 million that Norway had donated to it more than a decade ago. Ms. Hasina said Grameen, 3.4 percent of which is owned by the government, might have transferred the money to avoid taxes.

The bank, which has denied that accusation, reversed the transfer after Norwegian officials objected to it. Norway recently issued a statement clearing Grameen of wrongdoing.

The prime minister’s press secretary did not return calls seeking comment.