The Limits of Microfinance

Muhammad Yunus and the Grameen Bank were awarded the Nobel Peace prize this past year (one of the few whose contributions seemed to deserve it, rather than being a political response to American foreign policy). His contribution to microfinance of "group lending" (borrowers who co-sign for each other) really gave the concept the momentum it has today by considerably reducing the cost of lending. Due diligence was reduced since community members would know each other the best, and transaction costs were brought down to the group level and consolidated to the lender.

The success of microfinance is that it has leveraged markets - financing entrepreneurs from the bottom up, instead of massive white elephant projects that go to disrepair and require considerable graft to erect. Grameen bank has lent to more than 1 million people in Bangladesh, but there have been limits. Microfinance has had little macro-level impact on Bangladesh however leading those who wonder about its effectiveness.

I think one should view it in a different way. That microfinance has succeeded conceptually may have prevented far worse outcomes for those at the economic base. Today there is news of political upheaval in Bangladesh:

President Iajuddin Ahmed on Thursday declared a state of emergency, stepped down as leader of Bangladesh's caretaker government and indefinitely postponed elections scheduled for Jan. 22 following violent protests by a key political alliance that had said it would boycott the vote.

But looking at it in an even greater context, consider the following:

• Bangladesh places 156/163 (2006) perceived as being amongst the most corrupt countries in the world by Transparency International
• 141/147 (2006) in the Heritage Institute's barometer of economic freedom
• And, 88/175 (2006) in the World Bank's [Ease of] "Doing Business" ranking

There are those who would misrepresent "crony capitalism"/oligarchy, or worse, anarchy as being free markets, but property rights and the rule of law (for all, not just for the few) are basic requirements for free let alone successful markets. Is it really any wonder then that Bangladeshis remain some of the poorest and least developed in the world?