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Microcredit was a hugely hyped solution to global poverty. What happened?

Studies have shown it hasn’t really lifted people out of poverty. But it’s still made a difference in the lives of the poor.

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For a period of time from the 1980s to the early 2000s, “microloans” were all the rage in international development.

The idea was simple enough: By giving a very small loan to someone living in a poor country, you could help them expand a small business, which would lift their family out of poverty. When they pay back the loan, the money can be cycled to more borrowers, getting more families out of poverty.

Organizations offering microcredit to poor borrowers — many living on $2 or less per day — took off in those decades. Investors and donors poured money into microcredit, hundreds of organizations offered loans, and the number of borrowers worldwide skyrocketed to 211 million by 2013.

The microcredit movement has been undeniably successful in opening up financial services to poor people across many countries. But what has its track record been when it comes to lifting people out of poverty?

Over the past decade, this question has occupied researchers, who have conducted randomized studies across a variety of countries and settings. The findings have not supported the original hope for microcredit: They can’t find evidence that the loans have been lifting families out of poverty on average. Many concluded that the classic conception of microcredit was based much more on anecdotes than on robust evidence. Those results have in turn cooled the development community’s enthusiasm for microcredit.

But does this mean that microcredit has been a failure? Hardly.

Rather than see microcredit as it was portrayed in its heyday — as a way to get people out of poverty — we should see it through a different lens: as a way to expand options for poor people by offering more reliable financial services. Extremely poor people need these services just like everyone else, and the availability of capital to deal with irregular and at times unpredictable incomes is a huge help to them. This benefit, along with its impressive growth around the world, arguably makes microcredit a success.

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While earlier claims about microcredit’s benefits were overblown, there is mounting evidence that it nonetheless plays a valuable role in improving the lives of people in need. Financial diaries of people living on $2 or less per day have shown that microcredit helps many families deal with emergencies, make critical purchases that they couldn’t otherwise afford, and put food on the table in times of scarcity. While the new story about microcredit isn’t the one that propelled it to such heights, it’s much more grounded in evidence and, in many ways, it’s still inspiring.

A brief history of microcredit

Lending money to the poor isn’t a new idea. In his book Due Diligence , David Roodman describes the long history of microcredit, going back to Jonathan Swift (yes, the author of Gulliver’s Travels ), who began to lend small amounts to poor people in Ireland in the early 1700s.

Even though microcredit isn’t new, it has long faced some core difficulties. One basic issue with lending to extremely poor people is the cost: Because the loans are often small (averaging a few hundred dollars ), the overhead costs are higher as a proportion of the loan, and it’s harder to make lending profitable.

Another problem is predicting who will repay a loan. In poor communities, lending has long taken place locally between people who already knew each other (local moneylenders and family/friends), with social ties that could help ensure repayment.

Another extremely common form of lending has been credit cooperatives, in which people — often living in the same region and/or affiliated through a particular trade — could obtain loans. But organizations from outside a given community don’t have access to information that could help them judge who to lend to. On top of that, those living on $2 or less per day often do not have collateral to put up as a guarantee for the loan. In light of these difficulties, lending to the poor wasn’t widely seen as promising.

However, that changed in the late 1970s and early 1980s, with a new vision of how to offer microcredit to the poor, and what it could do for them. Economist Muhammad Yunus played a big role in shaping this new perspective.

In his book Banker to the Poor , Yunus describes meeting a woman in Bangladesh who was making stools out of bamboo and earned only two cents per day, because she had to repay so much money to her bamboo supplier. If she had a dependable source of credit, Yunus thought, she and others in similar situations could make their way out of poverty.

That idea, along with his conviction that “all human beings are born entrepreneurs,” led him to found Grameen (meaning “village”) Bank in 1983. He also took the crucial step of convincing outside funders, such as the Ford Foundation, that it was a good idea to invest in loans for the very poor.

The original Grameen Bank model included a few core elements. The first is that after a loan for a microenterprise is granted, repayment starts immediately, with frequent, regular payments over the course of a year or so. The second is group loans, in which a small group of borrowers from different households receive loans together — which then puts pressure on the members to help each other repay. Finally, the model cuts overhead costs by having loan officers hold weekly meetings in villages to collect and disburse payments, obviating the need for physical bank branches.

Grameen Bank played a big role as a catalyst for microcredit’s huge expansion (which some called a “revolution ”). A huge number of organizations all over the world entered the scene over the next two decades (more than 3,000, as reported in 2015), though most borrowers are clustered in a few countries such as India and Bangladesh. Borrowers repay loans to microcredit institutions at very high repayment rates , upward of 96 percent on average.

Grameen Bank wasn’t the first group to take on lending to the poor — the nonprofit Accion, working independently in Latin America in the 1970s, also developed a similar idea, and in Bangladesh, the nonprofit BRAC was an early pioneer — but it played a critical role in creating a powerful example of how microcredit for the extremely poor can work. As Roodman writes, other groups had done similar things, “but had never hit on a formula that combined such high repayment rates, manageable costs, and scalability to millions of people.”

Beyond the model for lending, Yunus also heavily promoted a vision for microcredit’s promise that proved hugely influential. Tim Ogden, managing director of the Financial Access Initiative , says that before Grameen Bank, there was a consensus that it was bad to lend to those living on only a dollar or two per day, because it would only trap them in debt. After Yunus began to talk about loans helping people to exit poverty through micro-enterprises, there was a “huge transformation” in the perception of microcredit.

Ogden describes this transformation: “You’re loaning money to a woman who is earning a dollar a day? How is that not going to trap her in debt? Oh! She’s starting a business and earning more money than I’m charging her.” Without this narrative, microcredit might not have taken off as it did.

Female empowerment also became integral to the story. Many microcredit institutions (including Grameen) made it a priority to lend to groups of women ( about 80 percent of microcredit borrowers are now women). Investors and donors poured money into microfinance, and in 2006, Yunus won the Nobel Peace Prize.

The inspiring narrative falters

In the 2000s, skepticism about the promise of microcredit started cropping up. One concern critics raised was the possibility that some microcredit institutions were harming people. In Andhra Pradesh, a state in southeastern India, the government issued an ordinance in 2010 essentially shutting down microcredit institutions, pointing to over-indebtedness, the pressure to repay loans, and widely reported suicides among borrowers.

There’s also been a long-running debate about what level of interest is acceptable versus exploitative. On average, institutions offer loans at annualized interest rates of around 20-30 percent , though some rates are much higher . While some people — including Yunus — have argued interest rates above a certain level means that microcredit firms have turned into predatory loan sharks, others counter that the rates sometimes have to be high to cover costs of sustainably lending to the poor.

Beyond concern about potential harm, researchers started to seriously, and publicly, question the narrative about microcredit allowing millions of people to get out of poverty. From the beginning, that story had rested largely on anecdotes from borrowers, which might not necessarily be representative.

There was some more systematic research to back up the claim: One of the main studies that supporters pointed to was a study published in 1998 by researchers Mark Pitt and Shahid Khandker, which claimed that borrowers — especially women — were getting out of poverty at significant rates in Bangladesh.

However, when Jonathan Morduch and David Roodman reanalyzed the study, they found issues that made them question the reliability of the results. (Morduch first commented on the original study, which led to a series of replies , and replies to the replies, that continued for a period of more than 15 years. ) This, along with the lack of other rigorous studies, meant that there was a big evidence gap for the first few decades of microcredit’s expansion.

Over the past decade, there’s been an influx of more systematic evidence on microcredit. Randomized controlled trials (RCTs) are a particularly good method for gauging impact, since they make it easier to distinguish causation from correlation.

The most recent six microcredit studies , published in 2015, were conducted by economists working independently across six countries. The studies found fairly consistent results: None found evidence that income went up on average among those offered credit. A few saw modest positive effects, such as people choosing to spend more time on their small businesses and some changes in spending habits. Abhijit Banerjee, Jonathan Zinman, and Dean Karlan sum up the studies , concluding, “We note a consistent pattern of modestly positive, but not transformative, effects” — not the result that many people had hoped for.

But in some ways the findings were also good news. For one thing, they countered the backlash that had been brewing against microcredit: Some critics argued that microcredit hadn’t just failed to lift people out of poverty, it was in fact even systematically harming people by trapping them in debt. But the RCTs didn’t find systematic evidence of this claim.

For another thing, these results are only a disappointment if one thought that microcredit would get most participants out of poverty. To be sure, this was a common belief, but many researchers say that that hope wasn’t realistic to begin with.

In a recent discussion about the history of microcredit, economist Bruce Wydick compared microcredit in poor countries to introducing credit cards in rich countries, as a way of explaining why we shouldn’t be surprised. “When they introduced credit cards in the US, so that almost everybody had access to a credit line, did that pull millions of people out of poverty? No,” Wydick says.

But just because it doesn’t pull most borrowers out of poverty doesn’t mean microcredit hasn’t helped people.

For evidence of microcredit’s value, look at how it helps the poor live day to day

So how does microcredit help people, if not by raising their incomes on average? Research that looks closely at the financial lives of people living on $2 or less per day, such as the work of researchers Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven in Portfolios of the Poor , shows that credit often plays a crucial role in borrowers’ lives.

Part of that story is that people very often use microcredit for their day-to-day needs, rather than for business loans, as Yunus had originally envisioned. They may have a need for cash to meet emergencies, or for a big purchase, or even just to provide an inflow of money to put food on the table when income fluctuates — and microcredit helps to meet that need.

In fact, microcredit organizations are far from the only source of credit — people often take small loans from friends and family, or from local shopkeepers, for example.

But a really valuable aspect of microcredit is its reliability: People can depend on getting a loan at a certain time, then commit to the small, regular repayments so that they can get a further loan.

As Jonathan Morduch writes :

Incomes are seldom steady and predictable; needs vary as well: families need to pay for schools, medicines, and food during slow periods…Evidence that microfinance loans are used to fund non-business needs (even if for education or health) is sometimes used to criticize microfinance, but that misses the point....poor families, like richer families, need broad financial tools. In fact, the poor may need them more urgently.

There are also other potential benefits of increasing access to credit. In Due Diligence , Roodman also points to Nobel Laureate economist Amartya Sen’s view about the value of increased freedom, in the sense of greater agency in one’s life. By giving the poor a greater number of options in how to navigate their financial lives, Roodman suggests, microcredit can increase this kind of freedom.

Roodman emphasizes that the details matter — some ways of offering microcredit might offer more freedom than others. For example, he writes that group microcredit “emerges in a surprisingly negative light” when looking at financial diaries. Groups that are “responsible for each other’s loans can generate ‘peer support’ in times of difficulty — or peer pressure to pay no matter what.”

There’s also some evidence — from a study in the Philippines by economists Xavier Giné and Dean Karlan — that group liability might not be necessary to achieve high repayment rates. Over time, some institutions have moved toward individual loans instead, while still keeping the group meetings.

Finally, there’s evidence that suggests that microcredit may be playing a broader positive role. For example, economists Emily Breza and Cynthia Kinnan studied what happened in Andhra Pradesh, India, when microcredit institutions were shut down in 2010. They found that this was followed by a notable decrease in wages in rural areas. They write that this result “shows that microfinance, despite its small loan sizes, can have meaningful impacts on rural economies.” It also suggests that the full picture of microcredit isn’t captured in studies that only look at individual borrowers.

Now what about cost? Recent research from the World Bank has shown that the vast majority of microfinance is subsidized, in the sense that investors and donors are providing capital at below-market rates. To the extent that the classic story included the claim that a lot of microcredit institutions would eventually sustain themselves without subsidy, it hasn’t turned out to be true in that regard either. However, the subsidy isn’t so expensive, amounting to a median of around $25 per borrower .

So to sum it all up: Microcredit seems to be very important in the lives of the poor, even if it’s not transformative. Given that it comes at a relatively low cost, it may be that microcredit is quite a cost-effective way to help people.

Comparing microcredit to other ways of helping people

All this said, some readers may want practical advice: Should they contribute to microcredit institutions?

This raises its own set of tough questions. What is the relative effectiveness (and cost-effectiveness) of microcredit compared to other potential ways to help extremely poor people, including just giving cash ? How much should an investor or donor be worried about harm to some borrowers? How much “ room for more funding ” do microcredit institutions now have, and which ones are the most cost-effective?

On the one hand, it’s useful to consult a review by nonprofit charity evaluator GiveWell, which does not recommend microfinance institutions as “among the best options for donors looking to accomplish as much good as possible.” GiveWell notes that microfinance is far from a failure, but finds the evidence for the benefits of cash transfers to be clearer, and expresses concern about potential harm to some microcredit borrowers. (Full disclosure: I have worked for GiveWell in the past.)

On the other hand, some researchers who have looked closely at microcredit and who have done work to compare the costs and benefits of microcredit compared to other programs to help the poor, including economists Jonathan Morduch, Asli Demirgüç-Kunt, and Robert Cull, argue that it could very still well be in the running when compared to other programs. A big reason for this is the low cost of subsidies for microcredit, which could make the program cost-effective in spite of modest average benefits. “It’s an open question,” Morduch told me, how microcredit fares when compared to other programs such as cash transfers, adding that, “There should be more serious comparative cost-benefit work.”

It’s also worth making a final point: While RCTs haven’t found that microcredit raises incomes for average borrowers, there is a small group of people who do achieve higher business profitability when they receive loans and sometimes these returns are really impressive , far exceeding interest rates. (In one study , researchers referred to this group as “gung-ho entrepreneurs” as opposed to reluctant ones.) So an ongoing research question would be whether it’s possible to find ways to better target people when offering loans for business, or whether tweaking the terms of the loans might improve business profits.

Whether or not one concludes that microcredit beats cash transfers or other ways to help the poor, there’s still reason to believe that microcredit has done — and continues to do — a lot of good, at fairly low cost. Beyond that, there’s reason to believe that there may be ways to make small loans (as well as broader financial services such as micro-savings and micro-insurance) even more useful to those living on very low incomes.

To some, the new vision of microcredit — helping poor people to better face their financial challenges — may not hold the simple allure of the old one. But the researchers who wrote Portfolios of the Poor and looked closely at the lives of those living on $2 per day find the new narrative inspiring nonetheless: “Whether or not the microfinance movement was right to stress loans for microenterprises, or has been too slow to embrace savings and other services, its greatest contribution is, to us, beyond dispute. It represents a huge step in the process of bringing reliability to the financial lives of poor households.”

The story of microcredit illustrates that even where a program doesn’t live up to the hype, it can still be a success.

Stephanie Wykstra ( @swykstr ) is a freelance writer and researcher based in New York.

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Microfinance and the Backlash

An excerpt from the new edition of Small Loans, Big Dreams on microfinance since the Nobel.

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By Alex Counts Nov. 8, 2022

Small Loans, Big Dreams, 2022 Edition: Grameen Bank and the Microfinance Revolution in Bangladesh, America, and Beyond

Alex Counts

409 pages, Rivertowns Books, 2022

Buy the book »

I spent the first five years of my career trying to understand everything about the Grameen Bank and its founder, Professor Muhammad Yunus, who would go on to share the 2006 Nobel Peace Prize. I spent the next couple of years writing a book about them that included months of intensive field research in a Bangladeshi village. To make the matter a bit more interesting and complicated, I decided to also study the experiences of an early effort to apply Grameen’s microfinance methodology in a depressed urban neighborhood in Chicago. To do so, I had to teach myself Bengali and become comfortable being the only white person the eye could see for lengthy periods of time. 

The original edition of this book came out in 1996, and a second edition was rushed to market after the surprise Nobel Prize announcement. Much has happened in the worlds of microfinance, Grameen, and Yunus in the 14 years since the 2008 edition was published. This third edition includes updates covering Yunus being forced to resign by Bangladesh’s Prime Minister from his post at Grameen Bank, and the backlash against microfinance in the media, in academia, and by some populist politicians and governments around the world.— Alex Counts

On October 13, 2006, Professor Muhammad Yunus, the founder of the Grameen Bank, received a call from a Norwegian television station while sitting in his office in Dhaka, Bangladesh. The reporter said that there was a rumor that he would be declared the winner of the Nobel Peace Prize in a few minutes, in recognition of his three decades of anti-poverty efforts through a strategy that had come to be known as microfinance. He wanted to be the first to interview Yunus if that were the case, and so asked that the telephone line remain open. Yunus agreed, wondering if it was a prank of some kind. Within minutes, the announcement was made and a joyous, chaotic celebration began in his office, one that would quickly spread across the country and indeed, the world. 

Pride welled up in Bangladeshis throughout the country. Celebrations spread to all corners of the world, especially places where microfinance was practiced as a tool to promote self-help among the poor. While some questioned why a bank, however successful it may be in addressing poverty, should win a prize recognizing contributions to world peace, millions more intuitively understood the Nobel Committee’s logic.

In the blink of an eye, a movement to address poverty through a businesslike strategy had moved to the center of the world stage. One man’s life’s work, and the small, but very real, successes of millions of women who were touched by it, had received the most significant affirmation possible. 

For Yunus, Grameen Bank, and microfinance, it changed everything instantly. But not necessarily in the ways that they or anyone else expected.

The Rise and Spread of Grameen-Style Microfinance

At its core, microfinance—the provision of loans, savings, and insurance to underserved populations—is pretty simple, but there are layers of complexity and nuance below the surface. Like most human endeavors, it can be practiced well or poorly.

So what exactly is Grameen-style microfinance?

First and foremost, it is the rare anti-poverty approach based on the strengths of poor people rather than their deficiencies. Some call these strengths “survival skills,” and they are honed in the process of eking out a living outside the mainstream economy in clever, creative ways.

In developing countries, there aren’t nearly enough jobs for all those who want to work, and there is little or no social safety net. Most poor people face a stark choice—work for themselves, beg, or starve. The vast majority choose self-employment, regardless of how undercapitalized and modest their microbusiness may be, because of the unattractiveness of the alternatives.

Many of these small business owners in developing countries are forced to turn to loan sharks for their capital, and pay interest rates anywhere from 10 percent per month to 20 percent per day.

Yunus discovered that being a reliable source of affordable loans to poor but hard-working and creative microentrepreneurs—almost exclusively women—could break this vicious cycle for many and make the pain of poverty less intense for others, transforming them from a group needing charity into an engine of national economic growth. 

Leveraging this discovery, his Grameen Bank, which began as a pilot project in 1976 and transformed itself into the world’s first bank for the poor in 1983, started a revolution in the banking and anti-poverty fields. Loans that might begin as little as $40 or $60 could grow over time to hundreds, and even thousands, of dollars.

His vision went beyond Bangladesh. He has even succeeded in bringing his approach to successfully combat poverty in the United States. But that success was a long time in coming.

Yunus was initially patient with the slow progress of efforts to make his style of microfinance work in America. But later he took matters into his own hands. He finally decided, in 2008, to send his own team of Bangladeshi experts into a low-income neighborhood in Queens to see what could be done. Yunus assembled a board and hired Americans to work alongside the Bangladeshis, who focused on field operations. This new program was launched under the name of Grameen America.

When I paid a visit to Grameen America in 2014, it had 7,000 clients, which at the time was an astonishingly large number for an American microfinance program. Almost half of its clients were being served by its original branch in Queens that hosted me. 

Much has happened in the years since then. As of March 2022, the organization has lent more than $2 billion to 142,000 clients. Grameen America passed the brutal test that the COVID-19 pandemic represented with flying colors by pivoting on a dime to use technology so effectively that it opened up new ways of serving rural populations. Perhaps most important, an 18-month long study tracked 1,492 women in 300 loan groups who applied to the Grameen America microlending program in Union City, New Jersey. This study, the first of its kind in the United States, showed impressive impact. Compared to a control group, clients enjoyed a reduction of material hardships by 15 percent, a 20-point improvement in credit scores, a $523 increase in monthly business revenue, and a $1,920 increase in nonretirement savings (63 percent more than those in the control group). 

Does Microfinance Work? The Ongoing Debate

Nonetheless, the rise and global spread of microfinance has been accompanied by significant controversy, even before the launch of political attacks on Yunus in his home country.

For the last 40 years, journalists, researchers, and students have been wondering whether microfinance actually helps improve the lives of typical clients. Let me try to summarize what the most serious evaluations have found, and how those findings have been used and, in some cases, abused.

The first major study of Grameen’s impact was undertaken by the late Dr. Mahabub Hossain in the 1980s for the Bangladesh Institute for Development Studies. (It was later published by the prestigious International Food Policy Research Institute, and in fact became one of its all-time most popular reports.) The findings were highly favorable. Grameen borrowers' incomes were 43 percent higher than comparable women in unserved villages, and extreme poverty had been cut from 75 percent to 48 percent in places where Grameen was operating.

In March 1993, another independent evaluation of Grameen was undertaken by Professor David Gibbons, who would later establish Cashpor, one of the most respected microlenders in India. It showed similarly positive results. 

The most widely cited and debated study that came later was one published in 1998. Commissioned by the World Bank and undertaken by a research team led by Shahid Khandker, it found direct correlations between female borrowing and the likelihood of school enrollment among the borrowers’ daughters, decreased malnutrition, and increased overall household expenditures on food and essential nonfood items. Khandker also estimated that 5 percent of Grameen clients escape poverty every year. Some of these findings were challenged by other academics, so Khandker recalculated them using a different approach and found that in a few cases, such as the increase in household consumption from incremental increases in borrowing, the impact was greater than his initial analysis had showed. He found that poverty rates among Grameen clients who had been borrowing since 1991–1992 had declined by more than 20 percent.

In addition, a 1996 study by Hashemi, Schuler, and Riley looked at the issue of women’s empowerment—that is, their ability to make or influence major household decisions, engage with their community in meaningful ways (including advocating for more responsive local government). They found that Grameen borrowers were 7.5 times more likely to be empowered than nonborrowers in non-Grameen villages. Perhaps more interesting, nonborrowers in Grameen villages were 2.4 times more likely to be empowered than nonborrowers in non-Grameen villages, strongly suggesting that the empowerment of women is “contagious,” and that microfinance’s impact is not limited to those who are directly served by microfinance institutions. 

You might think that all this research would put to rest the question of whether microcredit and microfinance have worked well enough to be pursued and further perfected. If so, you would be wrong.

Rather than focus their efforts on how this effective but imperfect approach that was in the process of being massively scaled up could be improved, many microfinance researchers turned their talents elsewhere. Sustained efforts were made to undermine the validity of past studies, especially the one by Khandker that had been published in peer-reviewed journals (and as a result was supposedly unimpeachable). 

Other members of the academy chose to analyze a group of mostly second-rate microfinance organizations and applied a powerful but problematic research technique called randomized controlled trials (RCTs) to study them. RCTs had been popularized in the pharmaceutical industry to assess drug and vaccine safety and efficacy and were increasingly being used to study social development programs. These studies, which tried to take a second look at whether microcredit “worked,” showed mixed results. But the authors and their public relations teams chose to emphasize the negative elements and downplay the positive findings, perhaps in order to gain visibility for themselves and their efforts. (Findings that confirm the conventional wisdom rarely get much attention.)

If you read these studies closely, as I have, you’ll find a recurring theme. Whenever a positive finding is discussed, the writer somehow twists it into being a negative by saying that it wasn’t positive enough —and therefore evidence that microfinance failed to live up to its promise of transforming the lives of most of its beneficiaries over the short time periods that these studies typically covered. 

In one memorable case, a press release put out by the group Innovation for Poverty Action came with this headline: “Microfinance does not live up to the promise of transforming the lives of the poor, six new studies show.” The problem was that this summary overshadowed all the nuance of the findings—many of which were positive. Doubts about microfinance grew. 

Yunus and the Backlash at Home

Many researchers' emphasis on undermining the proof of microfinance efficacy (at the cost of identifying ways it could be further improved) combined with their bias in favor of negative findings helped lay the groundwork for what in retrospect feels like the inevitable backlash against Yunus, Grameen, and the microfinance movement globally.

Beginning in late 2010—a scant four years after the Nobel Peace Prize was given to Yunus and Grameen and five years after the U.N. International Year of Microcredit—what had been rather isolated pockets of criticism, controversy, and government opposition to microfinance became much more widespread, and a story in itself. 

In India, an October 2010 crisis in the Indian state of Andhra Pradesh between local government and microfinance programs was inflamed shortly after the state’s largest microfinance institution, SKS Microfinance, went public through an IPO, raising $350 million and making its foreign and local investors, including its Indian-American founder Vikram Akula, very wealthy.

The local government alleged that pressure from the microfinance institution was responsible for a series of “farmer suicides,” and it used these attacks to bring a halt to the entire microfinance industry in the state. In fact, the government officials were mostly motivated by embarrassment stemming from the fact that their own public sector microloan program was losing clients to more effective and efficient private organizations like SKS. In fact, farmer suicides in India have been tragically common since the mid 1990s, when pressures from globalization and changes in Indian agricultural policy caused widespread debt and despair. Careful studies showed that suicides in Andhra Pradesh did not increase in 2010 due to SKS or any other microfinance institution’s acts, and were in fact lower across India than in 2009. But reasoned debate was notably absent from commentary on this crisis, which ended up impacting microfinance operators throughout the country. Similar controversies erupted surrounding microfinance in other countries including Nicaragua, Azerbaijan, Bolivia and Mozambique.

In November 2010, a Danish documentary filmmaker named Tom Heinemann released The Micro Debt , which aired on Norwegian television. The documentary alleged that Grameen took advantage of its borrowers, engaged in aggressive collection practices, and misallocated aid funding from the Norwegian government. Yunus denied any wrongdoing, and the government of Norway would later clear him of any malpractice. In the end, nearly all of the accusations fell apart. 

But in that moment, the film gave an opening to Grameen’s critics and those who saw some advantage in vilifying him. Most notably, the criticism prompted the Prime Minister of Bangladesh, Sheikh Hasina, to make a highly critical statement aimed at Yunus and Grameen, calling them “bloodsuckers” of the poor. Later, Hasina claimed that she should have been the rightful recipient of the Nobel Peace Prize that had gone to Grameen and Yunus. Many observers assumed that one of the factors motivating her was the fact that Yunus had publicly toyed with the idea of launching his own political party a few years earlier when Hasina was serving time in prison.

Her “bloodsucker” reference was based on the fact that Grameen charged interest on its loans to the poor. She failed to mention that Grameen’s microcredit interest rates were in fact the lowest in Bangladesh and among the lowest in the world. Nonetheless, within weeks, the nation’s finance minister—who had previously been a strong ally of Grameen’s since the early 1980s—relentlessly pressured Yunus to resign his position. Ultimately, the government concocted a scheme to allege that Yunus, then 71, had been required by law to retire at age 60. Why a law that had not been deemed applicable to him for 11 years was suddenly grounds for his dismissal was never explained. Yunus appealed the case to the nation’s supreme court. He lost the case on a technicality, and subsequently resigned.

Microfinance Today

Happily, the story doesn’t end there. Yunus refocused his energy on promoting a generalized model of for-profit, socially motivated institutions he called “social businesses,” of which Grameen was a prototype. He built an ecosystem to support these nonprofit/for-profit hybrids, and made impressive progress. In the meantime, Grameen Bank remained effective due to the adroit operational management and sharp political skills of a series of Yunus proteges who have run the organization since 2011.

The global microfinance movement has also recovered, in especially dramatic fashion in India. Indeed, one topic that researchers have failed to study is the strong correlation between the advent of the modern microfinance movement and the global reduction of extreme poverty by 75 percent over the last 30 years. The percentages of the poor and the extreme poor have dropped most dramatically in countries like India, Bangladesh, Indonesia, and Peru where microfinance has been practiced intensively for years. 

Unfortunately, most philanthropic leaders and members of the media have moved on from microfinance to other approaches. This has been especially true in North America, where use of the term microfinance is often frowned on as antiquated and irrelevant. In Europe, where people seem to take a longer and more realistic view of history, the term is still in wide use. 

The fact that fickle philanthropists and journalists have for the most part behaved as if microfinance disappeared from the face of the earth around 2015 has been rather mystifying, but not without its positive elements. On the one hand, if the philanthropy had not dried up, it could have helped cement and accelerate progress, as New York University researcher Tim Ogden persuasively argued in an important paper. But being off the radar screen has allowed microfinance institutions to focus on delivering value to clients and keeping peace with local banking regulators and politicians outside the spotlight of the philanthropy/media industrial complex. 

It may be tempting to diminish or even ignore what microfinance has accomplished. I don’t believe such pessimism is well founded. Yunus had a deep insight about the untapped potential of the world’s poor women and the role that affordable financial services could play in unleashing it. In the process, he inspired a generation of people—myself included—to do our part in applying that insight on a global scale.

Yunus—who turned 82 on June 28, 2022 and remains active—has received recognition for his part in this revolution, though at a great personal cost. The institutions he set up and inspired, and the powerful ideas that he forced two generations of experts and concerned citizens to consider, represent his most lasting legacy.

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Microfinance in India: A Tale of Two Models

By: Rajalaxmi Kamath, Nithya Joseph

The case highlights the differing trajectories of two, contemporaneous models of microfinance in India. The well-known Grameen MFI Model made inroads in the mid-90s, primarily in the four southern…

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The case highlights the differing trajectories of two, contemporaneous models of microfinance in India. The well-known Grameen MFI Model made inroads in the mid-90s, primarily in the four southern states of India. This was in a setting where there was an extensive network of a pre-existing indigenously developed group lending model, called the Self-Help Group Bank Linkage (SHG Bank Linkage) model. Today, the Indian microfinance story stands at a crucial juncture with respect to these two models. The SHG model, while being recognized as a key player in changing the financial inclusion discourse in India, is no longer salient in the current financial inclusion narratives. Grameen MFIs on the other hand, are on their way to being "mainstreamed" as banks, pretty much along the lines of Grameen Bank in Bangladesh. Using the dramaturgical approach of the sociologist Erving Goffman (1922-1982), the case differentiates the two models based on the front-stage (borrower-groups) and back-stage (organizations, investors, and the State). This distinction is useful for our microfinance narrative because while the front-stage is steeped in discourses of community, and poverty alleviation; the back-stage revolves around the hard-nosed financial ratios, fund disbursement and recovery pressures, break-even analyses around lender-borrower relations - which are unrelated or even detrimental to the front-stage discourse. Differentiating between the front-stage and back-stage interactions thus allows us to reveal processes that played out very differently for both these microfinance models. It helps us parse out a key question: did the more globally attuned model Grameen Model end up gobbling the clunkier and local SHG Bank Linkage Model?

Learning Objectives

The basic learning objective of this case is to highlight a few issues revolving around development of microfinance and social businesses in particular, and politics of globalization, in general. There are several crucial questions that we need to ask. Do we see it as a story where local (in this case, the SHG Bank Linkage model) gets supplanted and uprooted by the global (the Grameen MFI model), because the latter is intrinsically built for scale? Or is the answer more nuanced? Did the expansion of microfinance necessarily lead to greater formal financial access and inclusion? What was the role played by key stakeholders like the investors, regulators, and policy makers in this process? How can social businesses that work best rooted in the local peculiarities, tackle the problem of profitability and scale? More importantly, does this drive towards greater scale - driven both by the State and by global investors, have any benefits to the poor and the financially excluded for whom this is purportedly being done?

Jul 1, 2019

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