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Is Grameen the new Starbucks?

David Roodman of the Center for Global Development has written an excellent blog on the woes at Grameen Bank, asking whether Grameen has been fueling a microfinance bubble. Many households in Bangladesh are overindulging in microfinance loans:

Multiple borrowing is widespread in Bangladesh now, and it has raised concerns that some Bangladeshis are juggling microcredit loans the way some Americans juggle credit card debt, in a merry-go-round that must one day stop. The worry, in other words, is that there is a microcredit bubble. In 2007, Shafiqual Haque Choudhury, founder and head of ASA, which is known as the most commercially savvy of the big three, worried aloud about a “train crash.” And that was before the global financial crisis, which has probably been transmitted into poor Bangladeshi households via lower exports of clothing made in Bangladeshi factories and fewer construction jobs in the Middle East for Bangladeshi workers.

Indeed, the repayment rate on Grameen's loan portfolio has taken a significant hit:


Roodman is worried:

I think about this graph in two ways. One is by focusing on the ending level of 96.54%. That seems high in absolute terms. But it is low by historical standards. And Rich Rosenberg, in his authoritative field guide to delinquency metrics (quoted by Pearl and Phillips) and in a recent post, explains that a 95% collection rate can spell disaster. On a one-year loan with weekly repayments, lent taka (the Bangladeshi currency) return to the microcreditor over 0–12 months, so the average taka makes a lender-borrower round trip in 6 months, and can be immediately relent. Thus a 95% collection rate can lose 5% of capital in 6 months, and 10% in year—maybe manageable if interest rates are high enough, but not trivial. In addition, non-payment is contagious, as Yunus noted. Once delinquency starts feeding on itself, the costs of cajoling and pressuring for repayment can skyrocket.

Another way to analyze the graph is by focusing on the recent change. Whether or not Grameen Bank is yet in the red zone, it seems likely that something bad is happening. In Rosenberg’s language, the on-time collection rate graphed above is an excellent  red flag indicator because it plummets as soon as borrowers start struggling. It is a leading indicator of trouble, a canary in the coal mine.

Roodman is soliciting comments and alternative explanations. One commenter, Asif Dowla, notes that at one point Grameen was opening 2 branches a day, more than Starbucks (which has subsequently closed hundreds of shops over the past three years).

Has microfinance grown too fast?

(H/T Free Exchange)

(This post has been updated to include the name of the commenter, Asif Dolwa)


Submitted by Jason Hahn on
While it makes for a catchy title I'm not sure the link between Starbucks and Grameen is at all clear. And if it is Starbucks is doing fine so perhaps we shouldn't be too worried about Grameen. In either case what is missing from both this blog (and Roodman's) is comment from Grameen Bank. Before deciding that Doomsday is near I think it makes sense to reach out and ask Grameen a few questions. Surely someone at the World Bank has a contact there.

Submitted by Anonymous on
A big 4 firm performeded a privately funded audit of the Grameen Bank in the mid-nineties for an international donor to ascertain how they were able to make profit off of their micro-credit lending. The results proved conclusively that they were in fact not making profits, and never had, if you applied international accounting standards to their accounts. They rolled over bad loans into new larger ones routinely hiding collectibility problems and continuing to accrue interest on loans that should be in non-accrual status. Borrowers by the thousands used cash from increased loans to bring their loans current. Grameen, at that time, used Bangladeshi accounting standards for the calculation of loan loss reserves which were rates applied by law based on a certain % depending on the length of time of non payment, rather than the internationally accepted practice of assessing actual potential collectibility. What kept the ship afloat - a seemingly enless supply of dewy-eyed, gullible international donors flush with cash and boundless faith in the Grameen miracle. Needless to say, the audit report was never published.

Jason, as I documented in my post, I attempted without success to reach the Grameen Bank through all the channels listed on its "Contact Us" page. I have since received the e-mail address of Grameen's CFO. I wrote to the CFO one week ago and am still hopeful of a reply.

Submitted by Anonymous on
I think Roodman misses the point. Like a lot of academics he does his analysis assuming the numbers given him are accurate. They are not. Grameen uses the accounting tricks enumerated above to show the world a 95% collection rate. The real rate is far lower, and would be unsustainable from a cash flow standpoint if international accounting standards were used. Without new capital from foreign donors, Grameen would soon be exposed as the Ponzi scheme it is. The Micro-credit industry has so much of its faith invested in Grameen being a success that no one wants to hear the truth. It is why history repeats itself is such a depressingly predictable way.

Actually a newer post of mine offers evidence that Grameen is "cooking its books" in a way that reduces apparent delinquency. (I hope Grameen will respond.) I am not naive about the possibility. In fact, while the Grameen Bank does carry some old, low-interest donor loans on its books, it has not taken new donor money since 1995. So if there is a Ponzi scheme, it is not the kind Anonymous is suggesting. Grameen's main source of capital for lending has been savings deposits.

Submitted by milford bateman on
Would whoever is the anonymous referred to by Asif Dowla above please do me a favour and identify yourself? Even if you just privately communicate this to Asif, rather than on the PSD blog, that's OK too. I might be wrong, but I think Asif has yet again put his foot very firmly in his mouth. Thanks Milford Bateman

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