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)