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Is microfinance the best way to spend aid money?

By Pooya Karambakhsh - posted Wednesday, 27 September 2017

For the first time in the 21st century, world hunger is on the rise. According to the Food and Agriculture Organization of the United Nations, the number of undernourished people around the world increased from 777 million in 2015 to 815 million in 2016. This means that now 11% of the whole world population suffers from chronic hunger.

Probably our first thought is to increase humanitarian aid to tackle this issue. However, there are many obstacles on the way of this approach and it is hard to secure enough political support to take this step.

The second thought is to see if the current humanitarian aid is spent efficiently. This is the general question of this article. More specifically, it considers the microcredit program and casts doubt on it its effectiveness.


Many view the microcredit program as the way to "help the poor help themselves." For a casual audience of international aid, any reference to the microfinance program immediately brings out Bangladesh and the Grameen Bank. That is why, in this article, I use them to question the effectiveness of the program in empowering the poor.

Microcredit in Bangladesh

With an impressive improvement in developmental indices, Bangladesh is a glorified example of economic restructurings and free market system. According to the IMF's Bangladesh: Poverty Reduction Strategy Paper, the country experienced an average of 6% GDP growth during the 2000s, a reduction of poverty by 60% during the last 40 years, and an increase in life expectancy from 46.2 to 66.6 years.

A part of the success in the reduction of poverty in Bangladesh is attributed to the Grameen Bank and its pioneering the microfinance program. Its founder and a Nobel Prize Laureate, Mohd Yunus, recently claimed that the program changed 9 million lives in Bangladesh and is now benefiting about 300 million people around the world. The program was developed as an innovative financial model to empower the poor, in particular, women in rural Bangladesh. Its original purpose was to help the poor help themselves.

While many professionals, academics and activists continue advocating the microfinance programs as exceptionally, if not the most, effective method of poverty alleviation, some studies seriously challenge this claim. In this article, I briefly outline the main arguments against the microcredit program, both regarding its goals and its effectiveness on the ground.


As Aminur Rahman describes in Micro-credit initiatives for equitable and sustainable development: Who pays?, Grameen Bank was the first financial institution in Bangladesh that replaced material collaterals with social collaterals. Under the bank's microcredit mechanism, in each community five members can constitute a loan group and every 6-8 groups a loan centre. The bank first lends a small sum of money to two members of each group. If they fulfil the repayment conditions, then two other members of the group become eligible to obtain the loan. Therefore, the members are under constant pressure from other members of the group to fulfil their obligations.

Dr.Heloise Weber, of the University of Queensland, in two papers, The 'new economy' and social risk: banking on the poor? and Global Politics of Microfinancing Poverty in Asia: The Case of Bangladesh Unpacked, provides a radical critique of the microcredit program in general. According to her, the international organisations such as the IMF and the World Bank pursue two important agendas through microfinance programs. The first agenda is to advance financial sector liberalisation and commercialisation. This goal may involve severe austerity measures, eg by restraining governments' expenditure and subsidies. These measures can, in turn, lead to dissent and social unrest among the poor, unemployed or underemployed. To prevent social upheaval and potential solidarity among the poor around the world, social safety nets become necessary. The second and most important role of microcredit programs is to provide such safety nets.


Weber's argument is somehow ideological and is built upon her opposition to the neoliberal economic restructuring. However, from a more practical point of view, it may not be very important if the microfinance program is designed to reinforce and expand the neoliberal measures. What really matters is if it can fulfil its claims and empower the most vulnerable.

Rahman presents empirical evidence that the program has not been fully successful in its claims. Officially, the bank prefers to lend to women to empower and raise their social status in the community. However, in practice, loans usually end up in the hands of male relatives. Moreover, the program choses women for their shyness, passivity, and submissiveness. These culturally patterned behaviours make women more likely to abide by the repayment conditions. The social pressure can make them the target of their male partners' violence. In the worst-case scenario, when there is no choice but to default, the psychological burden can be so severe that drives women to suicide. In short, instead of empowering, the program may escalate physical and psychological violence towards women.

The way the aid funds reach the poor demonstrates a deeper problem. The Grameen Bank receives loans from the Central Bank of Bangladesh and some Western banks with an interest rate as low as 2 – 3.5%. However, final borrowers, the poorest, must repay loans with up to 15 times higher rates (20-30%). Proponents of the program try to justify that this rate of return is necessary to sustain the bank's resources, help it survive in the market and continue delivering services to the poor. However, this argument fails to justify why the Grameen bank's rate is 50-100% higher than the market rate.

Bank staff and managers are aware of the hardship in finding a business activity with a rate of return higher than the interest rate. This hardship, in many cases, leads to a "spiralling debt cycle", where the poor must borrow new loans to pay the previous. Nevertheless, the bank staff strive to increase their loan "outstanding".

Finally, the eagerness of bank workers to push loans illustrates an important aspect of dependency mechanism, which is the rise of a new elite. The relation between the core countries and the periphery is usually facilitated through a privileged group in the developing country, i.e. "comprador elites". The livelihood of this group depends on maintaining the status quo. In other words, the economic elites, consciously or unconsciously, strive for the poor to stay poor and prevent their country from developing and breaking out of the dependency relation.

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About the Author

Pooya Karmbakhsh is a volunteer with RESULTS Australia's Sydney branch. He is also a project officer at All Together Now and a postgraduate student of Political Economy at the University of Sydney. Email:

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