NYU Wagner

Microcredit is a great idea with a problem: the bank that made it famous.

Grameen Bank, launched in Bangladesh in 1976 by an economics professor named Muhammad Yunus, popularized the idea of giving poor people tiny loans to launch businesses. The bank has helped inspire an estimated 7,000 so-called microlenders with 25 million poor clients worldwide. To many, Grameen proves that capitalism can work for the poor as well as the rich. It has become an icon for the drive to give needy entrepreneurs a share in economic development. And that iconic status owes a lot to an almost miraculous loan-repayment rate of "over 95%," as the bank's Web site says. (www.grameen.org) But Grameen's performance in recent years hasn't lived up to the bank's own hype. In two northern districts of Bangladesh that have been used to highlight Grameen's success, half the loan portfolio is overdue by at least a year, according to monthly figures supplied by Grameen. For the whole bank, 19% of loans are one year overdue. Grameen itself defines a loan as delinquent if it still isn't paid off two years after its due date. Under those terms, 10% of all the bank's loans are overdue, giving it a delinquency rate more than twice the often-cited level of less than 5%.

Some of Grameen's troubles stem from a 1998 flood, and others from the bank's own success. Imitators have brought more competition, making it harder for Grameen to control its borrowers. The bank's loan portfolio grew rapidly in the early 1990s, but it has now shrunk to 1996 levels, at $190 million. Profits have declined about 85%, to the equivalent of $189,950 last year from $1.3 million in 1999. The bank, with 1,170 branches, all in Bangladesh, has high operating costs. Grameen would be showing steep losses if the bank followed the accounting practices recommended by institutions that help finance microlenders through low-interest loans and private investments. And the situation may be worse than it appears; the bank is converting many overdue loans into new "flexible" loans that Grameen reports< as up-to-date.

Safeguarding an "Idea"

Microlenders have been reluctant to call attention to Grameen's troubles. "Grameen's repayment rates have never been as good as they've claimed," says Jonathan J. Morduch, associate professor of economics and public policy at New York University. "Because Grameen has been so well-known, nobody has wanted to risk undermining the reputation of the idea."Microcredit is getting renewed attention as other poverty-fighting tools come under attack. Left-wing protesters accuse the World Bank of selling out the poor to corporate interests. Right-wing U.S. politicians argue that aid to the Third World has been wasted. U.S. lobbies often try to quash efforts to open American markets to imports from poor countries.

But microcredit is an idea everyone can agree on: It uses private enterprise, can be profitable and gets money straight to the poor. Bridging the gap between rich and poor "will help eliminate conditions of despair and hopelessness that breed violence and extremism,'' declares an e-mail message circulated after Sept. 11 by Bill Clapp, the chairman of GlobalPartnerships, a microcredit support organization based in Seattle.