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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…

• Length: 15 page(s)
• Publication Date: Jul 1, 2019
• Discipline: Economics
• Product #: IMB773-PDF-ENG

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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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Indian Institute of Management-Bangalore

IMB773-PDF-ENG

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Microfinance and the Backlash

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

• order reprints
• related stories

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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SKS Microfinance Case Study - Lakshmi's Story

SKS Microfinance Limited ( SKS ) is a non-banking finance company regulated by the Reserve Bank of India and currently operating in 19 of India’s 28 states. SKS’ mission is to eradicate poverty by providing financial services to the poor.

A study conducted by the Navnirman Institute of Management on the microfinance industry in India provides case studies illustrating the human impact of SKS’s work.

One such story is Bandaru Lakshmi’s:

When Lakshmi came to Atukula Bazaar in Suryapet with her family, they were penniless. The family had no hope of surviving. Her husband was not doing too well at his business and no one was ready to lend them money. Lakshmi was worried about how they would bring up their two daughters and their son.

When Lakshmi found out about SKS operations in her village, she took an income generating loan of INR 10,000 ( USD 212). She used this money to buy and sell readymade garments in the nearby villages. With a heavy load on her head, she went door to door and worked hard to save money. Confident about the sales and her hard work, she took a second income generating loan of INR 12,000 ( USD 255). Later, she took a loan of INR 14,000 ( USD 297) to purchase the readymade cloth for more sales. Her daily earnings grew steadily. Today, she clocks a monthly income of INR 30,000 ( USD 638) per month.

Lakshmi is an inspiration to many today. A role model to others in Suryapet, Lakshmi recently felt most rewarded when her eldest daughter secured a job in Infosys.

“Thanks to the loans SKS extended to me time and again, I was able to give my children a decent education. Today people respect our family and I am grateful,” she says.

Further information

• Study of Microfinance in India - Navnirman Institute of Management
• SKS India Webpage

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Creating Shared Value: Grameen Bank’s Microfinance Solution for Poverty and Growth

Michael Porter’s Shared Value concept is a business strategy that aims to create economic value while also addressing societal issues. The idea is that businesses can create both economic and social benefits by focusing on creating products and services that meet the needs of society. In this article, we will explore how Grameen Bank has created shared value by providing micro-finance services to low-income individuals in developing countries, helping to alleviate poverty and promote economic growth.

Grameen Bank is a micro-finance organization founded by Muhammad Yunus in Bangladesh in 1983. The bank provides small loans to low-income individuals who lack access to traditional banking services. The loans are typically used to start small businesses, such as farming or handicrafts, and help individuals generate income and improve their standard of living.

Grameen Bank’s approach to micro-finance is unique in that it prioritises the needs of its clients over profits. The bank provides loans without requiring collateral, and borrowers are encouraged to form groups to support each other and share knowledge. This approach has proven successful, with Grameen Bank disbursing over $27 billion in loans to more than 9 million borrowers since its inception.

By providing micro-finance services, Grameen Bank is addressing two key social issues: poverty and economic growth. Poverty is a pervasive issue in developing countries, and access to credit is often limited for those living in poverty. By providing loans to low-income individuals, Grameen Bank is helping to alleviate poverty by providing individuals with the resources they need to start businesses and generate income.

In addition to addressing poverty, Grameen Bank’s micro-finance services also promote economic growth. By enabling individuals to start small businesses, the bank is helping to create jobs and stimulate economic activity. This can have a ripple effect, as the increased economic activity can lead to further investment and growth in the local economy.

Grameen Bank’s approach to micro-finance is a prime example of how businesses can create shared value by addressing societal issues while also creating economic value. By prioritising the needs of its clients and focusing on providing access to credit, the bank is creating economic and social benefits that go beyond traditional profit-seeking business models.

Grameen Bank has created shared value by providing micro-finance services to low-income individuals in developing countries. By addressing social issues such as poverty and economic growth, the bank is creating economic and social benefits that go beyond traditional profit-seeking business models. This approach to business is in line with Michael Porter’s Shared Value concept, and serves as a model for how businesses can create value by addressing societal issues.

References:

• Porter, M. E., & Kramer, M. R. (2011). Creating shared value. Harvard business review, 89(1/2), 62-77.
• Yunus, M. (2018). A world of three zeros: The new economics of zero poverty, zero unemployment, and zero net carbon emissions. PublicAffairs.
• Grameen Bank. (2022). About Grameen Bank. Retrieved from https://www.grameen.com/about-grameen-bank/
• Prahalad, C. K. (2004). Fortune at the bottom of the pyramid: Eradicating poverty through profits. Pearson Education.

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