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With all the hype surrounding the Professor Yunus controversy and more and more details of corruption and abuse of the system emerging every day, my views on Microfinance, Grameen and Professor Yunus are being battered.

My book, Financial Empowerment Of Women In Bangladesh Through Microcredit, which comes out next month, is based on my thesis for which I spent several years studying and researching microfinance and Grameen Bank and other NGOs. At the onset of my research I had several questions:

  1. What is Microcredit?
  2. Do banks and NGOs in Bangladesh charge interest?
  3. If not then why do they call it interest?
  4. Can we advocate this method Islamically?
  5. Is it REALLY good for women?

Microcredit is the provision of small amounts of credit under a Microfinance scheme which encompasses the provision of financial services such as loans (microcredit), savings, insurance, and training to people living in poverty.

Grameen was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be “not creditworthy”. As a result it rejected the basic methodology of the conventional banking and created its own methodology. The question is – is this methodology interest free? The simple answer could have been no. Everyone using and promoting Grameen uses the word interest without any qualms at all, but when I spoke to the director of microfinance at Grameen and BRAC in 2009 I found that things were not quite what they seemed.

Grameen and BRAC did not begin their microfinance systems with the intention of profit as conventional banks do, they intended to promote credit as a human right and help the poor to help themselves to overcome poverty. Microfinance organisations make it a priority to serve the particular needs of women, since 70% of those living in extreme poverty are female. Women are often excluded from education, the workplace, owning property and equal participation in politics. They produce one half of the world’s food, but own just one percent of its farmland. When women improve their circumstances, they also improve the lives of their children. By investing in nutrition and education, they help to create a better future for their children and their communities.

Grameen says that the most distinctive feature is that they do not base their loans on any collateral, or legally enforceable contracts. It is based on “trust”, not on legal procedures and system. The women borrowers form groups who encourage and support each other and become their moral and financial collateral. Reaching sustainability is a directional goal. The women must reach sustainability as soon as possible, so that they can expand their outreach without fund constraints and eventually repay their loans and become debt and poverty free.

In addition to microcredit, microfinance programs provide education and empowerment programs and tools to enable women to build and develop skills for their future. Grameen and other NGOs realise that an injection of money alone is not enough to substantially empower women.

Now that all sounds lovely.

But if they are being charged ridiculous amounts of interest is it possible?

While Bangladesh is a majority Muslim country, it doesn’t implement sharpish law. In all the Muslim countries of the world, even where shariah law is implemented, an interest free loan is not possible and where they are the method is so inefficient as to draw little attraction or sustainability. (As an aside tho Islamic banking is on the up and up in the middle east and south Asian countries and so effective that it has caught the eye of global western banks who are eager to implement and adopt Islamic methods in order to avoid reoccurrences of the GFC)

How does Islamic finance work? The overarching principle of Islamic finance is that all forms of interest are forbidden.  The Islamic financial model works on the basis of risk sharing. The customer and the bank share the risk of any investment on agreed terms, and divide any profits between them.  Based on this simplistic definition, it is evident that Grameen seeks to share the risk of its borrowers and divides profits between them (the profit taken by the bank is reinvested into the bank so it’s not really a profit at all)

The main categories within Islamic finance are: Ijara, Ijara-wa-iqtina, Mudaraba, Murabaha and Musharaka.  Ijara is a leasing agreement whereby the bank buys an item for a customer and then leases it back over a specific period. Ijara-wa-Iqtina is a similar arrangement, except that the customer is able to buy the item at the end of the contract. Mudaraba offers specialist investment by a financial expert in which the bank and the customer shares any profits. Customers’ risks losing their money if the investment is unsuccessful, although the bank will not charge a handling fee unless it turns a profit.  Murabaha is a form of credit which enables customers to make a purchase without having to take out an interest bearing loan. The bank buys an item and then sells it on to the customer on a deferred basis.  Musharaka is a investment partnership in which profit sharing terms are agreed in advance, and losses are pegged to the amount invested.

Islamic finance forges a closer link between real economic activity that creates value and financial activity that facilitates it. Grameen does this by encouraging women to engage in labour that generates income and allowed them to become part of the economic field. Grameen also creates the framework of financial methods and that facilitates such income generating activities.

Islamic finance does not allow creating new risks to profit thereby. Grameen doesn’t approve proposals from women borrowers if there are risks involved or if they are not backed by the other women in the group.

Islamic finance is global and cosmopolitan. Having committed itself to a text accessable to all and Prophetic precedents available  easily, Islamic finance is open to any innovations that are in congruence with its fundamentals. It is not a closed system. It has no regional, ethnic or class affiliations. Same with Grameen.

The challenge lies not in conforming to a given set of rules but in realising the objectives of  the Shariah, and working towards them regardless of the obstacles.

The Government of Bangladesh has a fixed interest rate for government-run microcredit programmes at 11% at flat rate. It amounts to about 22% at declining basis.

“In comparison there are four interest rates for loans from Grameen Bank : 20% for income generating loans, 8% for housing loans, 5% for student loans, and 0% (interest-free) loans for Struggling Members (beggars). All interests are simple interest, calculated on declining balance method. This means, if a borrower takes an income-generating loan of say, Tk 1,000, and pays back the entire amount within a year in weekly instalments, she’ll pay a total amount of Tk 1,100, i.e. Tk 1,000 as principal, plus Tk 100 as interest for the year, equivalent to 10% flat rate.”

The above figures were taken from the Grameen website, in my own research and first hand investigations I have found that the interest rates are much higher BUT… the money that is taken in the name of interest is deposited into a deposit account for the woman borrower. So where is this ‘interest’ going? It is going into her piggy bank for a rainy day. When I asked NurJahan Begum why they used the word interest if it really wasn’t interest she said,

  1. Interest is a term widely used that is easy to define and understand
  2. Saying we were interest free would raise suspicion and align us to Muslims when we wanted to reach out to all audiences regardless of religion
  3. The money that a woman generates is wholly hers. A part of it repays her loan, a part of it is taken as bank charges and a part of it is deposited into her account.  If we didn’t label it interest and make it mandatory, the women would make excuses to withdraw or not deposit the cash at all into their account and come tragedies, weddings or natural disasters (which as you know are  regular occurrences) they would default and cause problems.

While there are flaws in this reasoning and while there have been cases of certain bank members charging interest and keeping the profit, in essence the methodology is proven to work and proven to be interest free. Grameen is not a conventional bank. It does not charge conventional interest.

In conventional banks charging interest does not stop unless specific exception is made to a particular defaulted loan. Interest charged on a loan can be multiple of the principal, depending on the length of the loan period. In Grameen Bank, under no circumstances total interest on a loan can exceed the amount of the loan, no matter how long the loan remains unrepaid. No interest is charged after the interest amount equals the principal.

In addition, Grameen pays a lot of attention to monitoring the education of the children (Grameen Bank routinely gives them scholarships and student loans), housing, sanitation, access to clean drinking water, and their coping capacity for meeting disasters and emergency situations. Grameen system helps the borrowers to build their own pension funds, and other types of savings.

So now that we know what Grameen does, can we support it Islamically?

My gut feeling was still yes till about a week ago. A rose is a rose by any other name. Grameen’s system in its original form was conceived to be interest free and to help the poor. Regardless of what it has become today due to the abuse inflicted upon it by its propagators, it was an Islamically and humanely encouraging concept. The Question now is.. will it ever be again? Up till now I advocated Grameen and its practices. Not anymore. It would need to go back to its roots and remain true to them, it would need to state its practices and fees and charges clearly without hiding under the general term of ‘interest’ if it is ever to regain the trust of its disillusioned supporters.

While there are many rumours (founded and unfounded) that women are targets of such schemes because they are easier to manipulate and control, that interest is high and debts are forcefully and sometimes violently extracted, that the programs and their founders are guilty of corruption, the truth remains that microfinance (which includes interest free microcredit) as a system is one which is capable of effectively alleviating world poverty through the empowerment of women and through them, their families and societies. If a concept is abused by man, the concept is not flawed, the man is. The concept should not be accused, the man should. This is something we should not forget in the wafts of controversy and corruptions riddled smoke that mars this topic.

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Women have traditionally been the object of orthodox ideas of representation and absorbed these into their ways of being. Bangladeshi women traditionally brought up with conventional religious, gender and class instruction develop ingrained ideas of how to be conservative in order to be socially acceptable. Through the injection of micro-credit and income generation, this condition has gradually been changing in villages across Bangladesh through a process of adapting to a new role in society.

Bangladesh’s economy has grown by a steady 6% a year in recent years, and the World Bank reported that the percentage of Bangladeshi people living on less than US$1 a day has been reduced to 40% from 49% (latest figure as at 2005).  In June 2009, I travelled to Bangladesh to conduct research interviews for my thesis on the effects of microcredit on women’s empowerment. I spoke to women who had lived below the poverty line as well as their husbands, several male borrowers and the employees of the microcredit intuitions. The women were aged 23-64 and had been engaged in a microcredit loan with Grameen, Bangladesh Rural Agriculture Centre (BRAC), Islami Bank or the NGO Proshika from 1-25 years.

Women borrowers of the BRAC microcredit scheme

The women I interviewed spoke openly regarding their experience with microcredit. Their testimonies confirm that they experienced sustained socio-cultural and economic empowerment as a result of involvement in microcredit schemes. Borrowers said they were motivated to apply for a microcredit loan due to the encouragement from bank workers and the success of other women.

Borrower participation was based on similar factors: minimal skills, a need to contribute to the household income and self improvement. The women agreed to the conditions set by lending institutions such as Grameen and BRAC and took on new tasks which developed their skill set to reflect their new status as women with greater empowerment, agency and financial input into their family.

The women acknowledged that gender and class are factors in play within a society that shapes them and how they interact. Bank workers elucidated that in addition to the women, they themselves were led to conform to the archaic ideologies in society through religious, class and gender related hegemony. The common woman was pressured into accepting political or cultural motives for religiousness and absorbing it into her way of being and hence restricted from achieving empowerment and realising her potential.

Employees of microcredit institutions affirmed that even if women recognised they were being dictated to, they were unable to alter the status quo. Now, due to a sustained injection of microcredit along with cultural education women have the confidence to assume economic and social standing. A woman’s participation in the economic arena allows her to acquire cultural and economic experience and develop through interactions in the workplace.

Women borrowers attend the Grameen collections meeting

As a result existing familial and social relationships are reshaped due to new found confidence, interpersonal skills and the new role of income earner which commands a different kind of respect to that of mother and housewife. Women who were previously only a daughter, wife or mother, now knew how to read and write, little things such as having their own loan books afforded them a sense of control which aided their empowerment.

All those interviewed recounted the strong opposition that microcredit institutions and their workers first met with in villages. Women involved in producing a cultural capital through microcredit loans by moving outside the home were seen as rebels as a Bangladeshi woman’s place is traditionally at home. Her entry into the economic field changed the dynamics and gender divisions which dictated society. Consequently, a women’s empowerment is limited by the religious, class and gender boundaries placed on them and affects the degree of change or empowerment experienced by the women.

The results of the interviews indicated that women engaged in microcredit loans from lending institutions benefit directly from their sustained interaction with the institution, co-workers and the work they do. Women reported higher verbal proficiency, the ability to write their names, a boost in self confidence and independence. The women also felt motivated to further their skill set or widen their sources of income generation through further loans in order to benefit from a further injection of primitive capital in light of the increased autonomy, agency and respect they received as a result of their financial contribution to their households.

Women reporting to the Grameen branch in Shirazgonj

While the microcredit schemes of Grameen, BRAC and other microcredit institutions all set their own conditions (not all of which are beneficial for the client), microcredit has provided village women in Bangladesh the opportunity to gain communication and interpersonal skills, independence and a position of authority within the family environment. It has motivated them to grow and develop skills which allow them to proceed onto skilled labour and open up new avenues of opportunity.

[Published on www.bangla-sydney.com 2009]

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