2011 Year in Review: Microfinance Vows to Do Better

December 29, 2011

Once viewed as pioneers in the fight against poverty, microfinance institutions (MFIs) -- under siege since 2010 when loan default rates in many developing countries soared and Indian politicians accused lenders of exploiting the poor -- faced growing political hostility and calls for stricter regulation in 2011.

The year got off to an inauspicious start when Bangladeshi prime minister Sheikh Hasina, long a champion of microfinance, accused MFIs in general and Grameen Bank and its Nobel Peace Prize-winning founder, Muhammad Yunus, specifically of "sucking blood from the poor in the name of poverty alleviation." In January, nearly a month after a documentary film on Norwegian state television raised questions about the use of $100 million in Norwegian aid funds by Grameen in the 1990s, Hasina initiated a probe into the matter -- despite assurances from the Norwegian government that the bank had been cleared of wrongdoing.

Subsequently, Hasina moved to dismiss the 70-year-old Yunus as managing director of the partially government-owned bank on grounds he was well past the country's mandatory retirement age of 60 -- a move that Yunus supporters viewed as politically motivated. While an investigating committee failed to dig up anything it could use against the bank, the Bangladeshi High Court rejected Yunus' appeal of the order, and he resigned from the bank in May.

That same month, the Reserve Bank of India issued new regulations capping interest rates and margins for MFIs operating in the country, limiting the size of loans and total debt per household, and requiring a minimum loan term and other protections for borrowers.

Meanwhile, MFIs continued to expand their operations in other countries, many with an eye to integrating their lending with so-called livelihood services. As of February, for example, Seattle-based Global Partnerships had invested $4.5 million of a new $20 million social investment fund in six Latin American MFIs -- all of which bundle their loan activities with business education, health services, agricultural training, and other services -- and expected to disburse the fund's capital by year-end. In March, a $25 million grant from the MasterCard Foundation enabled Bangladesh-based BRAC, the world's largest nongovernmental development organization, to export its "microfinance multiplied model" to Uganda and expand its capacity to undertake longitudinal analyses of the effectiveness of its integrated microfinance and livelihoods model. And in May, Opportunity International, a global nonprofit microfinance institution headquartered in Oak Brook, Illinois, was awarded a $2.5 million grant by the United Nations Capital Development Fund to provide access to safe savings accounts, business loans and training, and other services in the Democratic Republic of Congo -- a grant followed, in July, by a $2.5 million award to the organization from the John Deere Foundation to expand its community banking network in Ghana, Malawi, Mozambique, Rwanda, and Uganda.

As of October, roughly a year after the Indian state of Andhra Pradesh promulgated an ordinance regulating microfinance activities, MFIs reportedly had stopped making new loans in the state. At the same time, many appeared to be committed to improving their accountability and client protection practices. Indeed, the Smart Campaign, a global initiative committed to embedding client protection practices into the institutional culture and operations of the microfinance industry, issued a report (48 pages, PDF) in November that examined MFI practices in areas such as preventing over-indebtedness, transparency, responsible pricing, protection of client data privacy, and mechanisms for complaint resolution and gave 88 percent of the rated MFIs overall passing marks.

"The fact that we now have data from almost five hundred third-party, external assessments of client protection practices at MFIs shows the extent to which the microfinance industry has committed itself to accountability on this all-important front," said Smart Campaign director Isabelle Barrès. "Responsible finance is assured when we develop and apply tools to hold MFIs accountable for the way they interact with customers."

Global Partnerships Announces Investment of $4.5 Million in Latin American MFIs (2/23/11)

Bangladesh Court Upholds Order to Dismiss Yunus as Head of Grameen Bank (3/09/11)

5 Questions for...Alex Counts, President and CEO, Grameen Foundation (3/23/11)

BRAC Receives $25 Million to Expand Microfinance Model in Uganda (3/31/11)

Yunus Loses Final Appeal (4/7/11)

Reserve Bank of India Issues New Microfinance Regulations (5/04/11)

Bankers Without Borders Announces Partnership With Association for Enterprise Opportunity (5/08/11)

UN Capital Development Fund Awards $2.5 Million to Expand Community Banks Network Into DRC (5/15/11)

Opportunity International Receives $1.3 Million From Credit Suisse (5/24/11)

John Deere Foundation Awards $2.5 Million for Banking on Africa Initiative (7/08/11)

Microfinance Industry Embraces Accountability, Report Finds (11/13/11)