I make these qualifiers about Yunus and microfinance for a reason: Apparently, his fame has not gone down so well with a number of economic commentators--including Bhagwati. To wit, the venerable Professor Bhagwati highlights four criticisms of Yunus in a recent op-ed in Al Jazeera:
1. It wasn't Muhammad Yunus who invented microfinance but rather Ela Bhatt who founded the Self-Employed Women's Association (SEWA) in April 1974--two years before the former made his start in Jobram Bangladesh;
2. Yunus has relied on periodic inflows of foreign cash to keep Grameen afloat, whereas SEWA has never been reliant on foreign donors;
3. What is more, SEWA has been regulated by Indian authorities practically since its inception, while the same doesn't hold true for Grameen which resists such regulation;
4. Microfinance does not promote large-scale development.
There are interesting points which Muhammad Yunus would probably be better served rebutting himself. However, I can offer some counterpoints and suggestions here:
1. Yunus' innovation was perhaps more a case of marketing; that much is true. Prior to him, the term "microfinance" had barely entered the lexicon and was certainly not widespread worldwide. That said, why begin with SEWA? Those who've worked in development studies for any period of time are familiar with the Rotating Savings and Credit Association (ROSCA) which has similar features of credit pooling and turn-based lending among a small group. As far back as 1962, the famous anthropologist Clifford Geertz had already written about "The Rotating Credit Association: A 'Middle Rung' in Development." It's hardly an obscure work since Google claims it has 397 citations. ROSCA was already operative long before Geertz described it, so the origin of ROSCA certainly predates SEWA by an even more considerable margin. But if neither the ROSCA nor the SEWA folks coined the term "microfinance" despite having essentially similar mechanics, then I'll give Yunus the nod for doing so.
2. It would of course be good if Bhagwati came up with evidence to back his claim that could be very damaging to Yunus' operation not being self-sustaining by relying on periodic cash infusions from abroad.
3. It is incorrect to say that Bangladeshi microfinance institutions (MFIs) do not face banking regulation. Instead, they have a separate banking regulator in the Microcredit Regulatory Authority (MRA) which oversees their operations and has the power to impose sanctions. Instead of saying Grameen gets by with lax regulation, it would have been better if Bhagwati could explain why microfinance and conventional banking are similar enough to warrant coming under the same regulatory body (such as the Reserve Bank of India). Given India's own woes with allegedly usurious interest rates, the specificities of microfinance may warrant having a separate regulator as Bangladesh has decided to do. Yunus, after all, has been instrumental in creating a microfinance monitoring body in Bangladesh and calls for one in India as well:
“We have been lobbying for a regulatory authority in Bangladesh and as a result created the microcredit regulatory authority in Bangladesh,” Yunus said. “That’s what I have been recommending for India also.”Speaking of which, Bhagwati should note this provision of Bangladesh's MRA:
MFIs should not be permitted to accept deposits from the non-member/ general public.4. Alike many other things in development--remittances come to mind, personally--it is unlikely that microfinance is the "magic bullet" to development. Although some folks do a disservice as styling it as such, perhaps Yunus is even culpable to an extent. I personally think Clifford Geertz suggested as much since he termed ROSCA as a "middle rung" in development long before the chattering classes arrived on the scene. Microfinance is an intermediate stage in the development of financial institutions. That is, habituating folks climbing up the income ladder in the disciplines of borrowing, investment, and repayment is certainly not a bad thing when it comes to administering credit. Certainly the Americans--its government, states, municipalities and citizens--do not have a firm grip on such fundamentals given the parlous state of their finances at virtually every level of society.
It's interesting times for Grameen,to say the least.