Is microfinance overrated and do offshore banks really fuel graft?

For decades, people in the so-called developing world have been fed the mantra that microfinance is the solution to poverty even though there is little evidence to show that it has significantly improved people’s living standards.

Bangladesh, for instance, where microfinance is almost a religion, remains one of the poorest countries on earth.

Yet proponents of microfinance insist that it is not just a necessity among “the unbankable poor” but a right.

However, the weaknesses of microfinance are now beginning to emerge after the guru of microfinance, Mohammud Yunus, the 70-year-old founder of the much-lauded Grameen Bank, was ousted from his position as managing director of the bank by Bangladesh’s Prime Minister, Sheikh Hasina.

The move has been interpreted by liberals as a case of an oppressive State persecuting a courageous Nobel laureate who lifted millions of Bangladeshi women out of poverty.

New York Times columnist Nicholas D. Kristof labelled Yunus’ ouster as a case of “women hurting women”. “We see a woman who has benefited from evolving gender norms using her government powers to destroy the life’s work of a man who has done as much for the world’s most vulnerable women as anybody on earth,” he wrote.

Author David Bornstein said Hasina’s decision was “a brazen step to seize control of an institution that serves 8.4 million poor villagers across Bangladesh and provides inspiration to social entrepreneurs around the world.”

Leaders such as Hilary Clinton have defended Yunus, as has former Irish Prime Minister Mary Robinson, who is advocating for Yunus through the Friends of Grameen campaign.

Independent investigations, however, reveal that there is more to the Grameen Bank story than meets the eye. A Norwegian documentary has shown that millions of dollars in aid was irregularly moved from Grameen Bank to one of dozens of private firms controlled by Yunus.

The bank has also been accused of charging exorbitant interest rates of up to 30 per cent (which are much higher than the rates charged by commercial banks) and of using draconian methods to collect payments.

One study by University of Oregon anthropologist Lamia Karim found that most Bangladeshi microcredit NGOs operate like “loan sharks”, echoing Hasina’s sentiments, who referred to Grameen Bank as a “bloodsucker of the poor”.

These allegations come at a time when microfinance is coming under increasing attack in neighbouring India, where the suicides of thousands of farmers have been linked to their inability to pay back micro-loans.

More than 200,000 farmers in India have taken their lives in recent years because they could not deal with the aggressive debt collection methods of the lenders, even as drought ravaged their crops.

Critics of microfinance say that borrowers often use the loans to meet basic needs, such as food, rather than invest in a business.

They argue that microcredit is like an emergency fund that helps people survive in the short term, but does not offer the more sustainable solutions that a longer-term and larger loan could provide — the kind, for example, offered by commercial banks (at lower interest rates).

Another investigation titled How to Rob Africa by Al Jazeera has revealed that corrupt leaders in Africa are siphoning millions of dollars from the continent’s coffers and depositing them in secret offshore bank accounts in Europe and the United States.

This type of theft is aided by the formation of anonymous companies that allow corrupt officials to circumvent lax international money laundering laws.

Apparently, “brokers” that help corrupt Africans to form these secret companies have sprung up all over the continent, particularly in countries that have abundant natural resources or where such resources have been newly discovered.

This is hardly news to Kenyans, who got a hint of such phantom companies through the Anglo Leasing scandal.

If steps are not taken to prevent future scams, Kenyans may find that their future oil and natural gas wealth has been siphoned to such anonymous offshore companies.

Unfortunately, this practice has the tacit approval of Western countries who, on the one hand, reprimand African countries for being corrupt and on the other, benefit from the vast amounts of ill-gotten wealth deposited in their banks.

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