NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, March 27, 2012

Modern microfinance started with economist Muhammad Yunus. In the nineteen seventies, he started what became the Grameen Bank in Bangladesh. He and the bank jointly won the Nobel Peace Prize in two thousand six for the idea of offering small loans to the poor to fight poverty.

Last month, Mr. Yunus spoke to the New York Times newspaper about lending problems in India. In twenty ten, reports of harmful microlending methods and corruption shook the state of Andhra Pradesh. Mr. Yunus noted Andhra Pradesh had intensive microlending activity at the time. He said things got out of control.

We spoke to Ghiyath Nakshbendi about changes in the world of microfinance. He is an expert in international business and teaches microfinance as a business model at the Kogod School of Business at American University.

GHIYATH NAKSHBENDI: “After what we witnessed in Andhra Pradesh, then, for example, the government of India in certain states started taking steps in order to implement, in order to introduce, regulations that will guarantee that these institutions are operating under a strict system.”

Some experts have raised questions about whether microlending lifts women or poor families out of poverty. David Roodman is with the Center for Global Development, a research group in Washington. He says microloans do not do a good job of fighting poverty. He says over three billion dollars went into microcredit in twenty-ten. But many lenders failed because of bad supervision or failure to repay loans.

In one model, governments or nongovernmental organizations, NGOs, give money to microcredit operations. Interest income is often used up by costs, rather than helping other poor borrowers. But Ghiyath Nakshbendi says that model is changing.

GHIYATH NAKSHBENDI: “In the old days, when we talk about microfinance, we are talking about an operation by which the funding is coming from wealthy individuals or government, or what have you. So it is the NGO model. Then we discovered that whatever we are getting in terms of contributions, donations and what have you — we cannot sustain the operation.”

Mr. Nakshbendi says sustainability is now a main goal.