A question for Muhammad Yunus regarding exploitative interest rates

Muhammad Yunus has faced yet more trials this week at the hands of a Bangladeshi government of questionable transparency. Prime Minister Sheikh Hasina has essentially taken over Grameen Bank, on what some have described as a “Black Day” for the microfinance sector. In the build-up to this grand finale senior folk in the US government have weighed in to defend Yunus. Yunus is the good guy and Hasina is the corrupt prime minister, so the argument goes. I am generally a fan of Yunus’s broad principles of ethical, effective microfinance, and Hasina’s appearance on the BBC’s Hard Talk does leave the viewer wondering about her motivations.

Muhammad Yunus warned of the dangers of exploitative interest rates charged by some microfinance institutions. “I never imagined that one day microcredit would give rise to its own breed of loan sharks”, he told the New York Times. Alas the microfinance sector has conveniently failed to avoid a formal definition of exploitative interest rates, or what level constitutes a shark-like practice. So, I ask the question: does a highly profitable MFI charging annual interest rates consistently over 100%, and up to an independently verified rate of 144% constitute exploitation or shark-like behaviour? If you think not, stop reading now. If such rates make you feel uncomfortable, I have a second question:

Why did Grameen Foundation USA (GFUSA) invest in LAPO, the Nigerian microfinance institution that has been found by two separate rating agencies (MicroRate and Planet Rating), the New York Times, and the US-NGO MFTransparency to be charging such eye-watering interest rates? Criticisms of LAPO do not end here, but I will focus on this single point for now. Muhammad Yunus sits on the board of GFUSA and suggested that interest rates above 15% more than the cost of capital (typically of the order of 10%) are inexcusable. GFUSA not only supports LAPO and invests in LAPO, but guaranteed two loans to LAPO from Citi Microfinance and Standard Chartered Bank. There appears to be a contradiction here, and not a small one. GFUSA, Citi, Standard Chartered and Yunus have remained ominously silent on this topic.


I have a hypothesis: Yunus is likely rather disappointed that he is associated, via GFUSA, with an MFI charging the poor precisely the sort of interest rates he abhors. However you cut the numbers, whatever you assume about inflation rates, 144% seems a little steep and not entirely in line with Yunus’s preaching of the topic. But he dare not protest. To do so would send a shock wave through the US microfinance sector. With friends extending as high as Hilary Clinton, and with GFUSA acting as something of a rallying call for the US microfinance investment sector, it is as politically unacceptable for Yunus to take any action as it is for LAPO to charge the poor such interest rates to the poor, despite being extremely profitable. Politics win over exploitation of the poor. Yunus is in an impossible bind.

A hypothesis ought to yield a prediction. I therefore predict that as long as Yunus remains associated with GFUSA he will cease publicly lecturing the world about the evils of exploitative interest rates for fear of facing a rather obvious and embarrassing question from the audience about the rates charged by LAPO. Ironically, this will deny the world of one of the key advocates for fair pricing of loans for the poor, which is sad.

So, I imagine that Yunus is as irritated as many of us about LAPO charging the poor such interest rates in the name of development. His name if flaunted across the Grameen Foundation USA website thus he has further reason to be piqued. But, before we jump to the conclusion that Yunus was perhaps unaware of GFUSA’s activities regarding LAPO and its interest rates, we need to dig a little deeper.

Yunus sits on endless boards. One is of particular interest – the Schwab Foundation. Yunus is the only board member with any obvious microfinance experience (a Nobel Prize no less). Following the rating withdrawal, downgrade and front-page NYT exposé of LAPO, Schwab decided to give LAPO their apparently prestigious award for Social Entrepreneur of the year. Is this a coincidence? Did Schwab know about LAPO’s interest rates? Had Schwab’s criteria for selecting a potential winner extended to reading the NYT or any rating reports? Of all the MFIs in Africa, how did they select LAPO? These remain unanswered questions (and I’ve tried asking Schwab repeatedly).

Yunus’s defence against the Bangladeshi government is largely political – that Hasina doesn’t care for Yunus is fairly clear, and she is doing what she can to take control of the bank he founded. But LAPO is an entirely non-political, unrelated affair. It appears to the untrained eye that Yunus has softened his approach to MFIs that charge extortionate interest rates. Yunus himself criticised the Nigerian microfinance sector for charging such rates, and yet seems to have turned a blind eye in the case of LAPO.

In response to Tom Heinemann’s documentary Alex Counts of Grameen Foundation went to lengths to explain how Grameen’s interest rates were a mere 23%, and refuted Heinemann’s suggestion they were much higher than this: up to 200% apparently. Actually Heinemann never said they were anywhere near this level if GFUSA had bothered to watch the documentary, but Heinemann did pick up on LAPO’s interest rates of well over 100%, and Friends of Grameen have also remained rather quiet on this topic. It appears the focus on interest rates and transparency is used only when convenient for Grameen Foundation and Friends of Grameen.

So, I have an open question for Muhammad Yunus:

“What do you think of LAPO charging the poor interest rates up to 144% per year, through an institution named after Grameen Bank, on whose board you sit, and to whom Schwab Foundation gave an award?”

I will post any response on this blog. Don’t hold your breath.

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