The American critics of Grameen Bank are prolix and it’s hard to know where to start and end in an attempt to balance fairness with length of this essay. One site that offers links that present the good, the bad, and the ugly both by supporters and critics, by legitimate news sources and commentators is this site which has a specific connection to the documentary To Catch a Dollar.
After reading many criticisms, it is my opinion that those who criticize Grameen Bank fall into one of two categories. First, they lump Grameen Bank in with the other microcredit organizations. Second, they argue that because Grameen Bank’s collateralization is so high, the program is actually a wealth redistribution system rather than an authentic loan program.
As to the first critique, many of the microcredit organizations that have sprung up (and this would include Morgan Stanley’s foray into the field) try to operate microcredit banks like modern western banks in miniature. These organizations (1) require some form of collateral for the loans and (2) operate on a for-profit basis. Grameen Bank does neither of these and is therefore relatively unique. Second, many of the microcredit institutions charge exorbitant interest rates. Grameen Bank’s 10% – 20% range may seem high to those of us accustomed to banks that practice fractional reserve banking, but that’s comparing apples and oranges (more about that later). Grameen’s rates are, for the most part, the lowest in the microcredit industry.
American banks (and to a lesser extent, European banks) can charge much lower interest rates because of the practice of fractional reserve banking. The American government allows banks to loan ten times more money than they actually have, and thus create money out of thin air. If a bank is capitalized with $1 million, it can write up to $10 million in loans. Not only does this create money out of thin air, it means that banks can reap ten times the interest income that they would be able to get if they were required to be fully backed by actual reserves.
European reserve requirements are much higher than American, and some countries consider the whole idea of fractional reserve banking to be immoral and highly risky. Fractional reserve is in essence a legalized Ponzi scheme encouraged by the government.
Grameen Bank does not practice fractional reserve banking and therefore it needs huge cash reserves. A fractional reserve bank can loan out its million dollars, and as it grows, loan that same money out a second time, and a third time, etc. Bank growth therefore does not require an increase in cash reserves. On the other hand, as the same money is loaned out multiple times to different borrowers, the risk increases dramatically while that risk is spread out among a much larger base of customers. As Grameen Bank grows it does not loan the same money out to two different customers. It needs new cash reserves each time the customer base expands.
This refusal to participate in fractional reserve banking creates an optical illusion which is the basis for much of the criticism of Grameen Bank. Fractional reserve banking allows banks to create money out of thin air. If an observer assumes that fractional reserve banking is the natural order of things, when a bank does not participate in the highly risky practice of fractional reserve banking and therefore collects new cash capital for each new loan, it appears (to those for whom fractional reserve banking has become the norm) that cash is simply disappearing down a hole.
So, what happens to the money that Grameen Bank collects (from wealthy individuals, foundations, etc) for its cash reserve? That money is loaned out and then paid back over the next year. After it is paid back to Grameen Bank, it is again loaned out to new borrowers. Thus that cash reserve gets recycled into the microloan market year after year, just like an American bank. The difference is that if an American bank has a massive default rate (above 10%), the effect is a sort of financial black hole.
If an American bank has 10,000 depositors who have various savings instruments totaling $1 million dollars, the bank can loan out $10 million dollars. If housing prices crash and 20% of the loans go into default, it means that the bank has just lost $2 million dollars. (The problem is that only half that is real money. The bank has just lost $1 million of nonexistent money.) If there were no government bailouts, all the people with savings accounts at that institution just lost all their money.
If Grameen Bank had a similar default rate (which it has never had in its history), it would simply have 20% less money to loan out. The critics say this is very bad business – an investor can’t get a good enough return on investment without fractional reserve banking. Grameen Bank says it is merely honest business – artificially increasing one’s return on investment by creating money out of thin air is both risky and unethical. If one doesn’t understand the difference in sensibilities, one can never understand the faulty basis of these criticisms.
The other thing that mystifies many critics is the “no collateral” policy. Jeffery Tucker, for instance claims that the documentary tries to explain how Grameen Banks works “on mere rhetoric alone.” How does this system work, asks Tucker, why do people bother paying their loans back at all? Actually these questions are answered very clearly and forthrightly in the documentary. But Tucker, being totally blinded by his presuppositions, is completely incapable of understanding the answer. The women pay back the loans because in the real world (in contrast to Tucker’s Enlightenment view of things where individuals have no responsibilities to anyone or anything) these women are responsible to four other women. If they default they will (1) lose their reputation and (2) severely hurt the future prospects of the four other women in their group.
Yunus and Grameen Bank recognize that for a human being, this is some of the best collateral available. For Tucker and his ilk who have reduced people to individuals who care nothing for institutional relationships, such social responsibility is unthinkable. And, truth be told, such responsibility is seemingly unthinkable among the self-interested individuals who populate Wall Street and Washington, but among human beings, such social responsibility is a necessary part of what makes us human.
Tucker appears to be absolutely corrupted by the Enlightenment ideal of the individual with no responsibility to others and only self-interest to guide him. As such, he can’t recognize a real human with real human sensibilities when she is presented to him in the flesh (or at least, on the big screen). He finds the overwhelming evidence of success to be “mere rhetoric alone.”
Because of this huge gulf between the story of a non-Western Bank that treats humans like humans within all their human relationships and the Western critics who don’t believe in responsibility but only contracts, greed, and threats, it is extremely difficult to explain to a Western audience why the film critics so utterly missed the mark when writing about this documentary.
The above mentioned Jeffery Tucker deserves special attention because his critique is so inflammatory and so off the mark. But many readers probably won’t be interested in all those details. Therefore I have written a separate critique of his article, which can be found here. (There is no other link to this piece on the web site, so if you want to return to my critique you need to get to it through this essay or bookmark the critique.