The Next City
December 21, 1997

The little bank that couldn’t

BY ALL ACCOUNTS, microcredit — tiny loans that help poor entrepreneurs buy a $75 cow or a $200 sewing machine — is an overwhelming success. In the two decades since the Grameen Bank of Bangladesh started the world’s first microlending operation, more than 5,000 organizations have provided loans to 10 million people worldwide, not just in Third World countries but to disadvantaged Hispanics in the United States and aboriginals in Canada. At the Microcredit Summit held in Washington last year, the movement pledged to reach 100 million of the world’s poor with microcredit by 2005.

The Grameen Bank’s success has brought its founder, Mohammed Yunus, the 1994 World Food Prize, audiences with European royalty and luminaries such as Hillary Clinton, and international admiration for offering the poor credit — with all the respect that that implies — instead of handouts. “The only people benefiting from [foreign] aid are those already wealthy, though they do so in the name of the poor,” Yunus says in lambasting Bangladesh’s foreign aid economy. Instead of aid, Yunus touts a brand of collective capitalism promoted through profit-making microbanks.

“Conventional banks are based on the principle that the more you have, the more you can get; if you don’t have anything, you don’t get anything,” he explained. “Grameen has literally turned this principle around.”

The Grameen Bank has opened more then 1,000 branches in rural areas, where 90 per cent of Bangladeshis live. It serves over half of Bangladesh’s 68,000 villages and has more than two million borrowers — 90 per cent of them illiterate, 94 per cent of them women — who are also shareholders. To Yunus’s pride, although virtually all borrowers are landless or own less than an acre of land, and although these loan recipients could never get credit from a conventional bank, the Grameen Bank’s repayment rate far exceeds that of commercial banks — almost 98 per cent of its loans are repaid with interest.

If all this sounds too good to be true, it is: Although Yunus calls Grameen “the most sound financial institution in Bangladesh” and he abhors the thought of Grameen dispersing charity to its customers, the Grameen Bank, itself, is a big-time charity case, propped up by international aid agencies such as the World Bank, the national aid agencies of Canada, Sweden, Norway, and the Netherlands, UN agencies like the International Fund for Agricultural Development, private foundations like the Ford Foundation, and even commercial banks — together they represent 75 per cent of Grameen’s funds. Without this international largesse, Grameen would have long ago been bankrupt.

Grameen is not commercially viable, not a bank, not even the grassrootsy institution it pretends to be — the government of Bangladesh, with 25 per cent of its board members, effectively controls Grameen. Worst of all, the bank’s much lauded reliance on group responsibility and peer pressure to prevent defaults has a reprehensible underside.

Grameen’s lending process starts with five would-be borrowers who agree to form a group in which each member guarantees — and polices — one another’s borrowings. Initially, only two members may borrow; if they make their monthly payment regularly, Grameen will then extend credit to two more, and if all four continue their repayments, the fifth can borrow, and all become entitled to larger loans. From Grameen’s perspective, self-policing works wonders in preventing defaults. But critics claim Grameen promotes unprecedented levels of indebtedness among the populace, and that the low default figures mask unprecedented misery. Because the poor in Bangladesh live so close to the edge, charges Hamidul Huq, head of a Bangladeshi group attempting to alleviate poverty, large numbers inevitably fall behind in their monthly payments whenever illness prevents them from working or some unforeseen expense arises. When this happens, the fellow members — themselves also without resources and desperate not to lose their own livelihoods — can ruthlessly force would-be defaulters to sell their meagre assets or to visit the local money lender, from which escape is rare. Faced with repayments of loans at 120 per cent per annum on top of the Grameen loans at 20 per cent, the next step is bonded labor — still a widespread practice in Bangladesh. Entire families in this way become trapped — mothers and their children as servants, husbands as farmhands or factory workers.

In other cases, the members of the group convince Grameen to reschedule their loans: Grameen bankers let them take additional loans to cover the defaults, maintaining the fiction that Grameen has the world’s best repayment rate, but leading to impossibly high repayments and worse defaults down the road, along with more pressure to visit the village money lender or become a bonded worker.

IN SOME WAYS, THE GRAMEEN BANK resembles a cult. Members greet each other with a Grameen salute, recite Grameen chants, and promise to follow “The 16 Decisions of Grameen Bank” by abandoning marriage dowries, practising birth control, building latrines, and taking part in all social events collectively. Borrowers — despite having little or no disposable income — are also required to financially support the bank through forced savings programs: Grameen has so successfully commandeered the poor’s savings that its total savings — now roughly equal to the entire amount that Grameen lends — is four times larger than the combined savings recorded for five major commercial banks in Bangladesh. Yet Grameen savings accounts typically pay its customers 8.5 per cent interest — less than half the interest these same borrowers must pay Grameen. In another bank fund-raising scheme, all borrowers must buy a share in the Grameen Bank whose dividend yields about half as much as Grameen charges borrowers.

To the distress of its customers, the bank discourages withdrawals from the savings accounts, browbeating would-be withdrawers into instead borrowing more to meet the need the savings would have met. At times, thousands of desperate placard-carrying Bangladeshis have demonstrated to pressure Grameen to either return their money or grant them interest rate relief.

Grameen has done best at attracting and keeping members in the country’s most underdeveloped areas — feudal enclaves whose only other lender is the village strongman. Once areas become developed, Grameen’s borrowers drop off in droves, preferring the commercial banks who charge less interest and attach fewer strings to their loans. Because the Grameen lustre has become tarnished, its pyramiding growth in membership — by 1993 it reached 375,000 people a year — dropped to under 200,000 in 1994 and a mere 50,000 in 1995 (the last year for which figures are available). This trend could soon see Grameen lose members and spiral into bankruptcy.

To shore up its collapsing membership, the Grameen Bank juggernaut has created a string of new companies financed by Grameen and offering products to the poor on credit: GrameenCyberNet (an Internet company), GrameenTelecom (predicted to bring cellular mobile phone service to 100 million rural inhabitants within four years), GrameenShakti (a power utility to bring electricity to unelectrified villages), plus GrameenTrust, GrameenCommunications, and a flood of other Grameen offshoots. If these incestuous ventures succeed, they could rescue the Grameen Bank; if they fail, the savings of Grameen Bank’s two million borrowers-savers-shareholders — and the worldwide microcredit-financed house of cards — could come crashing down with it.

Lawrence Solomon

Revenue Canada rejigs RRSPs, keeps the change

FEBRUARY IS A FRANTIC MONTH for financial planners and their RRSP clients, but not for many immigrants and new workers who — thanks to an unadvertised tax grab several years ago — can no longer contribute to a retirement savings account or claim an RRSP tax deduction in their first year of work.

The federal government cloaked this de facto tax hike on new entrants to the workforce in a 1991 tax reform package designed to equalize RRSP contributions between pensioned and non-pensioned workers. But buried in the package is a scheme that especially short-changes the young and immigrants by basing contribution limits on a taxpayer’s previous year’s income.

For example, an immigrant who starts working in Canada in January 1997 cannot make an RRSP contribution or claim any RRSP deduction since Revenue Canada bases his contribution limit on his non-existent 1996 income. This individual loses out by not being able to invest toward his retirement in 1997, giving Revenue Canada the cash that would have been his tax refund (for someone earning $30,000 and contributing the maximum $5,400, that would amount to $1,451). Anyone who starts working in the middle of the year has it even worse: A new worker who started his $30,000-a-year job in July 1997 cannot contribute to an RRSP in 1997, and in 1998 is limited to $2,700 (18 per cent of the $15,000 he earned in 1997). In essence, this taxpayer pays taxes for a year and a half without being eligible to put money into an RRSP, and Revenue Canada grabs an additional $753 in 1998 on top of 1997’s $1,451.

Gail Vaz-Oxlade, author of the RRSP Answer Book, warns that contribution limits based on the previous year’s income can also bamboozle the unwary taxpayer who takes a year off to raise a child or who is temporarily unemployed. For example, a woman earning $75,000 in 1996 and $30,000 in 1997 could contribute $13,500 to her RRSP in 1997, but Vaz-Oxlade suggests carrying this deduction forward until she returns to a higher tax bracket, to increase her tax refund by $3,359. “Nobody knows about these tactics, not even many financial consultants,” Vaz-Oxlade says, “and the government isn’t going to advertise them.” Parents who don’t earn any income, and don’t have any contribution room accumulated from when they were working, aren’t able to contribute to their RRSPs until they’ve been back on the job for a year.

For most taxpayers who will earn more in the current year than in the previous year, the government’s tax grab continues year after year as it nickels and dimes taxpayers by giving them a deduction based on the previous, generally lower, year’s earnings. The government’s tax grab then continues to the end of a taxpayer’s career. People who retired at the end of 1996 after earning $60,000 that year could contribute $10,800 to their RRSP in 1997, but because most retirees have less taxable income, their deduction is worth less in 1997 — $871 less if this retiree has 60 per cent of his working income. Still, the compound interest this investment accrues before the RRSP matures at age 69 is minuscule compared to that of an investment working from year one. Given an eight per cent return on investment, in 40 years $5,400 would have grown to $117,312 — money that, upon withdrawal from the RRSP, would benefit both the retiree and future governments who would be taxing this saved income.

Amy Buskirk

Responses to Revenue Canada rejigs RRSPs, keeps the change

Frank Gue, Taxpayers Coalition Halton Inc., Burlington, Ontario, responds: February 2, 1998

This item took me back. At the start of my working career in 1951, I began making deposits in the system then being run by the Department of Pensions and National Health, Pensions Brands.

This was a lost cause; it was earning, if I recall, 3 to 4 per cent.

I withdrew my money. I could recover only the principal, without interest. The amount was rather small, but I objected on principle to the minister, asking by what authority the accumulated interest had been withheld. He cited an order-in-council which he acknowledged had not been publicized. He said the government was entitled to recover its costs; I checked the government’s books, and found those costs to be in the order of 0.1 per cent.

This was an early lesson in a dreary parade of devious, hidden, behind the scenes manoeuvres to which I reluctantly became accustomed, and which illustrate the eternal truth of the old adage about plucking the goose while causing a minimum of hissing.

I soon and sadly discarded the naively charitable belief that this kind of thing is merely the operation of the law of unintended consequences. Such consequences are often so obvious and elaborately contrived that they could not possibly be unintended. The political and civil service woods are obviously well stocked with folk willing and able to draft legislation and regulations so opaque, convoluted, and incomprehensible that, even if publicized, they cannot possibly be understood, nor can their consequences be warded off; check the Income Tax Act. Between such folk and the order-in-council mechanism, what hope has a taxpaying citizen? Your issues are enormously stimulating. Keep up the good work.