The Ethics of Micro Finance

Christopher Martin ‘Micro-finance programmes are aimed at reducing poverty. What ethical challenges are raised by the operation of micro-finance and which ethical theory can best be applied to assess how Grameen Bank addresses these challenges? ’ Introduction: The essay seeks to examine the ethical issues raised by the operation of microfinance. In the first section, an overview will be offered. In the second section the ethical challenges posed by operation of micro-finance will be examined. In the third section, an overview of Grameen Bank will be given.

Finally, in the fourth section, the ethical theories of Kant, Bentham and Aristotle will be applied to the ethical issues raised by the operation of Grameen Bank to see which theory best applies. 1. What is micro-finance? Conventional banks like we in the west know are not as widespread in the developing world. Even in places where there ‘mainstream’ banks do have operations, large numbers of people will not be in a position to utilise their services. Such people have been termed the ‘unbankable poor’. The World Bank estimates that there are 2. billion people (nearly 40% of world’s population) who do not have access to formal financial services. Microfinance has emerged in the last few decades in response to the needs of such people for savings and loans facilities. It is an alternative to them have to use the services of what are colloquially termed ‘loan sharks’, who charge high rates so high that borrowers struggle to pay off the principal sum borrowed. Micro-finance is the provision of savings facilities and small value loans to typically to poor people in the Third World.

Such people have a need for financial services, particularly as there is a lack of in rural areas where there is a lack of banking facilities. This makes it harder to makes deposits and so build up any sort of savings. For instance 1 ”if you live in a straw hut in a village, finding a safe place to store savings is not easy. ” People need sums for 2 “life-cycle events such as births, marriages & emergency situations. ” Stuart Rutherford in ‘The Poor and Their Money’ outlines the 3 “ Three common ways of raising large sums i) selling assets they already own (or expect to, e. g. dvance sale of crops) ii) mortgaging or ‘pawning’ those assets. iii) finding a way of turning their finding a way of turning their small savings into large lump sums. It is important to note that there is not any ‘one-size fits all’ definition of poverty . Muhammed Yunnus asks the rhetorical question 4 “Who on the list below is poor and who is not: -a jobless person, -an illiterate person, -a homeless person, -a person who does not produce enough food to feed his or her family year round, -a person with a thatched house that lets in rain? -person suffering from malnutrition, -person who does not send his or her children to school? street vendor? Micro-finance may increase someone’s income but that may just be spent on everyday consumption and not on addressing any of the different facets of poverty on Yunnu’s list. For instance, using an increase in income to send a child to school. Savings The very poorest may be too risk averse to take out a loan as they may have an erratic income, for instance due to crop failure. Hence the need for savings. In micro-finance schemes there are two types of savings schemes: I) Locked in: not available for withdrawal until a member a customer left the bank.

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Trust is built up and the commitment to repay is increased via mutually reinforcing behaviour. It can be described as a case of ‘one for all one and all for one’ in terms of repaying the loan. -However, there are potential problems as it depends on the co-operation of members. However, 7 “if it goes badly, then they are all in trouble. ” A benefit of individual loans is that 8 “the lending institution knows who exactly is responsible for the repayment of the loan, and does not get lost in a maze of group members referring to or blaming one another. ’’

Section 2 ethical challenges Doubts have been cast on the overall utility of micro-finance programmes in reducing poverty. Some critics argue that 9 “that micro-finance programmes fail to reach the poorest, generally have a limited effect on income, address the symptom rather than the social cause of poverty”. The 10 “focus on income poverty” being reduced by 11 “the provision of credit for income-generation through self-employment. ” Neglects to address the deep rooted causes of poverty such as lack of education and poor transport infrastructure.

Micro-finance is concentrated on the ‘bankable poor’ as they are seen as more able to take advantage of a loan to e. g. buy more equipment and so 12 “ can take more risk than the poorest households without threatening their minimum needs for survival. ” It is ironic that a program aimed at reducing poverty excludes the very poorest from participating. However micro-finance programs obviously the motive of reducing poverty. There are 13 ‘’MF premised on the notion that credit is a human right it can improve the lives of the poorest . ”

But as the very poorest are excluded the application of credit as a ‘human right’ is not universal. If something is a ‘human right’ is supposed to apply to all humans. In this case it doesn’t so it would fail Immanuel Kant’s Categorical Imperative….. It could be argued that Yunnus is instead focussing micro-finance on those people who are in the position to benefit most from it. 14 “Although Yunus frames his vision of MF in the language of human rights, his ideas are in fact concerned with entrepreneurial rather than redistribution. ” Thus he is a social businessman rather than a philanthropist.

Micro-finance institutions are self-sustaining businesses rather than charities and so 15 “poverty reduction becomes an externality and not a goal as such”. Thus Yunnus and others could be charged as potentially using borrowers as means rather than ends. Section 3 Grameen Bank Economics professor Muhammad Yunnus was motivated to set up Grameen after being disheartened at the level of poverty he witnessed in rural villages in his native Bangladesh in the early 1970’s. A catalysing experience was when he met 16 “ Sufiya Begum, a woman from a village called Jobra.

Like many others in her village, she relied on the local moneylender for the cash she needed to buy the bamboo for the stools she crafted. ” That loan was only granted on the condition that she sold to him (the money lender) all of her output at a price determined by him. 17 “ Thus, though hard working, she was trapped in poverty. ” Furthermore the villagers were cut off from borrowing from 18 “conventional bankers since they had no credit histories and no collateral to offer, and could not even fill out the necessary paperwork because they were illiterate”. 1.

Muhammed Yunnus’s was focused on providing the loans to the landless as he saw them as being more entrepreneurial than tradition bound farmers. He was very much of the view that micro-finance could help the poor to help themselves through becoming self reliant. Grameen means village in Bengali. Muhummad Yunnus wanted the bank to be the antithesis of a faceless bureaucratic bank headquarted in a large city (even though it is now). He aimed at recruiting banking staff who would build up an understanding of the everyday lives of villagers and the challenges they faced.

This would make it easier to identify which people would benefit most. Crucially this helped to engender the building up of levels of trust between the borrowers in village who took out the collateral free and contract free loans. Vitally the development of the level of trust necessary to ensure repayment collateral free loans without any contract was the process of group dynamic in binding borrowers together with mutually reinforcing behaviour. What helped make the repayment process be manageable for borrowers was that loans were paid in small weekly instalments rather than one lump sum to worry about at the end of the loan period. )Application of ethical theory: Grameen Bank’s focus on borrowers becoming self reliant relates to them developing virtues of self reliance and not being burdensome to others. Yunnus argued 19 ”On the recipient side, charity can have devastating effects. It robs the recipient of dignity, and it removes the incentive of having to generate income. It makes the recipient passive and satisfied with thinking ‘all I have to do is sit her with my hand out and I will earn a living” Instead, borrowers will developing a sense of ownership by coming 20 “With their own ideas” for business generation.

In this respect Yunnus is treating borrowers as ends and not means as he leaving it up to them how they behave. The programme develops members sense of self-discipline of saving regularly as they had to 21 “save for several months before they were eligible for to borrow. The requirement to save first also results in an investment in the institution that will lend to them – thus the loans they receive are financed not just by an outside faceless agency, but also by their own savings and those of their friends and neighbours. The borrowers are much more likely to be committed and conscientious about repaying. ’. Yunnus challenges the assumptions on human nature made by conventional banking paradigms by issuing collateral free loans without any contracts. 22 “Grameen assumes that every borrower is basically honest. We may be accused of being naive, but it saves us having to fill in all those endless documents And in 99 per cent of the cases our trust turns out to be vindicated. Bad loans of 0. 5 per cent is the cost of doing business, and it also represents a constant reminder of what we need to improve in order to succeed. ” Micro-finance proponents can’t be completely 3 “ ethical claiming to reduce poverty while pursuing other objectives. This is particularly so because other people’s money is involved”. The intentions of institutions should be transparent, e. g. through a mission statement and should not be cloaked in language that hides agendas of e. g. making a profit for shareholders, by only stressing social objectives. 24 “Furthermore the imbalance of power between the lender and the borrower. ” surely makes it harder for borrowers to pursue their own interests as they have to be reconciled with the banks financial interest.

Within the framework of the ethics of Immanuel Kant, Professor Yunnus succeeds ethically as is acting from the altruistic motive of reducing poverty. Kant agreeed that 25 “to act from a good will is to act from duty. ” Aristotle takes a stricter approach by arguing that acts are ethical if agents go beyond just doing so from a sense of duty. For instance, someone only went to visit an elderly relative out of a sense of duty, and not from any greater concern for the relatives welfare.

Muhammad Yunnus’s focus on helping the poor maintain their sense of dignity by becoming more self reliant is consistent with Kant’s approach as Kant argues 26 ““Our free will is what gives us our dignity and unconditioned worth” This of course relates to Kant maintaining that people should be considered as ends in themselves rather than means to someone else’s end. Kant’s stress on the universality of ethical principles is relevant to the potential problem of people stopping viewing promises as binding.

The group dynamic principle of micro-finance surely make the promises of members more binding as otherwise it would seem that if one person got away with not paying, then no one would and then the bank would not lend to them.. Additionally, as the borrowers and the bank are both benefitting so 27 ”No one (is) used merely as a means in an voluntary economic exchange where both parties benefit. ” Jeremy Bentham and John Stuart Mill’s Utilitatarianism holds that the ethical utility of actions can be measured by the consequences. This approach is onsistent with the cost-benefit analysis adopted by contemporary businessses where the utility being measured is profit. In the case of Grameen Bank the utility can be measure by a) the rate of loan repayment According to Yunnus the default rate was only 28 “0. 5 per cent”. However, on the other hand many members of Grameen were unhappy with their savings being ‘lockked-in’ and 29 “ were leaving the organisation in order to realise their (often substantial) compulsory savings. ” Such members went on strike in 1995 to protest at being denied accesss to their savings. 30 “The financial consequences of the strike were profound.

According to an unpublished Grameen Bank internal report (1996), in Tangail District the cumulative un-repaid amount had climbed to over $2 million. ” More generally, in terms of consequences for members there have been benefits. The scheme has helped the majority to build up savings that could be used as capital. Additionally it the scheme has helped reduce income poverty 31 “Grameen bank members had incomes about 28 % higher than the target group of non-participants. ” Act utilitarianism seems like the most appropriate branch of Utilitarianism to apply to Grameen bank and Muhammad Yunnus.

An act is right’ if it maximises utility. A sort of moral s is used to calculate the long term benefits and harm for each actor and then compute the result. But there is the problem of time-framing how long a period eto consider. One is reminded of Keynes quote ‘in the long term we are all dead’. Act utilitarian’s consider themselves equally with others so are not egoist in just assessing whether an act maximises their own individual utility or well being. Yunnus does seem sincere in doing that and is aiming to benefit the members as opposed to just enriching himself.

However on the other hand, Utilitarianism could be consistent with the Grameen member group dynamic process discussed earlier. Members realise that there will be bad consequences for them and their peers if they don’t follow the ‘rule’ of repaying’ and so are compelled to follow the rule. Robert Solomon, writing in ‘A companion to business ethics’ argues that 32 “ “In business ethics it is generally agreed that three elements, the principles of an action, the action itself, and the action’s consequences must be taken into account. However there is another option”: virtue ethics.

Grameen’s ethos of borrowers using using the loans to become self employed is connected to them developing the character traits consistent with the virtue of self reliance. Aristotle deemed behaviour a virtuous if is it was consistent with a 33 ”mean between the extremes” of e. g. being dependent on someone else’s act of charity and being selfish. As the 34“Various virtues reinforce one another”, the principle can be applied to the Grameen member group dynamic of mutually reinforcing behaviour encouraging the repayment of the loan.

In this case it is the non relative virtue of trustworthiness that is being reinforced. It could also be argued that different members are motivated by Aristotle’s 33 “Idea of practice- shared cooperative activity with mutually understood goals and ways of doing things. Conclusion Muhammad Yunnus set up Grameen bank with a good motive out of concern for the poor. Yes, this pure motive has been diluted by the pragmatic need for the bank to be financially self sustaining. For instance the previous use of locked in loans would be termed coercive by Kant, so in this aspect the borrowers are being treated as means.

How the bank lets members come up with their own ideas for business generation is consistent with Kant’s belief on people’s free will that enables them to be rational and moral. Furthermore as both the bank and the borrowers are benefitting from this economic exchange, then the borrowers are not being treated as means and so this would pass Kant’s test of whether it is ethical. It is difficult to measure the individual benefits and downsides experienced by the individual members, thus making it a less effective ethical yardstick. However the high repayment rate does score well on the Utilitarian scale.

But ultimately, Muhammad Yunnus is motivate by concern at the suffering of the rural poor. Crucially he wants to help them help themselves. One is reminded of Bob Geldof’s fishing rod analogy –better to give a man a fishing rod, than a fish. Yunnus and Grameen bank are thus actively promoting the virtue of self reliance. Additionally they are promoting the virtues of co-operation and trust via the group dynamic and by the fact the loans are collateral and contract free. Critics of Yunnus may have attacked him because he isn’t the perfect philanthropist. Rather, he is a socially responsible businessman.

Bibliography Wright, Graham, ‘Micro-finance systems’ 2000, The University Press, Zed Books, London. Roy, Ananya, ‘Poverty Capital’ 2010, Routledge, Oxford. Activities that are unlikely to create indebtedness” Rutherford, Stuart, ”The Poor and Their Money’, 2000, Oxford University Press, New Delhi Yunnus, Muhammad (with Alan Jolis), ‘Banker to the Poor’, 1999, Aurum Press, London Yunus, M, Moingen, B and Lehmann-Ortega, L, ‘Micro Finance- Building social business models: Lessons from the Grameen experiences’, article in ‘LONG RANGE PLANNING   Volume: 43   Issue: 2-3   Special Issue: Sp.

Iss. SI   Pages: 308-325   Published: APR-JUN 2010 Rutherford, S, ‘The Poor and Their Money’ , 2000, Oxford University Press, New Delhi. Frederick, R, ‘Companion to business ethics’, 2002, Blackwell Publishing, Oxford Vanroose, A, ‘Is microfinance an ethical way to provide financial services to the poor? Microfinance: Are its promises ethically justified? CEB Working Paper N° 07/014 June 2007 References 1. Wright, G, Microfinance Systems, page 2 2“ “ page 1 3“ “ page 5 3. Yunnus, Banker to the poor, page 10 4.

Wright, G, page 71 6. Wright, G, page 69 7. Wright, G, page 139 8 Wright, G, page 139 9. Wright, G, page 6 10. Wright, G, page 8 11. Wright, G, page 8 12. Wright, G, page 11 13. Roy, A, ‘Poverty Capital, page 13 14. Roy, A, page 23 15. Vanroose, A, CEB Working paper, page 11 16. Yunus, M, Moingen, B and Lehmann-Ortega, L, ‘Micro Finance- Building social business models: Lessons from the Grameen experiences’, Page 314 17. Ditto 18. Ditto 19. Yunnus, Muhammad (with Alan Jolis), ‘Banker to the Poor’, page 22 20. Yunnus, Banker to the poor, page 114 21. Wright, G, Microfinance systems, page 137 2. Yunnus, ‘Banker to the poor’, page 111 23 Vanroose, A, ‘Is microfinance an ethical way to provide financial services to the poor? , page 4 24. Ditto 25. Frederick, R, ‘Companion to Business Ethics, Chapter 1 by Solomon, R, page 3 26. “ “ page 4 27. Frederik, R, page 7 28. Yunnus, M, ‘Banker to the poor’ page 111 29. Wright, G, page 78 30. Wright, G page 78 31. Yunnus, & Lehman-Ortega, page 12 32. Frederick, R, page 30 33. Frederick, R, page 30 34. Frederick,R page 32

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