Micro Loans, Macro Politics: WSJ editorial on microfinance controversies

• REVIEW & OUTLOOK ASIA
• DECEMBER 15, 2010

Micro Loans, Macro Politics

Bangladesh and India are playing populist with microfinance.

Politicians on the Indian subcontinent are poor at giving credit to those who give credit to the poor. In October, the Indian state of Andhra Pradesh imposed heavy-handed regulations on lenders to the lowest strata of society. Now the microfinance revolution is under attack even in its birthplace, Bangladesh.

Earlier this month, Prime Minister Sheikh Hasina lashed out at Grameen Bank founder Muhammad Yunus and microfinance institutions in general, accusing them of "sucking blood from the poor." Last month, Dhaka capped the interest rates MFIs could charge borrowers, lest they become overindebted. Such government intervention is counterproductive, since it restricts lenders from serving the most poverty-stricken areas, which are also the most financially risky.

Ms. Hasina's attack followed the release of a documentary in Norway late last month suggesting that Mr Yunus misappropriated $100 million from the Norwegian Agency for Development in the late 1990s. That organization clarified last week that "there is no indication . . . that Grameen Bank has engaged in corrupt practices or embezzled funds."

Mr. Yunus, the winner of the 2006 Nobel Peace Prize, is a popular figure in his country. In 2007, when Bangladesh was under military rule, he briefly entered the electoral fray, challenging the culture of Bangladeshi politics that is dominated by two rival families, of which Ms. Hasina's is one. So Ms. Hasina's demand for an investigation has raised suspicions that she is motivated by political considerations rather than the merits of microfinance.

In India, too, politicians are busy milking the issue for its populist worth. A rash of suicides by poor and indebted farmers, sadly a common occurrence in India, led one Andhra Pradesh politician to declare that borrowers should stop payments to MFIs. Besides granting bureaucrats undue power over MFIs, the new rules are already hurting loan recoveries.

If this keeps up, microlenders in Bangladesh and India will be unable to continue expanding their business. That would deprive the poor of access to microcredit, which they can use to start new ventures or even smooth out their weekly consumption, as research from MIT's Poverty Action Lab conducted in Andhra Pradesh shows. Note that the interest rates charged—20% to 50% a year—reflect the costs of disbursing small sums to people with little in the way of credit history or assets. The rates charged are far lower than the alternative: Informal moneylenders are known to charge 100% per year or more.

This doesn't mean microfinance is the be-all and end-all of poverty alleviation. There is a legitimate argument that in some cases MFIs have been imprudent in their lending. The pace of loan growth last year in India especially prompted concerns that standards were being left by the wayside.

If Bangladesh and India really want to put the microfinance business on a sounder footing, they could start by removing the politically mandated subsidy that microlenders enjoy. In both nations, MFIs can borrow from financial institutions at significantly lower interest rates than regular firms. This easy credit may fuel their rapid growth beyond the point of diminishing returns to society. Instead of demonizing microfinance, the business model could be subjected to the discipline of the market to see whether it is truly creating value.

The Land of Three Currencies: WSJ editorial on high inflation in Vietnam

• REVIEW & OUTLOOK ASIA
• JANUARY 3, 2011

The Land of Three Currencies

Vietnam is in danger of falling back into inflation.

In the annals of easy-money policies over the last decade, Vietnam deserves its own chapter. Hanoi tried to use cheap credit to spur growth while neglecting fundamental reforms. Now it is reaping the consequences.

Year-on-year consumer price inflation hit 11.75% last month, a 22-month high. Erosion of the domestic value of the currency has also helped weaken the Vietnamese dong externally. All this is dissuading investors from holding dong assets, and capital is fleeing the country.

More could flee if Vietnamese firms have trouble making good on their debt. The state-owned shipbuilder Vinashin defaulted on a $600 million international loan last month. Moody's and Standard & Poor's downgraded the country's debt rating in the past month; Fitch did so last July.

Four or five years ago, encouraged by cheap loans, such firms were enjoying the ride. They ramped up investment, which, as the country's Communist rulers intended, boosted GDP growth. The State Bank of Vietnam, the central bank, allowed annual credit growth of around 50% in 2007. The country was itching to follow China's model of investment-led, credit-powered growth.

Now the credit expansion boom is leading to a bust. Vietnam saw inflation at 28.3% in mid-2008—a 17-year high—a rate that makes today's environment look benign in comparison. Workers were striking at factories to demand higher wages, as they saw their purchasing power destroyed.

The aftermath of the global recession temporarily caused inflationary pressures to ease, but with the central bank cutting rates and encouraging lending, it wasn't long before overheating reared its head again in late 2009. In response, Hanoi enacted a law, in effect from last October, that gives the state the power to impose price controls. Foreign businesses complained that the law unfairly targets their imports.

As with China, some of the price increases (particularly for food) have been caused by temporary shortages due to poor harvests. Some of it could also be attributed to productivity increases and a secular rise in household purchasing power, typical in a growing economy. But headline inflation wouldn't be increasing at the rate it is without loose monetary policy. Nor would households be saving and transacting in gold and U.S. dollars if they weren't afraid of an increasingly debased dong. Vietnam is again becoming a land of three currencies, as it was in the 1980s when inflation at one point hit nearly 500%.

The economic solution is straightforward: the State Bank of Vietnam should be tightening. The central bank did hike its primary policy rate by one percentage point in early November, but judging by the sheer buildup in inflation expectations, the bank is far behind the curve. The problem is that the State Bank—which isn't independent of government—remains politically focused on growth. So last month, despite the threat of inflation, it capped the interest rates banks charge for loans, to ensure firms don't run into too much trouble accessing credit.

The Communist Party of Vietnam, with its iron grip on power, wants to follow the Chinese model of growth. As Beijing is finding out, an investment-led economy is a liability in a sluggish global economy. Vietnam is in an even more precarious position as it has failed to free up its private sector and encourage productivity growth. If it continues to promote credit growth without such reforms, continuously accelerating inflation will result.

Manias, Panics and Bangladesh: WSJ editorial on Bangladesh stock market panic

• REVIEW & OUTLOOK ASIA
• JANUARY 26, 2011

Manias, Panics and Bangladesh

Dhaka's attempt to stanch a bleeding stock market is worsening the wound.

Add Bangladesh, January 2011, to the litany of failed government attempts to "stabilize" a falling stock market. The regulator in Dhaka, the Securities and Exchange Commission, has spent the last few months trying to support prices. The predictable result of these efforts has been greater instability and uncertainty for all parties.

Angry investors burned by the mass market selloffs have taken to the streets, most recently in riots last week. And one can hardly blame them, since late last year Dhaka encouraged shareholders to believe that the government would protect them from losses. Instead the carnage has continued. On Jan. 10, the Dhaka stock exchange's index dropped 660 points, or 9%, in an hour.

Bangladesh's stock market started booming in 2009 and rose 80% in 2010, luring even villagers with the promise of making a quick buck. Like other manias, this one had a familiar culprit. Credit was cheap, and with few other avenues of investment open, money flowed into stocks.

Some investors realized last year that the market was overvalued and began to sell, but the SEC had other ideas. To prevent a sharp selloff, the regulator made it cheaper to buy stocks on margin. That worked for a time, but it sowed the seeds of a bigger decline.

That came in December, when the central bank suddenly hiked banks' required reserve ratio in a belated attempt to rein in lending. Encountering higher borrowing costs, companies and investors sold stocks en masse.

That only drove the SEC to more desperate measures. It had to shut down trading four times in 10 days this month, and it closed its exchanges for two whole days. Last Wednesday, it installed circuit breakers to suspend trading if the benchmark index moved more than 225 points. But this worsened the panic; the next day, the market fell 600 points in six minutes. The SEC removed this control yesterday.

Dhaka might have saved itself the trouble by allowing the market to clear and find its natural bottom. As long as the government is artificially supporting prices, those looking for a cheap buy are naturally reluctant to step in. This often causes prices to fall further.

If governments feel compelled to respond to market cycles, their best option is to undertake reforms that help promote future earnings, thus restoring market confidence. Bangladesh's economy has been growing at around 6%, but the government could still disinvest more from state enterprises and increase access to natural resources.

Dhaka could also help stabilize the market by introducing short selling. When investors can bet against a stock, price discovery is more efficient. During a boom, short selling can temper the euphoria. And sudden falls can be softened as the short sellers buy to close out their positions.

But the best way a government can promote a healthy and more stable market is to make clear that it will not socialize the risks of investors. When shareholders know that they alone must take responsibility for their decisions, they are bound to be more prudent about where they direct investment. And that ultimately is what a stock market is supposed to be about.