Muhammad Yunus in Dhaka High Court, March 3, 2011

Tom Heinemann, a 24-year-old, six-foot-four-inch forward, made a sensational entry into American Premier Development League. In 2006-08, he scored 35 goals in the 36 games he played for St Louis Lions over three seasons. That earned him his first professional contract with Charleston Battery, which loaned him in 2010 to Carolina RailHawks to play in US League Division 2. He scored the game-winning goal against Montreal Impact and took RailHawks into the semi-finals. On January 6, 2011 he moved to Columbus Crew; now he is playing in the Major League.

But that is not the Tom Heinemann we are interested in here. The other Tom is a Dane. He makes films on the tragedies that befall poor people in poor countries for television channels in Scandinavian countries, whose people more or less understand one another’s languages (except Finnish). When the Nobel Foundation gave the Nobel Peace Prize in 2006 to Muhammad Yunus and his creation, the Grameen Bank, in Stockholm, Yunus showed a film. In it, he showed Sufia, who took the first loan from his bank and built a two-storey house. Heinemann went to Bangladesh and interviewed Sufia’s daughter; she said that the story of Sufia having been made rich by microcredit was a lie, and that Sufia had lived in a rented house and struggled with indebtedness all her life. Heinemann met Jehanara, who had had to sell her house because she could not repay a loan she had taken through a self-help group from a microfinance organization or microfinance institution. Those and other stories started him off on a tour of countries where MFIs had worked wonders to study the experiences of borrowers from MFIs. He tied together his findings in a film. Its message was that far from rescuing villagers from poverty, microcredit had often hurtled them into a vortex of mounting debt and misery. He also alleged that in 1996, the Grameen Bank had taken a loan of about $100 million from Norad, the Norwegian aid agency, and not used it for the purpose for which it was given.

Soon after Heinemann’s film was aired, Sheikh Hasina Wajed, the prime minister of Bangladesh, made a statement criticizing Yunus’s personal hold on the Grameen Bank and throwing doubt on its poverty alleviation. Subsequently, the Bangladesh government appointed a committee to inquire into allegations of misappropriation of Norad money by the Grameen Bank. The report of the committee, submitted last week, has not been released, but bits of it have leaked out. It echoes Wajed’s criticism that the bank is too centralized, and says that the bank needs a stronger administrative structure. The charge of misappropriation of Norwegian money had already been undermined since the Norwegian development minister himself denied it; on it, the committee clears Yunus.

Meanwhile, however, the government removed Yunus from the chairmanship of the bank. He went to court. A Bangladesh high court confirmed the dismissal order on two grounds — that the correct procedure was not followed in his original appointment in 1999, and that he had crossed the retirement age of 60. So in effect, Yunus has been cleared of charges relating to Norwegian aid, but has lost control of the Grameen Bank. Lacking a strong administrative structure, the Grameen Bank may well run into problems. But it is too big to fail. The government would take it over, but its managerial skills are not much greater. So there may be further scandals. But Yunus at least will not be associated with them. He is also jobless; but seeing the number of prominent people who made statements or wrote to the Bangladesh government in his support, he has many friends; he should not remain idle for long, provided he is prepared to leave his beloved Bangladesh.

But the personalization of the problems of the Grameen Bank has hidden the more important issue: that they throw considerable doubt on the heroic model of the microfinance institution. It is not only in Bangladesh that it has come under a cloud; the government of Andhra Pradesh has simply thrown MFIs out of business. An advocate of MFIs would want to ask: how can they be protected from the government? A government advocate would want to ask: how can MFIs be prevented from cheating and exploiting customers? A less engaged observer would ask: MFIs being financial institutions of potentially wide reach, what kind of regulation would be appropriate for them? I would ask: what is the problem MFIs are intended to solve, and what is the best solution for it?

I take my cue from Wajed’s epithet for MFIs: bloodsuckers. Hers is a widespread perception: that MFIs lure poor, simple villagers into taking loans, and earn unconscionable returns on them by extortion. It is, of course, politically incorrect to say anything unfavourable about villagers, so the argument on these lines can only be polemical and onesided. But those who take this line must surely be prepared to view the basic problem as one of villagers’ poverty and helplessness; MFIs may be vultures, but they do not go about killing the people they eat. They should ask themselves whether credit is a good solution for poverty, or whether it is a solution at all.

Obviously, the way to alleviate poverty is to give the poor money: a subsidy. But some consider credit superior because they expect it to go into productive activities, and thus increase production as well as consumption. This was the idea behind Gandhi’s constructive programme of village handicrafts. MFIs are a variation that differs from Gandhism only in one respect: they would leave the choice of activity to villagers, whilst Gandhi was passionate about handicrafts.

But they put the cart before the horse: the driver of production, let alone small-scale production by villagers, is the market. Those who want to relieve poverty should first of all create a market for villagers’ goods. That is what Fabindia started out to do; but it changed course. It still sells handicrafts in cities, but they are not cheap. Real estate costs so much in cities that only expensive, high-quality goods that can fetch a high mark-up can be sold in them. They do not create much employment.

Contrast the United States of America. Money incomes are 10 times those in India or more; but vegetables and meat are often cheaper than in India. Enormous family houses in the US countryside cost less than flats in Indian cities. The reason is that property in the US is cheap. It is cheap because good roads disperse population much more widely across the country, and cheap transport brings people and goods together at a lower cost.

Subsidizing the poor is not a bad idea. Sometimes it is the only option: for example, in respect of the old, the disabled and orphans. But if we want to reduce rural poverty, we must reduce the costs of producing in villages and selling in cities: costs of real estate and transport, which are interrelated. We should create smaller cities with good roads, so that bringing rural goods for sale would cost less; and we should let villagers periodically come and set up stalls in side streets of cities, or even just let them sit on pavements with their wares on selected days.