This weekend, I finished reading Banker to the Poor by Nobel Peace Prize winner Muhammad Yunus. If you haven’t heard of Yunus or his work before, Banker to the Poor is an excellent introduction to the world of rural microcredit in addition to an enjoyable and inspiring narrative. Yunus, an economics professor in Bangladesh, describes how he journeyed from the realm of elegant but abstract economic theories to dedicating himself to a lifelong career of fighting poverty. Yunus has a gift for story-telling and conveys his academic ideas in a straightforward, compelling way. I recommend this book (a New York times best-seller) to anyone interested in learning a bit more about what I am doing in Mexico.
Yunus – who I found out was actually a Fulbright scholar to the U.S.! - studied economics in the U.S. and taught for many years in Chittagong, Bangladesh. Moved by a major famine in 1974, Yunus realized he had to engage with the world as an agent for change and not just a thinker. After carrying out an exploratory research study in a local village, he developed the idea of microcredit – providing small size, very low interest loans to the poorest of the poor.I read this book my freshman year of college as part of an International Studies introductory course. The book, and the topic of microfinance, impressed me back then and was even more interesting the second time around. Reading the book with a more critical eye, and a bit more experience in development, a couple of things really struck me about Yunus’ story and the success of his microcredit bank - called the "Grameen Bank" because Grameen is the Bengali word for "rural" or "of the people".
Foundational Techniques
'Microfinance' as an organized effort has been around for nearly 40 years now, and has spread to every continent in the world. However, reading through Banker to the Poor, I realized that the majority of the fundamental characteristics that are recognized as 'best practices' in microfinance originate from Grameen. This makes sense because historically, Grameen was the organization that forced economists and bankers to take microfinance seriously. Before Grameen, very few commercial bankers considered finance programs for the poor viable. Yunus describes the incredulity and intense financial resistance he experienced from the formal banks in Bangladesh. Even after they became a formal bank with thousands of creditors, people still disregarded the bank as unreplicable. Nonetheless, the model has been replicated, all over the world.
Microfinance programs are diverse and commercially commanding. Assets of Microfinance Investment Vehicles (MIVs), companies that raise funds in richer countries and channel them to microfinance institutions in developing countries, amount to US$6 billion in 2009. In 2007, a microfinance company in Mexico, Banco Compartamos, held an IPO resulting in a market valuation of US$1.5 billion, making world headlines for being the first bank to go public. While the decision has been extremely controversial, many arguing Compartamos prioritizes profits over poverty reduction – a “double bottom line” - this was a landmark indicator that investors and banks have embraced the business potential of microfinance.
Here are some of the techniques and technologies that make microfinance programs work:
Members must be part of a loan group of five people. Group members discuss new loan possibilities and are collectively responsible for repayments. While this practice was developed out of experience, there is a very solid economic explanation for this practice. Tyler Cowen, George Mason economist, mentions how this system of community pressure serves as an implicit guarantee for the loans. While poor people can’t offer collateral in most cases, their social network and fear of peer retribution (a form of ‘social capital’) ensure repayment.Also, unlike most typical loans that require lump sums when a loan period ends, Grameen requires weekly payments. The system helps people plan better, eases the shock of having to return a relatively large amount of money, and does not restrict the use of the money. The loan rules, further, are incredibly streamlined and accessible to the illiterate. Grameen requires an annual percentage contribution in savings to a group or individual fund. This fund helps cover emergency situations and promotes better savings practices.
The other fundamental ‘best practice’ Grameen developed is a focus on women as borrowers. While Grameen set a goal early on to have at least 50% female borrowers to advance women’s rights in a repressive society, they soon found that women turned out to be better clients. Due to a whole host of social and cultural factors, many of which are connected to poverty, women are more reliable with loan repayments and less likely use the loan on drugs or alcohol. However, in targeting women, Grameen experienced an intense cultural resistance due to strict conservative purdah laws in Bangladesh that prevent women from engaging in public life, leaving the home, or handling money. In 1985, Yunus was not permitted to attend a UN conference on women’s issues in Nairobi because the president raised the objection, “Why should a man go to a UN women’s conference?” (Yunus, 125)
Yunus describes the powerful psychological effect for a women upon receiving a loan:
“When she finally receives the twenty-five dollars, she is trembling. The money burns her fingers. Tears roll down her face. She has never seen so much money in her life… This is the beginning for almost every Grameen borrower. All her life she has been told that she is no good, that she brings only misery to her family, and that they cannot afford to pay her dowry. Many times she hears her mother or her father tell her she should have been killed at birth, aborted, or starved. To her family she has been nothing but another mouth to feed, another dowry to pay. But today, for the first time in her life, an institution has trusted her with a great sum of money. She promises that she will never let down the institution or herself. She will struggle to make sure that every penny is paid back.” (Yunus, 65)In 1982, Grameen had 28,000 members and fewer than half were women. Today, over 95% of the borrowers are women.
Grameen’s institutional structure
Grameen, despite it’s enormous trust and geographical presence, is run much more like a small, horizontal company. Local branch managers are given almost complete autonomy to design specialty loan programs, experiment with new projects, and offer any quantity of loans within the basic framework and rules of the Grameen method. Managers are trained by spending time working in a successful branch, and then sent out immediately to start their own - apprenticeship, intense knowledge sharing, and branch planting.
This institutional design helps explain the stunning rate of expansion in it’s early years. In the 1980s, Grameen added approximately 100 branches every year. Talk about aggressive expansion. Grameen was opening a branch almost every single day. This growth is a testament to the skilled staff they recruited, and enormous un-met demand for credit in rural areas. This idea of unmet demand is one of the major themes I’m encountering in the literature on Mexican microfinance.
Stunning rate of repayment
By 2003, Grameen had grown to 1181 branches in 42,127 villages, loaning out U.S.$3.9 billion since it’s inception. Of that $3.9 billion, $3.6 billion was repaid. That’s a recovery rate of 98%. This success rate is mind-boggling and one of the enduring characteristics of Grameen replicants. Defying all expectations, this rate of repayment has come under recent scrutiny. Some argue Grameen’s method of rescheduling loans is a cheap slight of hand to avoid defaults, but their accounting books are transparent and even accounting for a possible over-statement, the recovery rate still far above larger commercial loans.
Ownership
Unlike the commercial oriented incarnations of Grameen, Yunus’ bank is owned by it’s borrowers. According to their website, 95% is owned by the borrowers, the other 5% owned by the Bengali government.
Commitment to product innovation
The most impressive aspect to Grameen’s growth, to me, is their incredible agility in developing new products and venturing into new business fields.
One of their first innovations was a housing loan program. Some early nay-sayers argued a loan program couldn’t succeed because there was no productive element involved. However, since they started giving houseing loans, over US$190 million has been doled out to build more than 560,000 houses with a near perfect repayment rate. Grameen’s housing programs was chosen in 1989 to receive the Aga Khan International Award for Architecture for ‘designing and building the $300 house’. At the award ceremony, Yunus responded to the question of who designed the prototype by saying “no professional architect ever designed the houses…It is the borrowers who are the architects of their own houses…”(130).
Grameen has also created other innovations such as a loan insurance program that covers outstanding loans in the case of death. On the last day of every year, subscribers deposit 2.5% of the outstanding amount, and in the case of death, the saved up money is given back to family and the outstanding loan is erased. They also have developed a very clever retirement program that serves as a huge source of liquid capital for the Grameen foundation. Members that contribute a small amount every year to their ‘retirement’ fund, will see the amount doubled upon retirement. The interest Grameen earns on the flow of funds more than covers the retirement allocations.
In the 1990s, Grameen started offering a tube-well loan program to sink hand powered wells, seasonal loans for land-owners, and an equipment and cattle leasing programs to help their borrowers slowly purchase equipment and livestock. As Grameen has grown in size, their capacity to find start-up capital for larger ventures, as well as risk tolerance, has also increased. The Grameen spin-offs are stunning:· A textile production company that sells materials and lunghis, employing over 200,000 hand-weavers (Grameen Check)
· A company to market Grameen finished products to the domestic market (Grameen Shamogree)
· A telephone and cell phone provider (GrameenPhone and Grameen Telecom)- In 1997, Bangladesh had the lowest telephone density in the world at 1 phone per 300 inhabitants. GrameenPhone now has 850,000 cellular phone subscribers in Bangladesh, 24,000 of which are ‘village phones’
· An energy provider (Grameen shakti)
· An internet service provider (Grameen cybernet)
· An information technology company (Grameen communications)
Resilience to resistance
Culturally, Grameen has battled against ingrained beliefs of women’s roles. Politically, Grameen is seen as a threat to local land-owners, money-lenders, and patriarchal community leaders. Grameen has an interesting approach to over-coming political sabotage – winning over the community members with goodwill. Branch managers facing resistance are encouraged to start by serving the communities needs – starting a day care center, cleaning up trash, etc.
Resilience to natural disasters
Yunus estimates that about 5% of their loans go to survivors of natural catastrophes (139). However, this is surprising considering the number of disasters Grameen has survived and how much effort Grameen has put into rebuilding credit after a disaster. In April 30, 1991, a cyclone killed 110,000 people in one night in Bangladesh. Grameen workers were the first volunteers cleaning up hit areas, providing emergency food and shelter. They immediately rescheduled all loans, provided new housing loans, and offered new credit lines to all the affected borroers. Amazingly, all these loans were repaid. This resilience defies expectations, and reinforces the fundamental argument of Grameen, which is that the poor are the most trust-worthy borrowers because they have almost nothing to lose, and have so much to gain.
Over-reaching idealism
Despite the impressive trajectory of Grameen, and remarkable institutional design, their idealism has led to over-inflated expectations of the potential of microfinance. Yunus has undeniably demonstrated the power of microfinance to strengthen communities and fight poverty. However, the celebrity status of Yunus and the Grameen project has communicated the idea that microfinance can fundamentally eradicate poverty. As Grameen’s adventurous foray into other ventures shows, microcredit alone does not solve every problem. There is no silver bullet for development.
However, I believe microfinance has powerful benefits and works. Microfinance does little harm, and a lot of good. However, Yunus’ confidence in microcredit to end poverty has left him vulnerable to criticism.
Yunus writes, “poverty does not belong in civilized human society. Its proper place is in a museum. That’s where it will be. I have always believed that elimination of poverty from the world is a matter of will.” He continues, “The poor themselves can create a poverty free world. All we have to do is to free them from the chains that we have put around them.”I agree with Yunus that the poor are natural entrepreneurs and know their needs the best. That’s why I’m in Mexico working with migrant clubs to adapt microfinance models to the unique needs of migrants. However, the contextual factors that shape the outcome of microfinance projects are tantamount, and the creation of institutional support is central to the ability to overcome shocks, such as natural disasters. Further, if microcredit becomes predatory, it will fail, as the recent microcredit crisis in India is demonstrating. Onlookers must check their hopes that poverty has been solved.
I believe that microfinance when handled correctly acts as a economic and a social catalyst. Not only does it raise income, but it helps the poor advocate for themselves. In 1997, over 6% of the elected representatives in all the local bodies in Bangladesh were Grameen borrowers. This goes to the heart of one of the biggest divides in development theory: Can sustainable economic development come from the bottom up, or must it be complemented by larger, structural changes? I think that the Grameen case demonstrates there cannot be one without the other. To allow for bottom-oriented growth, Yunus had to fight ingrained cultural institutions, financial laws, and political disbelief. However, Yunus also showed that when you leave room for autonomy, and provide the resources to act on this initiative, there will be greater innovation and unexpected, locally oriented solutions. And that, makes me excited.
I'll finish with a few more words from the Nobel winner himself:
“In reality, credit creates economic power, which quickly translates into social power. When credit institutions and banks makes rules that favor a distinct section of the population, that section increases both its economic and its social status. In both rich and poor countries alike, credit institutions have favored the rich and in so doing have pronounced a death sentence on the poor…
To me, changing the quality of life of the bottom 50% of the population is the essence of development. This is where growth and development part their ways. Those who believe that growth and development are synonymous, or move at the same speed, assume that the economic layers of society are some how linked to each other like so many railway carriages, and that one only need stoke the engine for the entire train and everyone in it to move forward at the same speed. In the case of human society, each economic entity or group has its own engine. Macro projects increase the efficiency of the engines in the first class carriages. But whether these investments can help ignite or enhance the capacity of the engines in the subsequent carriages, in all other layers and strata of society, remains uncertain.”
