DEVELOPING WORLD: by John BallantyneNews Weekly
Grameen Bank - banking on the poor
, May 8, 2004
The Grameen Bank, based in impoverished Bangladesh, has turned conventional banking theory on its head. It lends money only to the poorest of the poor without demanding any sort of collateral security. Moreover, it argues that the poor are a better credit risk than the rich.
This bank nevertheless makes healthy profits, recovers in full more than 98 per cent of the money it lends, has weathered natural disasters, and has generally confounded its critics.Micro-credit
The Grameen Bank, founded in 1976, has pioneered a unique system of micro-credit, or micro-finance. This entails making tiny loans to poor people (primarily women), for the purpose of allowing them to earn additional income by investing in the establishment or expansion of "micro-business", such as raising livestock, food-processing, tailoring and hundreds of other enterprises.
Since its modest beginnings, the Grameen Bank has grown steadily. It now has more than three million borrowers and more than 12,000 employees. Each month the bank lends out more than US$35 million in tiny loans, practically all of which are repaid in full. Grameen's model of micro-finance to help the poor has been so successful that it has now caught on in 60 other countries.
The bank's founder is economist Professor Mohammad Yunus. In 1974, he had recently returned from a Fullbright scholarship in the US. While lecturing on economics at Chittagong University, he was acutely aware that in the nearby village of Jobra, people were starving. A horrifying famine that year was to claim 1.5 million lives.
Yunus was disillusioned with the failure of orthodox economics to explain the existence of poverty.
"What good were all these elegant theories when people died of starvation on pavements and on doorsteps?" he asked himself.
He resolved to look outside his university to find some answers in the real world.
In Jobra, he met a poor 21-year-old woman, Sufia Begum, who made bamboo stools in her dilapidated dwelling. "She could have been any one of a million women who labour every day from morning to night in utter destitution," recalls Yunus.
For each stool that she made, Sufia had to pay five taka (25 cents) to buy her raw materials. Lacking even this small sum, she had to borrow it from local money-lenders.
To repay them, she had to sell her bamboo stools back to them at the end of the day at a price far below their market value. Her net profit amounted to a couple of cents; her status was virtually that of a bonded slave.
Professor Yunus and his students spent the next week identifyinging people in Jobra, like Sufia, who were similarly trapped by debt. They found 42 such people who in total had borrowed 856 taka, a total of less than US$30.
Says Yunus: "I was shocked to see how people suffered for lack of access to tiny amounts of money, as small as one dollar."
"If I lent them $30, they could sell their products to anyone; they could then get the highest possible return for their labour, and would not be limited to the usurious practices of the traders and money-lenders."
Yunus gave them this sum as a loan from his own pocket. Seeing how much even this small amount helped them, he approached the local bank in order to arrange further loans for the poor.
The bank manager, however, ridiculed Yunus's scheme, saying that banks could never give loans to the poor because they were not creditworthy.
Yunus thereupon set out to investigate if this was really true. He gave more small loans to more poor people in the village. Amazingly, it worked. Every penny was paid back. Yunus continued his experiment - from one village to two villages, five villages, 20 villages, 100 villages and more. But still, the banker remain unconvinced.Own bank
Frustrated with trying to change the mind of bankers, Yunus went ahead and founded a bank of his own.
His principles of running a bank have been quite contrary to commonly accepted practice. He says:
"Our clients do not need to show how large their savings are and how much wealth they have; they need to prove how poor they are, how little savings they have.
"To my amazement and surprise the repayment of loans by people who borrow without collateral is much better than those whose borrowings are secured by enormous assets. Indeed, more than 98 per cent of our loans are repaid because the poor know this is the only opportunity they have to break out of their poverty. And they don't have any cushion to fall back on."
Over the years, Grameen has come to focus almost exclusively on lending to women, who now make up more than 90 per cent of Grameen borrowers. Yunus argues that money going through a woman in a household brings more benefits to the family as a whole than money entering the household through a man.
Helping women in this way, however, was not always easy. "The first and most formidable opposition," recalls Yunus, "came from the husbands. Next the mullahs. Then the professional people, and even government officials."Philosophy
Professor Yunus has explained his unique philosophy in his autobiography, Banker to the Poor
(Aurum Press, 1998), co-written with Alan Jolis.
Yunus is highly critical of orthodox economic theory. He says: "In a major way, economics is responsible for creating the world that we live in. Economics text-books create the mindsets; mindsets create the world. People see what they are trained to see."
His thesis is simple. It states that "every single human being, even one barefoot and begging in the street, is a potential entrepreneur".
"Labour, as they appear in the text-books," says Yunus, "look more like draught animals than human beings. Economics assigned creativity only to a select, rather rare, category of people called 'entrepreneur'.
"Because of this misconstrued vision of the human beings, wage employment emerged as the only legitimate source of employment."
Yunus, however, argues that self-employment is the key to unlocking the creative potential of human beings. Capital, he says, is the rightful ally of the poor. And making credit available for the poor, on the reasonable terms offered by Grameen, is a sure way to help them along the path to self-betterment.
He says: "Banks can and should lend to the disinherited of this Earth, not only out of altruism but out of self-interest. Treating the poor as outcasts is immoral and indefensible; but is also financially stupid."
How does the Grameen Bank actually work?
First, there is no written legal agreement to enforce contracts. The loan is the responsibility not of one person but of a group of five people, all from different families, thus introducing an important feature of mutual responsibility and support. This system is called "social collateral" (rather than financial collateral).
A bank worker trains the borrowers for one week, not only in the loan process itself, but also in the Grameen philosophy.
Would-be borrowers must learn off by heart Grameen's Sixteen Decisions which teach and reinforce the virtues of hard work, entrepreneurial behaviour, health and hygiene, economic self-sufficiency (through growing vegetables all year round), and educating one's children. Borrowers are expected to put these decisions into practice in their daily lives.
For all his work among the poor, Yunus is profoundly distrustful of big government and international aid.
When cyclones and floods hit Bangladesh, Grameen Bank staff suspend loan repayments and instead distribute food and medicines to people in need. But they carefully record what each person has received. When the disaster is over, they present the bill.
Aid recipients sometimes resent this practice until it is explained to them that, if they pay up, the bank can afford to help them again next time. In this way the people of Bangladesh re-create their own disaster fund.
Yunus argues: "Doing it that way is also more efficient, because if relief is free everyone inflates their demands, and the poorest, who have least clout, will get nothing. If it is not free, you literally count every match."