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Microlending

From tiny acorns
Dec 10th 1998


BANKER TO THE POOR.;; £
By Muhammad Yunus, with Alan Jolis.
Aurum Press
313 pages
18.95

“CAN we really create a poverty-free world?” asks Muhammad Yunus at the end of his autobiography. Yes, he says, and he believes that he has the key: credit. According to Mr Yunus, the surest route out of destitution for the world’s poorest people lies not in aid, welfare payments or loans from development banks to governments, but in lending tiny amounts of money directly to the poor. This book, the story of both Mr Yunus’s life and Grameen Bank, the institution he founded, is his account of how he has put his belief into practice.

In 1974, as a young economics professor at the University of Chittagong in his native Bangladesh, Mr Yunus was appalled at the poverty in the village next to the campus. The theories he was teaching, he felt, did nothing to explain this misery nor to suggest how it might be ended. He decided to find out for himself. His first interviewee, a young woman, made bamboo stools with raw materials bought with borrowed money. The finished stools had to be sold back to the moneylenders, leaving scarcely enough, after repaying her loan with interest, to feed her family. So to make her next batch of stools, she had to return to the moneylenders. There seemed to be no escape from the usurers’ grip.

Why, thought Mr Yunus, should banks not lend such women the money to buy their raw materials? Having sold her wares at a fair price on the open market, she should have enough left over to service her debt, feed her family and make a profit. To most banks this seemed—and still seems—a daft idea. People this poor have no collateral, no business experience and are often unlettered. Surely, there could be no worse credit risk?

Mr Yunus disagreed, and set up his own bank, at first under the wing of Bangladesh’s agricultural bank and some commercial banks. The poor, he argues, have a much greater incentive than the rich to repay their debts: it is their only way out of destitution. He claims that Grameen Bank, which was incorporated in its own right in 1982, has a default rate of less than 1%, far lower than conventional banks can boast. Moreover, most of the world’s poorest people are women. To Grameen, they are more reliable customers than men, and make up 94% of the bank’s borrowers. The bank’s unusual system of making loans, which relies on peer-group pressure, also plays an important part in keeping defaults down. Prospective borrowers form groups of five who learn the bank’s ways together. If one member of a group defaults, the others cannot get a loan.

Apparently, even incredibly, it works. The bank employs 12,000 people, has 2.3m borrowers and lends $35m every month; it also makes a profit. Quite how, to anyone steeped in conventional economics and banking, is a puzzle. Why does Grameen succeed where ordinary banks fear to tread? Subsidised loans used to be part of the answer, but Grameen now borrows commercially. A more likely explanation is that conventional banks cannot justify the costs of making the tiny loans, often of a few dollars, in which Grameen specialises. Their streamlined lending systems also demand credit histories and so forth. Grameen’s more personal system dispenses with all that. Mr Yunus’s connections—often, the bank progresses thanks to a chance meeting with an old friend—are also convenient in a country governed so badly and often so corruptly.

Microlending has now spread beyond Bangladesh, to America and Western Europe as well as developing countries. A summit in Washington, DC, last year attracted 3,000 delegates. Grameen has moved beyond banking, to fish farming, textile manufacture and even telecommunications and the Internet. Is Mr Yunus right to think that microlending and other Grameen-type enterprises can go a long way to rid the world of poverty? Perhaps—although in the course of his book he unwittingly points to a reason why it very likely will not. In Grameen Bank’s early days, his unwilling patrons in the commercial banks resisted the extension of his then tiny project. It would not work, they said, because the success of the venture so far had depended on Mr Yunus’s energy, and there was only one of him.

This, says the author, made him “angry”; his co-workers were just as capable and dedicated. Twenty years on, the growth of his ideas might seem to have proved him right. Nevertheless, microlending, for all its successes, has barely scratched the surface of the world’s poverty. To rid the globe of poverty through credit would require many, many more people with Mr Yunus’s energy and optimism. Are there really enough?




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