March 02, 2007

Small loans, big idea

This article about Nobel Peace Prize recipient Muhammad Yunus was my column in the February issue of India Currents. Your comments welcome.


Of all there is to say about Bangladesh’s Grameen Bank, here’s my choice for the most telling statement: 75 percent of Grameen borrowers have come out of poverty. Is there any other effort, anywhere in South Asia, that has had success like that? And that’s why Grameen’s founder, the 2006 Nobel Peace Prize winner Muhammad Yunus, was once moved to say: “People need opportunity, not charity.”

Not a new idea, of course. But arguably, it is Grameen Bank that has most successfully turned that idea into reality.

The story of how Yunus started the Grameen Bank is something of a legend; it is also the best explanation of what the bank wants to achieve. After getting a Ph.D. in economics from Vanderbilt University, Yunus returned to Bangladesh soon after its independence. He began teaching at Chittagong University, and by 1976 was head of its Department of Economics.

One afternoon that year, he was walking through a nearby village when he ran into Sufiya Khatun, a widow whose living came from making baskets from bamboo. From an entire day’s work, Sufiya took home 60 paise. Yunus asked her why her profit was so low. She explained that she was in debt to the trader, who sold her bamboo worth five taka every day. After repaying that loan with her day’s production, 60 paise remained. She was bonded to him, with little hope of ever freeing herself. “People become slaves for just five takas, and here we talk of millions of dollars of plans and programmes,” Yunus said about this incident.

What Sufiya needed was a small loan. Yunus could have dug into his pocket, given her some money and gone about his life. Instead, he tried something slightly more difficult. He and his students looked around the village and found 42 other women in similar circumstances. Their capital requirement, the amount they needed to buy materials and so be able to work freely, was 850 taka ($12). “I felt extremely ashamed of myself,” Yunus was later to tell a U.S. Congressional hearing, “being part of a society that could not provide [850 taka] to 42 able, skilled human beings who were trying to make a living.”

Yunus stood guarantee at a bank, got the money after some trouble (The bank queried the women: “Have you asked your husbands?”) and gave it to the women. He arranged for the loans to be repaid a little at a time, at a local tea stall.

All the women repaid their loans: on time, in full.

But of course Yunus could not stand guarantee every time somebody needed a loan. So two years later, he and a few of his students established the first branch of the Grameen Bank. Today, its record is no less than spectacular (even without the Nobel).

The idea is simple: small loans, small people, small reasons—or microcredit, as it is now known. There were two other insights. One, as Amartya Sen has suggested, is that the ability of women to earn a cash income affects their status in a society. Husbands recognize that if earning wives must also bear children, the flow of cash is interrupted. So they have an interest in fewer children. This helps explain why women in Kerala, for example, are so much better off than elsewhere in India. Two, Yunus realized that poor women are better credit risks than poor men. Men tend to spend on themselves, drinking or gambling, whereas women use their money on the family. “When a woman brings in income,” Yunus said, “the immediate beneficiaries are her children.”

Thus the Grameen Bank operates on three principles. First, loans must be repaid, and on time. That happens with over 98 percent of the loans, a rate better than many banks in the world. Second, only the poorest are eligible to borrow. In fact, to qualify for a loan, a woman must show that her family’s assets fall below a threshold set by the bank, which flies in the face of conventional loan thinking. Third, the bank lends primarily to women. Only about 6 percent of its customers are men.

Grameen has lent money for children’s education, to buy cows, to buy medicines. Borrowers have initiated hundreds of different kinds of businesses: cultivating jackfruit, making ice-cream sticks, repairing radios, processing mustard oil. These are reasons, and involve amounts, that other banks would not even sniff at.

How does it all work? In Grameen Banks for the Poorest of the Poor, Guy Dauncey explains:
    Instead of insisting on personal collateral, the Grameen Bank asks landless villagers to form into groups of 50 people … and then to form into smaller groups of five. The 10 groups of five each meet regularly with a bank worker for training, and with each other to discuss their business ideas. Each loan has to be approved by a smaller group of five, by the larger group and, finally, by the bank’s officer in the field.

    Two people in a small group can then apply for a loan. The average loan size is equivalent to [about $8,000], given the annual incomes of landless peasants. Women borrowers use their loans for such things as buying a milch cow, paddy husking and cattle fattening, while men tend to invest in paddy and rice trading, cattle fattening and setting up grocery shops. After six weeks, if the first two have been regular in their payments, the next two members get their loan, and after another six weeks, the final member. The loans are not analyzed by the bank—they leave it up to the villagers to do the analysis. As they depend on each other’s success in repaying them, the system works.
What does it mean for so many to escape poverty on their own—without handouts? Grameen’s loans have helped some of Bangladesh’s poorest eat three meals a day rather than one or two; go from one or two sets of clothing to three or four. With improved nutrition, family planning, and spending on health, infant mortality has improved greatly. And remarkably, Grameen has remained committed to a clientele that is simply overlooked by the free market. This, while being itself a creature of the market. Indeed, Grameen has always been an essentially capitalist enterprise. Its interest rates are 4 percentage points higher than commercial rates; it never forgives loans, not even for natural disasters; it charges fees for every service. Credit is a human right, Yunus believes, but that does not mean it must be free, or subsidized.

Self-employment, respect, accountability, trust: Grameen’s success hinges on these ancient values. And if more enterprises around the world follow the Grameen method, tapping the potential of poor women, Yunus believes we can lick the world’s worst disease, poverty, in just 25 or 30 years.

Pay attention, and not just because he won the Nobel.


Baby Vaijayanti and Puppy Manohar said...

Dear Indroneil Kamath,

I take great pleasure to inform you that I liked your article. It is both inspiring as well as informative. Thank you. It was a very good read as always.

I dont love you but we will always be good friends.

Mr. Bineeta Chaudhary III

Jai_Choorakkot said...

I've read elsewhere (TOI) that there are a few niggles about the micro-credit scheme:

- women dont always control the amount once it is disbursed, their menfolk occasionally commandeer it for their use.

- inspite of that, its the women that are stuck with the repayment.

- there is some irritation with the 4% higher interest, no waiver ever, etc.

- some women feel this is taking undue advantage of their sense of duty/ obligation to protect family honour (by not defaulting) on all sides.

Some of the above is nothing to do with micro-credit and more to do with predatory/ irresponsible men. Overall, Grameen is a big plus.