Are The Poor Really Credit Unworthy?
Popular as “banker of the poor” Nobel Prize winner of 2006 Professor Muhammad Yunus has proved conclusively that microfinancing can be highly effective for lifting poor people out of poverty. His Grameen Bank (“village bank” in the Bangla language) initiative, which is now a popular name across the world, highlighted the effectiveness of using tiny loans to help the most destitute people on earth.
The formal banking sector has well-known allergy to giving credits to the poor. They judge a client based his “bankability” and “credit worthiness” before shelling out money – of course, after having “sufficient collaterals”! Giving loan to only those who are already well off and can pledge security is considered the “normal” prudence. No one can find fault with the logic – else the banking sector will go out of business if they start losing money.
This “prudence” automatically excludes the poor who lack sufficient income and assets to pledge as security for credits. Therefore, they have no option but to approach local money lenders who charge exorbitant interest and also keep whatever little assets the borrower has as security. More often than not, the poor find themselves in the debt trap and ends up worst off than when he got the credit.
In the mid 1970s, while working as Head of the Rural Economics Program at the University of Chittagong in Bangladesh, Professor Muhammad Yunus was conducting research to examine the possibility of designing a credit delivery system to take the banking services to the rural poor. He was disillusioned by the abstract theories of economics that failed to explain why so much abject poverty in Bangladesh.
How 27 Dollars Did Wonders to 42 Poor Women!
Determined to find practical solution, Professor Yunus was visiting nearby villages. In one village, named Jorba, he met a group of 42 women who made bamboo based items to sell. The women lacked funds to purchase the raw material. The local traders would arrange for the raw material bamboo and buy back the finished products at throw away prices – leaving the women with practically nothing for their labor. The women were helpless: despite hard labor they lives in perpetual debt cycle and hence in poverty. Professor Yunus was shocked to find that the combined need of credit of the 42 women was just 27 dollars! He figured out that all these poor women needed was access to small credits so that they could start small businesses. He strongly believed that given the chance, most of them would succeed. They would earn enough money to improve their lives – and pay back the money they had borrowed.
He loaned them the money without interest. Immediately the women got the freedom to sell their goods in open market at reasonable higher profits. Soon they were out of past debts, paid back the loan of Professor Yunus and started saving money!
This was the experience that laid the foundation for birth of Grameen Bank!!
The Grameen Bank
Thus, in 1983, he started the Grameen Bank. Today, the bank is a global phenomenon. Around 95 percent of its customers are women. The money they borrow helps them make more money. For example, some women borrow money from the bank to buy stuff to sell in the market. Many women have turned into successful shop-keepers this way. Others use it to buy cow so that they can make money from its milk. One group of women bought mobile phones with the money they borrowed. Nobody else in their villages had telephones. So, the “telephone ladies” provided a public telephone service for money.
The money they earn has helped millions of villagers to improve their lives. From having just one or two meals a day, they can now afford three. They can pay for their children’s education and afford medicines. No wonder Bangladeshis treat Prof. Yunus like a hero, but he gives credit for Grameen Bank’s success to the ordinary people. In his opinion people already have the capabilities; they only need an enabling environment to change their own lives. Today Grameen Bank is owned by the rural poor whom it serves and is a commercially viable bank. Borrowers of the Bank own 90% of its shares, while the remaining 10% is owned by the government. It serves over 25% of Bangladesh Population. The recovery rate is over 99 percent – an eye opener for the orthodox bankers who ignore the poor!
Microcredit does what billions of dollars given in charities for the poor failed to achieve. Micro-credit helps solve a host of in-tractable, long-term social ills related to poverty: In Norway’s Arctic Circle, it is helping repopulate the Lofoten Islands. In the US, in Oklahoma microcredit is helping reduce alcoholism and in Chicago, it is helping get unwed mothers off welfare. If world leaders are truly concerned about eradicating poverty, it should get behind microcredit and support it with more than just lip service. [Read how the idea of microcredit evolved since then.]
Charities have an inherent limitation: by tackling the symptoms of poverty they only help sustain it rather than eliminate it. Most charities are limited to distribution of free food, clothing and other essentials; they make people dependent. Microcredit, on the other hand, is empowering; it helps the poor stand on their own strength. It enables them to setup small businesses to have running income source.
The Grameen Bank Objectives
The Grameen Bank came into operation with the following objectives:
- To extend banking facilities to poor men and women.
- To eliminate the exploitation of the poor by money lenders.
- To create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh.
- To bring the disadvantaged, mostly the women from the poorest households, within the fold of an organizational format which they can understand and manage by themselves. And
- To reverse the age-old vicious circle of “low income, low saving & low investment”, into virtuous circle of “more income, more savings, more investment, more income”.
Focus on Building Social Capital
The Grameen Bank gives high priority on building social capital. It is promoted through formation of groups and centres, developing leadership quality through annual election of group and centre leaders, electing board members when the institution is owned by the borrowers. To develop a social agenda owned by the borrowers, it undertakes a process of intensive discussion among the borrowers, and encourages them to take these decisions seriously and implement them. It gives special emphasis on the formation of human capital and concern for protecting environment. It monitors children’s education, provides scholarships and student loans for higher education. For formation of human capital it makes efforts to bring technology, like mobile phones, solar power, and promote mechanical power to replace manual power.
The Grameen Bank believes that the poor have skills which remain unutilized or under-utilized. It is definitely not the lack of skills which make poor people poor. It believes that the poverty is not created by the poor; it is created by the institutions and policies which surround them. In order to eliminate poverty all we need to do is to make appropriate changes in the institutions and policies, and/or create new ones. It also believes that charity is not an answer to poverty. It only helps poverty to continue. It creates dependency and takes away individual’s initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty. It entered India in 2011 through its Grameen Foundation India.