The famous Grameen Bank has succeeded in lifting an estimated one million Bangladeshi people out of poverty each year and creating a new entrepreneurial class, writes Pat Byrne.
Conventional banks won’t lend to the poor. “They’re not creditworthy,” they say. “They won’t honour their debts.”
That philosophy has been turned on its head by Professor Muhammad Yunus, who in the early 1970s, envisaged a means of alleviating poverty and creating a new class of entrepreneurs through a revolutionary lending system to the poorest of Bangladesh.
In 1976 he started by lending about $27 to 42 women in the Bangladeshi village of Jobra. They repaid the money and pulled themselves out of their otherwise endless debt to local traders, and out of abject poverty.
It was the start of the Grameen Bank, which boasts a 99.9 per cent repayment rate from people who could never have obtained a loan from a commercial bank. Grameen is taken from the Bengali word gram, meaning “village”.
Today, the Grameen Bank issues about US$30 million in loans per month, mostly to women; and has more than 3.2 million borrowers, 1,178 branches, services in 41,000 villages, and assets of more than $3 billion.
Capital the friend of the poor
In a paper, Grameen Bank: Taking Capitalism to the Poor, Evaristus Mainsah and other academics from the Columbia University Business School, point out that Prof Yunus created the bank “in the belief that capital is a friend of the poor and that its accumulation by the poor represents their best means of escaping the abject poverty that the welfare state and wasteful, corrupt and incompetent international aid organisations have failed to combat.
“Yunus’s vision was of a bank that would address all aspects of rural life and support commercial activities, ranging from manufacturing to retail, including even door-to-door sales.
“The bank would require no collateral and would prove once and for all what Rosemary Righter [of the London Times] later referred to as ‘the bankability of the unbankable’.”
The Grameen Bank promotes credit as a human right. Its mission is to help the poor families to help themselves to overcome poverty.
It is targeted towards the poor, particularly poor women. They have the least access to employment, bank credit and other traditional credit lines, and little power in household decision-making.
Professor Yunus said that in 2004 fewer than one per cent of all borrowers from commercial banks were women, but they make up 95 per cent of Grameen’s loans.
Grameen credit is not based on any assets, or legally enforceable contracts, but is based on “trust”. It is offered for creating self-employment, for income-generating activities and for housing for the poor, as opposed to consumption. It believes the people should not go to the bank; the bank should go to the people. Loans start at US$35 and average US$200.
In order to obtain loans, a borrower must join a group of five to 10 borrowers, liberating them from the victim mentality and stressing that the group is responsible for repayments. Participants rank their fellow group-members according to financial strength and use this ranking to determine the order in which members receive their loans, with the neediest members receiving loans first.
The members of the group elect a chairperson, who receives her loan only after the neediest members of the group have met the terms of their loans, including a weekly or bi-weekly schedule for repayments.
The lending system is paternalistic, but works in a society where basic infrastructure like sanitation is poor, disease is easily spread, mortality is high and educational opportunities are few.
The basic guidelines are discipline, unity, courage and hard work through the building of family prosperity. This is to encourage maintenance of the house, growing of food, building and maintaining of pit-latrines, promotion of physical exercise and the prohibition of dowries as a condition of marriage.
New loans become available to a borrower if her previous loan is repaid. Multiple loans are available.
Accompanying lending are obligatory and voluntary savings programs for the borrowers.
Generally, lending is through non-profit organisations or through institutions owned primarily by the borrowers, but some are done through for-profit institutions not owned by the borrowers. The rule of thumb is to keep the interest rate as close as possible to the market rate prevailing in the commercial banking sector (not the local money-lenders’ rate), without sacrificing sustainability.
Grameen Bank gives high priority on building social capital. This is promoted through the formation of groups and centres, developing leadership qualities through the annual election of group and centre leaders and 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 the environment. It monitors children’s education, provides scholarships and student loans for higher education. To help create human capital, it makes efforts to introduce technology, such as mobile phones and solar power, and promotes mechanical power to replace manual power.
Grameen believes that 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.
The bank believes that charity helps poverty to continue, creating dependency and taking away an individual’s initiative to break through the wall of poverty. Unleashing energy and creativity in each human being is the answer to poverty.
Evaristus Mainsah and his colleagues from the Columbia University Business School point out that the bank annually rates its branches according to a five-star system designed to promote its core values, notably savings, prudence and education. The basic benchmarks are:
- Green Star – a 100 per cent repayment rate (66 per cent of the branches qualified in 2003).
- Blue Star – profitability (66 per cent of the branches qualified in 2003).
- Violet Star – deposits exceed loans (33 per cent of the branches qualified in 2003).
- Brown Star – all children of borrowers attend school (13 per cent of the branches applied in 2003).
- Red Star – borrowers have crossed over the poverty line (4 per cent of the branches, which represented more than 125,000 families, applied in 2003). The bank claims that 46.49 per cent of borrowers have already risen above the poverty line.
Grameen Bank has established a very popular pension fund, a loan-insurance business and 17 Grameen Network companies.
A mobile phone business allows women to link distant villages by phone, while providing these “phone ladies” with profitable local business. The bank has also become an internet service provider and is providing solar energy projects to villages.
The poor will own the companies running these projects, with shares sold to villagers and the profits going back to shareholders.
In 1999, the bank financed a project to spread the Grameen Bank micro-credit concept worldwide. Its clones are now in 43 countries.
The Grameen Bank was also part of the 1997 Microcredit Summit Campaign (MSC), which is optimistic that it will reach its goal of raising 100 million people out of acute poverty by 2005.
The MSC campaign has the support of the Bush Administration, which has passed the US Law on Microenterprise, calling for USAID funds to target the very poor.
A criticisms of aid groups and of micro-credit organisations is that they fail to reach the very poorest as they are too costly to identify and reach.
Unperturbed, Professor Yanus issued an instruction early in 2004 that all the Grameen Bank employees try and “have at least one customer who is a beggar”. Three months later, the bank had 4,000 beggar clients on interest-free loans, with the aim of helping them become socially acceptable entrepreneurs.
Antidote to fundamentalism
Women’s increased empowerment by the Grameen Bank may explain the fundamentalist Islamic Party’s loss of 14 of its 17 parliamentary seats in the June 1996 Bangladeshi elections after it expressed opposition to micro-credit and women’s rights. It is estimated that more women than men voted. Given the average size of the families they represent, Grameen’s 3.5 million women borrowers may have affected the vote of 20 per cent of Bangladesh’s electorate.
As Alan Jolis pointed out in the International Herald Tribune (February 19, 1997), “Immediately after the vote, Mr Yunus began getting angry phone calls from people blaming him for the results. But Mr Yunus assured them that fundamentalists had only themselves to blame.
“It was their supporters who burned down micro-credit banks, attacked borrowers and condemned micro-credit as un-Islamic because it helps women become self-employed.”
Jolis said that subsequently at a meeting of the Council of the Americas in New York, geo-strategists were astonished by how micro-credit worked to combat fundamentalism.
“Giving those, whom society treats as less than human, access to personal profit and self-esteem unlocks a static hierarchy. It allows social mobility. Suddenly, the old repressive, patriarchal ways become less relevant.
“Micro-credit does what billions of dollars worth of AWACS and Patriot missiles cannot.
“For decades, the West has tried to defeat fanatical extremists militarily; this has been bloody, costly and highly unsuccessful. But quietly, every day, the attraction of militant Islam is being blunted, at the ballot box and in people’s hearts and minds, thanks to the economic development of the poor,” Jolis said.
Further, Grameen loans have built 600,000 homes, 95 per cent owned by women. The bank insists that the house can be built only on land owned by the woman borrower.
As Mainsah and his colleagues comment, “In Bangladesh, according to Sharia tradition, all a man needs to do to be divorced is to say so three times. But in marriages in which the wife is a Grameen Bank borrower, the incentive to divorce has also changed somewhat, because it is likely that the man would have to pack up and leave the family home.”
The Grameen Bank represents a paradigm shift in the allocation of financial resources, lifting an estimated one million Bangladeshi people out of poverty each year, creating a new entrepreneurial class, and propelling the younger generation into education.
- Pat Byrne