In December 2006, Muhammad Yunus, a Bangladeshi national was awarded the Nobel Peace Prize. His
work on structuring financing in Bangladesh revolutionised the thinking on how to lend to the poorest, and
most rural , segments of countries, that is the communities in which the majority of poor people are employed in the agricultural
sector, often buffeted by unpredictable events, and live in villages which lack physical infrastructure (roads or power supplies),
making the costs of establishing a formal banking network prohibitive. Professor Yunus’s innovation was to find a way to lend to the poorest of the poor who have no collateral
-no house, no car, no tangible asset against which to borrow. People whose only nominal personal wealth
would probably be in the form of land, where the collateral is undocumented and legally unenforceable.
Looking across Bangladesh, Yunus realised that although many villages had no obvious
visible asset, they all shared one thing – a community of interdependence and trust. The genius behind
Yunus’s Grameen Bank (literally translated from Bengali as “Bank of the Village”) was in converting that
trust into collateral. | The mechanics of Grameen Bank’s solidarity lending are pretty straightforward.
Take a small village with 5 traders for a basic illustration. Through its micro-lending programme, the Grameen bank lends
the group $100. Within the group, the $100 is passed on to trader A for a pre-specified period (a loan period currently runs
for about one year). At the end of this time, she (97 per cent of Grameen’s loans are made to women) has to pay back
to Grameen bank the loan amount plus interest 9which can be between 8 and 12 per cent). Trader A is solely responsible for
paying her loan. When the loan is repaid, the next $100 loan is made to the group, which is then passed on to trade B. But
if trader A does not repay, the group is extended no further loans.
Although, technically speaking there is no group liability (the group
as a whole is not responsible for the loan when one member defaults), the group is implicitly liable in the sense that
the behaviour of each individual member affects the group as a whole. So very often when difficulties in
repayment do arise, the group members contribute the defaulted amount (with the intention of collecting
the money from te defaulted member at a later date), thus keeping the loan-cycle turning. In this sense microfinance in poor
countries works much like credit cards in rich countries – borrowers repay their loans because they know that if the
don’t repay the loans they have today, their lender will blacklist them and they won’t be able
to borrow more tomorrow. The bonds of trust extend not only between members of the group, but also between the group and the
bank – there is no legal instrument between Grameen bank and its borrowers.
The Grameen Bank model has met with resounding
success. At least forty-three countries around the world have adopted some version of it.
| Grameen Bank offered microfinance to 36000 members with a portfolio of
$3.1 million when it became a bank in 1983. By 1997, it has 2.3 million members and a portfolio of $230
million. Perhaps more impressively its default rates are less than 2% and, with its success the bank now provides a host of
other financial services (beyond also insurance and pension schemes) to the poor – micro-enterprise, scholarship and
housing programmes.
According to Grameen Bank estimates from March 2008, over 1.3 million members took microenterprise
loans (mainly for power-tillers, irrigation pumps, motor vehicles, and river craft for transportation and fishing), for a
total of over $450 million. On the education side, scholarships amounting to $950,000 have been awarded to over 50,000 children,
and by March 2008 nearly 23000 students received higher-education loans, many for medicine, engineering and professional certificates.
Finally, in the 12 months to February 2008, Grameen housing loans alone have reached $1.19 million with some 8,300 houses
having been built. Since the housing programme’s inception in 1984, over 650,000 houses have been constructed.
The
most truly extraordinary aspect of this tale is their “No Donor Money, No Loans” policy. In 1995 Grameen Bank
decided not to receive any more donor funds, and today funds itself 100 per cent through deposits. Although
recognised as the grandfather of microcredit and microlending, Grameen Bank has spawned numerous variations all over the world’
all targeting the segment of the population that had fallen through the high-street banking cracks. The BKI in Indonesia, BRAC in Bangladesh, and Jamii Bora in Kenya are a sample of the growing and expansive list. |
