Sunday, August 24, 2008

The Grameen Bank: Part 2

Jo Hunter Adams

Mohammed Yunus' history of the Grameen bank, Banker to the Poor, was written in 1999, and offers some perspective on the movement. I enjoyed it because it faced some of the challenges to the movement head-on, and so made it easier to understand the motivations and ideas that made micro-lending a success in the case of the Grameen Bank.

To recap, the movement started in the 1970s with an encounter with poverty. A woman earned dismal profit (2c) weaving stools every day. Her profit kept her stuck where she was- with nothing. All she needed was the capital to be autonomous. Yunus saw possibility.

The concept of lending without collateral was revolutionary, and in a way, still is. In Bangladesh, only the rich were permitted to get loans. The argument was that filling out and processing forms would make lending to the poor unprofitable. That is, even before thinking about collateral, lending to the poor just didn't seem worthwhile.

Today, the Grameen bank is sustainable. At the time of writing, the standard amount of interest was 20% per year, as compared to 15% per month for other non-bank sources of loans in Bangladesh.

Yunus discovered that one of the main reasons that individuals failed to pay their loans back was the daunting size of the payment at the end of the loan period. Instead, in the Grameen bank the payments are weekly, very small and therefore not too daunting.

What is striking is that everything in the structure of the bank is oriented towards long term change. For example, a branch of the bank is not permitted to expand until it has a 100% repayment rate. Its foundation and management has to be really good before it begins to reach more people.

It also tries to prepare borrowers for the long term. Each individual who receives a loan deposits 5% of the loan in a group fund. This group fund is meant to protect the borrowers during hard times. As a result, rather than running away from the loan when severe financial hardship strikes, the borrower is able to ride out the storm.

Criticisms of microlending come from both sides of the political spectrum, and Yunus provides some defense in Banker for the poor. One argument is that the bank depends heavily on the cultural context concerned. Although it is clear that Grameen relies heavily on personal relationships and social pressure, it is not clear why these relationships couldn't exist universally.

Another common criticism of the Grameen Bank is that it diffuses righteous anger around inequality. Therefore the poor, rather than being a constant reminder to the rich, become poor but content. Rather than protesting an unjust system, the poor are thinking about minor entrepeneurial activities. I have heard a similar criticism of Mother Theresa, who, critics argue, didn't change the system itself, but only made the system seem less horrific.

My response is that it is very hard to change a system. Microlending that is repaid does, at some level, actually change the system itself. The poorest of the poor may not be as visible if a bank is truly successful, but this visibility may shift rather than actually disappear. If an individual was struggling to survive, I would also argue that they were not in a good position to protest an unjust system.

People also ask "why is no skills training required to get a loan?" Yunus argues that although skills training is available and important, the very poor in Bangladesh often have immense fear of trainings. It would be an impossible barrier for some people who DO have the skills necessary to manage, repay, and benefit from their loan. Yunus turns the "trickle down effect" upside down; if the poorest of the poor are doing better, he argues, the effect will "bubble up."

Importantly, Grameen is doing all types of other things to show the world that doing business with and for the poor CAN be profitable. They are involved in telecommunications, healthcare, and even fish farming.

The challenge to us may be to look closely at this business model as an alternative to the dependency model still lived out by many aid agencies. There are plenty of ways this type of business model is already lived out in the informal sector, so I am not intending to introduce anything new or revolutionary. I am just thinking about how the informal sector deserves a new name, maybe a name that evokes a little more respect?

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