Saturday, August 30, 2008
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?
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?
Poor Countries in Debt: Part 1
Jo Hunter Adams
“Sometimes in life one has to admit that things just aren’t working. This is one of those times.” p178 The Debt Threat, Noreena Hertz.
Last week I spoke about how Mohammed Yunus and the world bank think of credit as an opportunity for the poor to survive and better themselves. I will also talk more about the Grameen in a post in the next week, but for now I would like to talk about the debt that plagues many of the poorest nations in the world. This post is based on my reading of The Debt Threat by Noreena Hertz. Debt and Credit are two sides of the same coin.
Most of the debt of poor countries did nothing to help them grapple with poverty. Yet today, debt repayment makes poverty more intractable than ever.
"Much of the debt of poor countries is left over from the 1970s - and often arose through reckless or self-interested lending by the rich world." (Noreena Hertz) In the height of the cold war, wealthy countries used their wealth to buy the friendships of other countries. They attempted to win countries over to their political system by implying that system was synonymous with abundant resources. Not surprisingly, lenders were less interested in where the money was spent than on how it served them politically.
Just as quickly, at the end of Cold War, debts were suddenly due. Before reading The Debt Threat, I had not connected the concept of "sustainable development" with the end of the Cold War. Hertz makes this connection. And it's a powerful one! Suddenly, development needed to be sustainable, not based on loans, at the same time that loans were no longer politically necessary. Understanding the origins of the system is really helpful for making sense of why "sustainable development" is generally not terribly sustainable. Hertz is arguing that the driving force behind sustainable development was political; it was not based in the inherent dignity of self-sufficiency.
The impact of debt repayment is dire. Instead of spending money on health care or social infrastructure, funds are spent servicing loans. The argument that many advocated of debt-forgiveness make is that if all debt were to be cancelled, there would be no real negative impact on the countries or institutions who own the loans. The $150 billion would not be missed-- it would not impact stock value, employees, or governments. Yet the payment of the debts has a huge impact. If debt were canceled it would free up money to tackle infectious diseases and maternal and child health.
One could argue that the money used for debt repayment will never be used for infrastructure in countries that have corrupt governments. And many of the governments with the most debt are also the most corrupt. This argument doesn't strike me as reason to hold on to debt. After colonialism (another breeding-ground for corruption), the existence of abundant credit bred corrupt politicians.
Hertz argues that making an entire country meet subjective standards of good governance may not be the job of those holding the debts or advocating for debt forgiveness. It may only be their role to create islands of good governance.
Hertz also provides a framework for the forgiveness of debt. She argues that sovereign debts should be canceled and considered illegitimate if three conditions apply:
1 The regime borrowing money lacked democratic consent.
2 The monies were used in ways that were inimical to the interests of the population
3 The lender knew that monies would be used in such a way
Hertz also argues that a nation should be able to declare bankruptcy, under specific conditions. Her line of reasoning makes sense-- why should one try to draw blood from a stone?
I recommend The Debt Threat because it provides a framework in which to think about when and how to cancel debt without encouraging irresponsibility. I was left wondering how colonialism-imperialism-slavery fitted into this paradigm of debt and indebtedness. It's a relationship I would like to process more fully, and probably could use some help thinking about.
A Few Resources
Jubilee Debt Campaign http://www.jubileedebtcampaign.org.uk/
Questions and Answers on debt relief http://www.jubileedebtcampaign.org.uk/?lid=98
Jubilee USA: http://www.jubileeusa.org/
“Sometimes in life one has to admit that things just aren’t working. This is one of those times.” p178 The Debt Threat, Noreena Hertz.
Last week I spoke about how Mohammed Yunus and the world bank think of credit as an opportunity for the poor to survive and better themselves. I will also talk more about the Grameen in a post in the next week, but for now I would like to talk about the debt that plagues many of the poorest nations in the world. This post is based on my reading of The Debt Threat by Noreena Hertz. Debt and Credit are two sides of the same coin.
Most of the debt of poor countries did nothing to help them grapple with poverty. Yet today, debt repayment makes poverty more intractable than ever.
"Much of the debt of poor countries is left over from the 1970s - and often arose through reckless or self-interested lending by the rich world." (Noreena Hertz) In the height of the cold war, wealthy countries used their wealth to buy the friendships of other countries. They attempted to win countries over to their political system by implying that system was synonymous with abundant resources. Not surprisingly, lenders were less interested in where the money was spent than on how it served them politically.
Just as quickly, at the end of Cold War, debts were suddenly due. Before reading The Debt Threat, I had not connected the concept of "sustainable development" with the end of the Cold War. Hertz makes this connection. And it's a powerful one! Suddenly, development needed to be sustainable, not based on loans, at the same time that loans were no longer politically necessary. Understanding the origins of the system is really helpful for making sense of why "sustainable development" is generally not terribly sustainable. Hertz is arguing that the driving force behind sustainable development was political; it was not based in the inherent dignity of self-sufficiency.
The impact of debt repayment is dire. Instead of spending money on health care or social infrastructure, funds are spent servicing loans. The argument that many advocated of debt-forgiveness make is that if all debt were to be cancelled, there would be no real negative impact on the countries or institutions who own the loans. The $150 billion would not be missed-- it would not impact stock value, employees, or governments. Yet the payment of the debts has a huge impact. If debt were canceled it would free up money to tackle infectious diseases and maternal and child health.
One could argue that the money used for debt repayment will never be used for infrastructure in countries that have corrupt governments. And many of the governments with the most debt are also the most corrupt. This argument doesn't strike me as reason to hold on to debt. After colonialism (another breeding-ground for corruption), the existence of abundant credit bred corrupt politicians.
Hertz argues that making an entire country meet subjective standards of good governance may not be the job of those holding the debts or advocating for debt forgiveness. It may only be their role to create islands of good governance.
Hertz also provides a framework for the forgiveness of debt. She argues that sovereign debts should be canceled and considered illegitimate if three conditions apply:
1 The regime borrowing money lacked democratic consent.
2 The monies were used in ways that were inimical to the interests of the population
3 The lender knew that monies would be used in such a way
Hertz also argues that a nation should be able to declare bankruptcy, under specific conditions. Her line of reasoning makes sense-- why should one try to draw blood from a stone?
I recommend The Debt Threat because it provides a framework in which to think about when and how to cancel debt without encouraging irresponsibility. I was left wondering how colonialism-imperialism-slavery fitted into this paradigm of debt and indebtedness. It's a relationship I would like to process more fully, and probably could use some help thinking about.
A Few Resources
Jubilee Debt Campaign http://www.jubileedebtcampaign.org.uk/
Questions and Answers on debt relief http://www.jubileedebtcampaign.org.uk/?lid=98
Jubilee USA: http://www.jubileeusa.org/
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