Wednesday, August 30, 2006

Fighting Poverty for Dummies 2

Rolling on with the magical anti-poverty tour. This time, microlending.

Muhammad Yunus

Who’s Who? Bengali banker and economist and founder of the Grameen Bank

Must Read:
The Price of a Dream: The Story of the Grameen Bank by David Bornstein and Banker to the Poor, Yunus’ autobiography.

What’s the Big Idea? Like de Soto, Yunus recognized the poor needed additional investment capital but couldn’t get it from anyone but underworld Guido and Rocko types who charged ruinous interest rates and would drill your knee caps if you didn’t pay up on time!

He also noticed that rural Bengalis had powerful social and communal bonds, and that women often held those poor rural communities together while many of the men partayed the night away to drown their sorrows. He thought he might be able to leverage those two powerful forces to help insure the repayment of loans to a new kind of bank.

He was drained soul-dry by the ineffective, top down western approaches to development and grew tired of mouthing economic abstractions while he watched his countrymen starve.

As a result he took action and came up with a thoroughly pragmatic and grass-roots approach to throw a knockout blow at poverty: microlending.

He set up a whole new kind of bank--Grameen Bank--to make very small loans to the poorest of the poor with a focus on lending to groups of women bound together by family and community ties. The entry level loans are often no more than 25 or 50 dollars. Just enough to help a poor entrepreneur or farmer take their tiny business or farm up to the next level on the way out of poverty.

Yunus argued that the bank should come to the poor, not the poor to the bank. So Grameen sent teams out to rural villages, offering to lend money to very poor folks based on the following conditions:

** Borrowers must join a ‘borrowing group’ with fellow community members who jointly make decisions about who receives loans and exercise group discipline to insure the repayment of loans on time. If a member of the group isn't repaying a loan, the other group members slap 'em up side the head until they do! :^)Bank representatives (really community organizers in a way) meet consistently with the borrowing groups, teaching and counseling members on investment and on effectively growing income generating activities. They strongly emphasize self reliance and the building of social capital and leadership skills among group members.

** With rare exceptions, the members of the borrowing group are women. This insures higher levels of commitment and takes advantage of feminine persuasion (arm and ear twisting? :^) to help keep their husbands and sons from squandering the loan monies.

** Interest rates are affordable for the poor and at a level that allows Grameen to operate effectively but nothing more. Interest rates aren’t set to produce the kind of big bank profits that would entice phat investors looking for the next juicy kill.

** Loans must be used for income generating activities and housing and never for consumption. Loans must be paid back fully and on time. Defaulted loans disqualify individual borrowers from receiving further loans and eventually jeopardize the entire group’s eligibility. Paying back loans on time creates better and better credit and makes individuals and groups eligible for even greater loans as they continue to incrementally build up their micro-enterprises or farms. The old carrot and stick, you know. In the development world, don't leave home without them ;^)

Grameen’s approach was simple and pragmatic. It was also revolutionary.

It turned out the social collateral (communal self-discipline) of the poor resulted in repayment rates of 95% or above, just as good or better than commercial bank individual middle class loans based on material collateral in the west. Business boomed for Grameen. And scads of poor people were lifted out of poverty in Bangladesh as a result of Grameen’s efforts. Cool!

Who’s Walkin’ the Talk? Grameen showed conclusively that desperately poor people can repay loans as well as individualistic middle class westerners given the right kind of banking institution and social environment. As a result, microlending blew up and became the buzz of the development world. Hundreds of rural and urban versions of the original Grameen beta went on line and now even national governments and large banks are beginning to download the software. Hundreds of millions of poor people have gotten a big leg up in life as a result. That's great news in the big old sea of misery.

My Take: What’s not to like?

Maybe the most powerful tool in the toolbox right now and any group or non-profit can implement it.

Next time: Jeff Sachs and “The End of Poverty”


Anonymous Jon said...

Thanks for that - you gave more details of his program than I had known before.

As for "what's not to like", I don't see anything bad with the program as he apparently enforces it. But I can imagine a version with only half the effort (not focused on income generation, or without the accountability structures Yunus set up) causing more harm than good. My bet is that it's the accountability/counseling that really makes it work.

1:34 PM  
Blogger Wordcat said...

Yeah, I think that's right on target Jon. Though I think that the involvement of the poor in making their own decisions is key too. The failsafe in microlending, though, is if the borrowers squander the money and can't pay back their loans, the lender goes out of business. So both the borrower and the lender in the system have strong incentives to make sure the money doesn't go down a rat hole.

3:34 PM  

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