Sunday, October 15, 2006

Power of an Idea

30 years back, a young professor of economics went for a walk in a village adjoing his university in Chittagong (Bangladesh). While there, he met a poor widow, Sufiya Begum, who tried to make a living by constructing and selling bamboo stools. She worked hard the whole day, and yet her daily net earning was just $0.02 (2 cents).

Why?... because she had to take a daily loan for buying bamboos from the local moneylender, who charged exhorbitant interest, and whose lending condition was that she sells her produce to him at a price decided by him!!!

She was poor - not because she lacked skills, or because she was lazy - but becasue she did not have access to her own working capital. All she needed was $0.27 (27cents) to get out of this vicious cycle of:

Low income => No working capital => High interest loan => Low income

The professor gave her 27 cents... but then, also went on to find out how many others in the village lived on an income of less than $1/day. To his amazement - and dismay - he found that there were 42 such able-bodied skilled working people, whose cumulative requirement to end their poverty was just $27!

He gave them that sum as loan, which they could use to break out of the cycle of poverty... and they returned the loan in due course.

It was such a simple solution to end the poverty. Poverty, the professor realised, is not caused by people; it is caused by the system. Much later, he described his first insight through an analogy:

"You take the best seed of the tallest tree from the most fertile forest, and plant it in a small flower-pot. The seed does not grow into the tall tree..." not because the seed was bad, but because it got planted in the wrong place.

Academically, this simple insight had a simple solution. Get the banks to give loans to the poors.

But the banks refused: how can you give loans to people who have no collaterals to offer? what if they default? and since they own nothing, you can't take back anything from them, can you?

Failing to convince the regular commercial banks to lend money, the professor decided to become the "guaranteer" for their loans with the bank. If they default, he would pay the banks - but they did not default!

But this experience led to the second insight:

The commercial banking system works on a premise that the more you have (i.e., as collaterals), the more you get; the less you have, the less you get... and of course, if you don't happen to own anything, that you are forever condemned out of the banking/credit system.

...Like the local moneylender, the commercial banking system imposes its own conditionalities in which the rich become richer - and the poor become poorer.

And thus the the third insight: Create a bank for the poors!

This simple idea led to the establishment of Grameen Bank - the "barefoot bank" - in 1983. The professor of economics, you guessed, was Professor Muhammad Yunus, who was awarded the Nobel Peace Prize 2006 this week... The rest, as they say, is history...

Today, the Grameen Bank:

  • has 6.6mn borrowers ("poorest of the poor" - including beggars), of which 97% are women

  • has 2,226 branches operating in more than 71,000 villages of Bangladesh, supported by a staff of around 18,000.

  • is owned 94% by the borrowers (the rest 6% is with the government)

  • offers loan without any collaterals, legal instrument, group-guarantee or joint liability

  • has provided loans of about $5.7bn since its inception

  • provides loans for micro enterprises, housing, education, scholorships, life insurance and pension funds for the borrowers, disaster loan funds, etc.

  • has remained profitable all through its existance, except for 3 years (1983, 1991 and 1992)

  • does not rely on external funding or donations since 1995 (has paid back its loans since then)

  • has helped about 58% of its borrowers to cross the poverty line

  • and has a loan recovery rate of 98.85% (the other 1.15% constitute the defaulters on deadlines of payment - not on payment itself)

    Perhaps more importantly, the contribution of Prof Yunus was The Power of the Idea:

  • that the poor are "credit-worthy" (or the reverse: the commercial banking establishment is not "people worthy")

  • that poverty eradication does happen by handing out "doles" through the top-down subsidies, donations, grants or investments (by govt/IMF/WB, etc.)... In an article in WSJ (Oct 14,'06), he noted:
    " of our most successful tools for rebuilding businesses is not government handouts, but rather, small loans packaged with practical business and social advice.... very little of the cash so generously given ever gets all the way down to the very poor. There are too many "professionals" ahead of them in line, highly skilled at diverting funds into their own pockets. This is particularly regrettable because very poor people need only a little money to set up a business that can make a dramatic difference in the quality of their lives."

    Instead, eradicating poverty requires innovating systems for economic empowerment... By giving the poor that elusive access to the "first dollar that gets you the next dollar."

  • that there is another "bottom-up" model of development that is far superior to the "trickle-down" economic model... That perhaps "the rising tide will lift all the boats" is a merely a myth in the minds of the owners of those few boats who have "access rights" to the tide!

    It was this power of idea, that has mobilised a global movement for providing "access to credit" to the poor during last 30 years. There are now:

  • about 3,100 MFIs worldwide

  • who service 92mn clients and

  • about 330mn people from the "poorest of the poor" families

  • across more than 100 nations

    ... and are growing in numbers, and innovating new solutions.

    Cross-posted at:


    gaddeswarup said...

    I think that this is an inspiring story and the processes should be pursued but it may be only a band-aid in some cases and other institutional reforms are needed. See Rajshekhar's writings on the Indian experience and a study of the Phillipines experience which has some similarities with India:

    Madhukar said...

    You are right prof!
    poverty is more than just lack of money/credit... it is a systemic problem.

    MFIs as a stand-alone credit lending organisations are not likely to succeed on a sustainable basis - will remain, as you mentioned, mere band aids.

    Grameen's success was not just because of providing credit to the poor, but also creating institutional arrangements, which provide them other kind of access (to information, to markets, to appropriate technology, to social justice, etc.) as well... it is more about social change than just about Micro-credit.

    gaddeswarup said...

    Please do'nt call me professor. I always felt like a student. After almost 50 years of topolgy, I feel ignorant about most things and have been trying to catch up in the last year or so. I have been reading a bit but it is not clear how much I have assimilated or whether I will ever come to some sort of understanding. I find your posts quite educational.

    shikha said...

    have just read Fortune at the bottom of the pyramid and somehow my weird brain is relating both these approaches.

    There is no fortune at the bottom of the pyramid as advised by C K prahlad urging companies to produce smaller packages in order to eradicate poverty,however the poor spends more on basic needs.

    There is no untapped purchasing power at the bottom of the pyramid..what is needed is microfinancing in order to help the people at the bottom of the pyramid be producers(funded by these micro credit agencies,which are not self supported,non profit organizations) as opposed to them being consumers.

    This is the difference between C K prahlad, who I doubt has engaged in implementation of the ideas made sitting in comforatble homes and Yunus who has been on the field and knows the reality.

    If we were to follow what prahlad has told us, we could never ever eradicate poverty.

    Madhukar said...

    I agree; CKP's thesis is too "consumer driven". I
    had made a posting of my critique here:
    Revisiting the "Bottom of the Pyramid"

    Rajesh said...

    Maxim of the 21st century, "Behind a success story there is an idea".
    Economics does not obey the following:
    Low income => No working capital => High interest loan => Low income (rift in economics) rather it obeys:
    Low income =>decreases purchasing =>decreases demand =>decreases sales =>decreases capital investment =>demand for loan decreases => Low interest rates.

    sarkar.subroto said...

    Oh what a great idea. But under every lamp there is a shade. So also here. The rate of interest is 30% same as that a kabuliwala used to charge.The recovery rate is high as the staffs of the bank after the scheduled period of 20 months forcibly removes the property finaced even if it is a cow.Mr. Taj Hasmi has written elaborately at IHRO group at yahoo groups about this which I request readers to go through. The story of noble prize it seems has come with a tag and is heading behind the scene of Norway getting a cell phone deal in Bangladesh Tax free. Many villages in Bnagladesh is refusing to give entry to this grameen bank. There should be some reason.Please wait and see truth is slowly emerging.

    Madhukar said...

    thanks for ref to Taj Hashmi's article. I went through that, and find many factual errors and inconsistencies in his assertions, which make his article sound like a rant

    I hope you have read Taj Hashmi's original article, and about Grameen Bank, before making your comment here.
    In any case others can read it here

    For instance:

    - Grameen Phone is not owned by Grameen Bank - it is co-owned by Telenor (not Nortel, as Hashmi mentions) and Grameen Telecom, a non-profit foundation formed by Grameen Bank officers. AND Grameen Phone happens to be largest tax-payer in BD.

    - Grameen stopped taking donor loans by 1994 (two years before Taj Hashmi says he got disillusioned), and repayed back all loans by 2001. Hashmi's contention that Grameen ovecharges interest on free of 2% interest loan is not accurate

    - Grameen Bank charges on average 20% interests on decreasing balance (loans on education, etc. are lower )... which overall would work out to 10-12%. (even Hashmi mentions that the traditional village moneylenders charge 96-200%)

    - contrary to Hashmi's assertion that Grameen does not provide loans to poorest of poor, in 2004, it did start a interest-free loan schee for beggars. The idea was that since in any case they go begging, then can also use the money to buy and sell some merchandise.. It has been quite a successful initiative

    - In micro-financing sector, interest rates will always be higher than commerical lending rates because the transaction costs are high - poor save money in small quantity, on a daily basis, and the banking sevice is often provided on their door-step.

    - If Grameens' practices for loan recovery were as inhuman as descibed by Hashmi (who incidentally lives and teaches in Canada), then villagers would have long stopped taking loan from the bank - it wouldn't be covering 2/3rd of Bangladesh villages.

    True, micro-credit is not a panecea, but then nothing is....

    and lastly, while Hashmi has his criticisms, he has no solutions to offer either