Little World Banks

(Muhammad Yunus and the Grameen Bank of Bangladesh)

by Jessica Mathews

One of the most successful development organizations in the world is the Grameen Bank of Bangladesh. Started by professor Muhammad Yunus, the Grameen Bank is noteworthy for the stark contrast between its operating principles and those of the big, international lending institutions, such as the World Bank and the IMF. The Grameen Bank's success in empowering the poor has made it a model that is being emulated around the world.

Muhammad Yunus is an academic turned banker in Bangladesh who has turned the most sacred rules of the profession up-side down and made himself a frequently mentioned Nobel Prize candidate in the process.

He didn't plan it that way. Twenty years ago, Yunus was simply moved to try to help the abject poor who lived near the university where he taught economics. He approached local banks, convinced that what these people most needed was simply a tiny amount of money, as little as one dollar per person. The reception was not warm. Where was the collateral? the bankers asked. These people can't even read.

Finally, Yunus took out the loans himself, despite repeated warnings that the recipients were so poor and the amounts so small that "they'll just eat it up." Nevertheless, the scheme worked. The tiny loans were repaid. Soon, Yunus expanded to several villages, then to the whole district and finally, to five districts. The bankers still could not be convinced that Yunus' vision was sound and would not lend to his borrowers directly. Nothing, he finally concluded, would ever convince them. He would have to set up his own bank. It took another three years to secure government support. The Grameen ("rural" in Bengal) Bank was formally created in 1983, and the rest, as they say, is history. Today, the Grameen Bank has a record that many a traditional bank would envy. It has more than a thousand branches and 1.6 million borrowers in 34,000 villages in Bangladesh. It lends $30 million per month and enjoys a loan recovery rate of 97 percent. It charges 20 percent interest with a one-year repayment requirement, yet the bad debt on its books is less than one half of one percent. What is its secret?

Yunus saw the banking system as anti-poor, anti-illiterate and anti-women. He set out to reverse all three.

He changed normal practice from "the more you have the more you can borrow" to "the less you have, the higher your priority." His bank would lend only to the poorest of the rural poor, and half of them must be women. Anyone who asks for a loan, he told his staff, is "a fake poor person. The person you are looking for will never come to you. When you find her she will say, 'Oh I don't need money.' When you hear that, you've found your person." The loan officer's job is not to be convinced of the borrower's creditworthiness, but to convince the borrower that she can use money to improve her life.

Banking with Grameen is no picnic. To build commitment and provide community support, the prospective client must find five friends to borrow with. Initial loans are $10 to $20. Average loans are $100. The interest rate is high, the repayment time short and there is a mandatory savings requirement. Yet 48 percent of those who have borrowed from the bank for ten years have crossed the poverty line. An other 27 percent have come close. The remainder have not been helped, usually because chronic ill health erodes any progress.

Experience showed that the payoff from loans to men often did not find its way back to their wives and children. The benefit to whole families was much more reliable when the borrower was a woman. In spite of enormous tensions in borrowers' marriages in a culture where women have few economic rights, today, nearly all borrowers are women.

Scattered around the world are thousands, perhaps tens of thousands, of small success stories like Yunus's program was ten years ago. The particular significance of the Grameen Bank is that it is one of a handful that has been able to grow. It uses a franchise-like system. New staff serve a lengthy apprenticeship. Branches borrow from the headquarters at 12 percent and lend at 20 percent. With that 8 percent spread they have to become profitable, which takes on average seven years. With these requirements and the capital accumulated through borrowers' required savings, the main bank's only need for concessional funds is to fuel expansion.

Now Yunus wants to see his program spread around the world. There are special conditions in Bangladesh, he thinks, that make the idea applicable there and not elsewhere. If anything, Bangladesh should be the acid test. Income is very low. Fertility, malnutrition, illiteracy and gender inequality are high. The communications infrastructure is poor to nonexistent. Yunus' dream is a Grameen Trust of $100 million to capitalize replicas in dozens of other countries: a little World Bank for people. Within the past few weeks, the U.S. Agency for International Development and the World Bank have each pledged $2 million: a small but hopeful beginning.

Many of those who work to ameliorate poverty in developing countries and in our central cities believe that the people they are trying to help have a better idea of what they need than experts in faraway capitals. The perennial stumbling block has been how to tap into this intimate knowledge of local needs on a large enough scale to make a difference. The Grameen Bank is one of few proofs that it can be done.

In Yunus' view, bankers' notions of "bankability" and "creditworthiness" unwittingly create a caste system that locks poor people into poverty. If he is correct, and if his bank can be replicated, he may have found a spark to revolutionary change.

from the book 50 Years Is Enough
edited by Kevin Danaher of Global Exchange

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IMF, World Bank, Structural Adjustment