Should microfinance be commercialized?
In 1974, Professor Muhammad Yunus, a Bangladeshi economist from Chittagong University, led his students on a field trip to a poor village. They interviewed a woman who made bamboo stools, and learnt that she had to borrow the equivalent of 15p to buy raw bamboo for each stool made. After repaying the middleman, sometimes at rates as high as 10% a week, she was left with a penny profit margin. Had she been able to borrow at more advantageous rates, she would have been able to amass an economic cushion and raise herself above subsistence level.Realizing that there must be something terribly wrong with the economics he was teaching, Yunus took matters into his own hands, and from his own pocket lent the equivalent of $27 to 42 basket-weavers. He found that it was possible with this tiny amount not only to help them survive, but also to create the spark of personal initiative and enterprise necessary to pull themselves out of poverty.Against the advice of banks and government, Yunus carried on giving out 'micro-loans', and in 1983 formed the Grameen Bank, meaning 'village bank' founded on principles of trust and solidarity. In Bangladesh today, Grameen has 1,084 branches, with 12,500 staff serving 2.1 million borrowers in 37,000 villages. On any working day Grameen collects an average of $1.5 million in weekly installments. Of the borrowers, 94% are women and over 98% of the loans are paid back, a recovery rate higher than any other banking system. Grameen methods are applied in projects in 58 countries, including the US, Canada, France, The Netherlands and Norway.In 2006, Yunus and the bank were jointly awarded the Nobel Peace Prize, "for their efforts to create economic and social development from below.
Muhammad Yunus: Commercialization is a kind of code word. In plain, simple English it means “make money” by doing that. My position has always been microcredit should be an area for social business where you want to help poor people get out of poverty by doing business. You don’t lose money. You get your money back, but you don’t make profit out of it. Because with that money you want to give to the poor people so that they get out of poverty faster. That’s where the interest is. So I look at microcredit in that direction. The other direction is this is an interesting, new, emerging area of business. If you put money . . . If you invest your money, you make a lot of money. I don’t see that is the right kind of approach, because loan sharks have been doing this for years and generations and for ages. They lend money to the poor people and make a lot of money by exploiting them. So microcredit is not a new tool for exploitation. Microcredit is a tool to help people get out of poverty. So if commercialization means you make money, I will say I’m not in support of that. I would rather discourage that thing to happen. But if you want to do in a business way . . . make some profit, I would still allow or admit up to a certain amount. And their interest rate issue comes in – how much you take back. Say my definition of reasonable interest rate is cost to fund at the market price, plus 10 percent maximum. So that should be the maximum of interest rate that you can charge, and you’ll be a proper microcredit program. If you go beyond that, I tell you you are going into a risky area where you are getting too high. And after a while if my cost to fund at market price plus 15 percent and above . . . If that is the interest rate, then I’ll say you are in the red area of lending to the poor because now you are moving into the loan shark zone. So this is the kind of ground rules that I try to promote.
Recorded on: 1/23/08
"Microcredit should be an area for social business where you want to help poor people get out of poverty by doing business...You get your money back, but you don't make profit out of it."
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