Microfinance

Also known as micro-credit.

My apologies, as this is rather "Grameen Bank-o-centric." This is for good reason, though, I assure you.

In 1983, Muhammad Yunus, an economics professor-turned banker, officially created the Grameen Bank in his home country of Bangladesh. Through his bank, Yunus became a leader in the micro-credit movement, eventually spawning hundreds of offshoot organizations (Yunus, 1999). Through the efforts of Yunus and the organizers of other institutions modeled after the Grameen Bank, it has become apparent that micro-credit is quickly becoming one of the most powerful tools in combating global poverty in the modern world.


Yeah, but what IS it?

At the most basic level, it involves providing relatively small loans with reasonable interest rates to impoverished people in order to help them begin their own income-earning efforts. According to Yunus, “Grameencredit (the Grameen Bank’s style of micro-credit) is based on the premise that the poor have skills which remain unutilized or under-utilized. It is definitely not the lack of skills that make poor people poor” (Yunus, 2003). Because of this, the Grameen Bank model of micro-credit has a number of very specific organizational structures, conditions and purposes for its lending.

The name grameen derives its meaning from the word gram, which means “village” (Yunus, 1999). The name was chosen because the Grameen Bank, during its inception, developed a highly networked structure. The main office is located in the Tangail district of Bangladesh. All the rest of the branches are located close to various clusters of villages, with a “center” of borrowers in each village. Each center is responsible for the administration of its own members, and it reports to the local Grameen Bank branch. It is necessary to have each branch in relatively close proximity to its constituents, as many poverty-stricken people’s sole method of transportation is by foot. Once all of the physical logistics were worked out, Grameen Bank began to develop its ideology (Yunus, 1999).

What makes the Grameen Bank unique?

The first and arguably most important concept that Grameen Bank upholds is about the nature of credit. Unlike in the typical westernized economic model that makes credit a privilege for those who are already in the wealthiest levels of society, Grameen Bank considers credit a fundamental human right. Through this lens, it attempts to cater to women, the poorest demographic in Bangladesh, as its primary clients. By 1993, women made up 95% of Grameen’s borrowers (Yunus, 2003; Develtere, 2005). In addition, it was discovered through various studies that each taka (Bangladesh’s national currency) loaned to a woman produces a larger increase in family income than when loaned to a man (Develtere, 2005). Not only are women the most needy of society, but they also tend to use their loans more efficiently than men.

Though societal development is the overarching mission for the Grameen Bank, it is still a bank, and it functions as such. Unlike typical banks, however, its clients rarely have any sort of collateral to back up loans. Because of this, the Grameen Bank operates on the concept of trust (Yunus, 2003). However, this does not simply mean that borrowers are able to arbitrarily default on their loans without penalty. The Grameen Bank relies on a group-lending model. This means that in order to receive any loans from the bank, the borrower must be part of a group of already-established borrowers. As the members of the group use the micro-credit services more, they are allowed to take out larger and larger loans. If a member of the group fails to pay back a loan the rest of the group is penalized by having their credit damaged, inhibiting them from receiving any larger loans (Yunus, 1999). This approach circumvents the need for collateral and replaces it with social pressures. With a repayment rate of over 95% (Yunus, 1999; Woodcock, 1999), this method seems to be having significant success.

In order to further encourage repayment, Grameen Bank modified the standard lump repayment method for debt collection. This sort of repayment can be very intimidating to people who have little money, as it seems like a large sum of money to pay all at once. This has a tendency to cause borrowers them to put off the payment for longer and longer periods of time. To combat this, Grameen uses a weekly or bi-weekly repayment schedule. Through this, their borrowers can pay back smaller amounts on a regular basis. This is much easier for their clients to handle, and raises repayment rates even higher (Yunus 1999; Yunus 2003).

What about financial training?

One major difference between the Grameen Bank and other micro-credit organizations is that it started with a very basic approach: lending money. Unlike other organizations, Grameen did not offer any sort of job or financial training (Develtere, 2005). As stated earlier, their philosophy is that the poor are not poor because they lack skills. Eventually, Grameen would begin to offer a number of mandatory and voluntary programs that revolve around savings. While Grameen does now offer some training, they do not reach near the scope of most other aid organizations (Develtere, 2005).

One aspect of Grameen’s policy that strongly resembles training is their institution of the Sixteen Promises. These are a set of sixteen statements that help to overcome cultural and societal barriers that might prevent people from accumulating wealth with their loans from the bank. These statements include injunctions against common practices, such as “we shall not take any dowry at our sons’ weddings; neither shall we give any dowry at our daughter’s weddings. We shall…not practice child marriage” (Yunus, 1999), promises to maintain healthy and sustainable lifestyles such as, “we shall plan to keep our families small,” and “we shall build and use pit latrines” (Yunus, 1999). Still others are promises toward particular values that encourage holistic living, such as, “we shall follow and advance the four principles of the Grameen Bank – discipline, unity, courage, and hard work – in all walks of our lives” (Yunus, 1999). Those who borrow from the bank are taught these promises and expected to uphold them in order to maintain good standing within their lending groups and the institution itself.

Is micro-credit more effective than other anti-poverty methods?

Grameen Bank, and the general micro-credit institution is a powerful instrument in the fight against poverty. But what advantages does it have over other methods that have been attempted in the past? One of its largest advantages comes from engaging poverty at the ground level. The Bretton Woods institutions work through governments and governmental agencies, which inevitably takes long periods of time. When they do give money, it tends to be for large, generalized public projects. While these may be beneficial in the long run, the fact remains that a dam does very little good for a widow who can’t afford to buy food for her children. In contrast to this, an established member of the Grameen Bank can quickly request and receive a loan in order to begin an income-generating cottage industry. Grameen also offers loans for members whose houses or crops have been destroyed by natural disasters, providing a societal safety net. In general, however, loans provided by the Grameen Bank are intended for investment as opposed to consumption (Yunus, 2003).

The focus on income generation is one major difference between the Grameen Bank and humanitarian aid organizations. While money and food granted by these organizations can serve as a stopgap method of relief, it provides no lasting solution to poverty. Once it is consumed, it is gone. The Grameen Bank, however, encourages the use of loans in a sustainable manner. Often, all a poor woman needs to begin a small business out of her home is enough money to buy an initial lot of supplies. This sort of loan often amounts to the equivalent of under thirty U.S. dollars (Yunus, 1999). One example that Muhammad Yunus (1999) uses is that of a woman attempting to earn money by weaving bamboo stools. She borrows five taka (approximately twenty-two cents) from a middleman to buy raw materials. With this loan, she must promise that she will sell the stools she makes back to the middleman as repayment for the loan. She earns an average of two cents per stool made. This is barely enough to keep her and her children fed, nothing more. With a micro-credit loan from the Grameen Bank, however, she could buy her raw materials and sell her stools directly in the market, earning a much larger profit than what she would normally receive when working for middlemen.

Finally, micro-credit institutions don’t have the same damaging effect on national sovereignty that multilateral lending can have. Loans from the World Bank often come with strings attached. These strings can take the form of structural adjustment policies that require adjustments in national spending which allocate money away from health care and education in favor of enhancing industry, thus further harming the poorest of society. With institutions like the Grameen Bank, there is no need for structural adjustments. Existing social services can remain in place and continue serving the citizens of the country.

How successful is the Grameen Bank?

The Grameen Bank has been met with significant success in Bangladesh. A study from 2005 showed that while 85% of a sampling of borrowing members lived in poverty at the beginning of their inclusion in the program, that number dropped to just under 40% after that sampling spent eight years in the program (Chowdhury, 2005). In addition to helping bring the poor out of the cycle of poverty and the material and physical benefits thereof, the former poor also experience less stress and a heightened level of self-esteem (Yunus, 1999).

Because of the success of the Grameen Bank, many other micro-credit institutions have come into being, all throughout the world. This particular approach received its major governmental recognition as an effective method in reducing poverty at the U.S.-led Microcredit Summit in 1997. During this meeting, “organizers…said their objective was to raise $21.6 billion over the next nine years, in order to reach 100 million of the world's poorest families, with emphasis on aiding women” (President Clinton, 1997). So far, it is estimated that 10 million households worldwide have been aided by micro-credit (Chowdhury, 2005). While it is a far cry from the 100 million that was the goal in 1997, it is certainly more than a mere drop in the bucket in the fight against poverty.

Alright, so what's the catch?

Despite the successes that the micro-credit movement has had, it isn’t without its problems. For example, one study by Patrick Develtere (2005) examined whether or not the Grameen Bank and its micro-credit model reached the “hardcore poor.” When they surveyed borrowing members of the Bangladesh Rural Advancement Committee (BRAC), an organization that work similar to that of Grameen, they found that 11% of the borrowers were richer than the target wealth level of the organization. He goes on to identify a number of barriers that might prevent the poorest of the poor from participating in micro-credit programs.

The first barrier that must be overcome is that of membership requirements. The poorest people must spend their entire days working in order to merely survive. Because of this, “time consuming activities such as paying registration fees, saving, attending group meetings, and participating in training sessions are often impossible for poor members” (Develtere, 2005). When one has to work all day, every day just so one’s family can eat, very little else seems possible. This mindset can lead to self-exclusion from micro-credit projects.

Self-exclusion can also result from a lack of self-confidence. If the returns of an investment of the Grameen Bank’s loan do not pay off as expected, the borrower will be stuck in debt just as they would be with a local moneylender. There are few ways for the poor to escape from this sort of debt. They can begin selling their assets, though the poorest poor normally have very few assets]. Their other option is to borrow money from other sources in order to pay off their loans. This sets up a debt spiral that is essentially inescapable (Develtere, 2005).

The other problem with inclusion comes from the poorest poor being excluded from lending groups. As the Grameen Bank model makes groups of borrowers reliant on each other for credit (which can turn into a life-or-death situation), people who are less likely to be able to pay off their debts would not frequently be invited to join groups. This cuts them off from the credit that they so badly need. (Develtere, 2005).

Another criticism of micro-credit as a sole method of poverty alleviation comes from the idea that poverty elimination requires political stability. While the Grameen Bank’s model works well in countries that are relatively politically stable, it is unclear how well it would work in areas of the world that are more prone to disruption, such as civil war-torn countries of Africa and Latin America. Loans from institutions such as the World Bank can be used by governments to implement stabilizing programs. Micro-credit can do no such thing, however. As a grassroots project, small loans can help the poor earn a modest living. They are not designed to pull a nation out of an economic or political nosedive.

So, in conclusion...

Despite these criticisms, the fact remains that micro-credit has helped millions of people provide food, water, shelter, and education for themselves and their families. More micro-credit organizations are developing daily all across the globe. A number of them have even been started in the U.S. (Yunus, 1999). It is important to remember, however, that micro-credit it is not a “magic bullet” for poverty. It must be implemented carefully and intelligently in conjunction with other poverty-alleviation methods such as macroeconomic policy adjustments and multilateral aid from Bretton Woods institutions and NGOs. Hopefully, with the proper application of methods, society can some day reach the point at which we can declare poverty a thing of the past.


Works Cited:

Chowdhury, M. J., Ghosh, D., & Wright R. E. (2005, Oct ). The impact of micro-credit on poverty: evidence from Bangladesh. Progress in Deveopment Studies, 5(4). Retrieved Apr 09, 2006, from Academic Search Premier.

Develtere, P., & Huybrechts, A. (2005, Apr ). The impact of microcredit on the poor in Bangladesh. Alternatives: Global, Local, Political, 30(2). Retrieved Apr 08, 2006, from Academic Search Premier.

President clinton endorses new campaign to help poor. (1997, Mar ). Fund Raising Management, 28(1). Retrieved Apr 09, 2006, from Business Source Premier.

Woodcock, M. J. (1999, Jan ). Learning from failures in microfinance: what unsuccessful cases tell us about how group-based programs work. American Journal of Economics & Sociology, 58(1). Retrieved Apr 09, 2006, from Business Source Premier.

Yunus, M. (1999). Banker to the poor. New York: Public Affairs.

Yunus, M. (2003). What is microcredit?. Retrieved Apr. 08, 2006, from Grameen Banking for the Poor Web site: http://www.grameen-info.org/mcredit/index.html.