Grameen Bank, Bangladesh

THE GOOD BANKER
Alan Jolis
in The Independent on Sunday Supplement, 5 May 1996

Muhammad Yunus believes that he can eradicate world poverty, all by the use of one simple idea. Now the world's leaders are starting to take him seriously.

Cynics roll their eyes to the ceiling, but Muhammad Yunus, a 56-year-old banker from Bangladesh, is that rare thing: a bona fide visionary. His dream, which he is actively pursuing, is the total eradication of poverty from the world. "One day," he says confidently, "our grandchildren will go to museums to see what poverty was like."

But what is truly amazing about Yunus is not the extravagance of his vision but the fact that, after two decades of working in anonymity, his ideas are winning converts among the world's top policy-makers. Bill Clinton said in his last election campaign that Yunus deserved a Nobel Peace Prize and cited his experiment in Bangladesh as a model for rebuilding the inner cities of America. Since then, the World Bank has made him the head of its advfsory committee to propagate his vision worldwide. He has also won countless prizes and accolades: hailed by "Asia Week" magazine as one of the 25 most influential Asians, by the "New York Times" as the star of the UN's Women's Conference last year, and by ABC TV as Man of the Week. When he's not busy receiving prizes -- the World Food Prize and the Care Humanitarian Award among them -- he is escorting Hillary Clinton on a field trip to his borrowers or preparing for a visit by Queen Sofia of Spain. In July he will come to England to receive an honorary doctorate from Warwick University.

What this man has invented that excites so much interest is something called micro-credit. It is both terribly simple and, in the field of development and aid, completely revolutionary. Rather than donating billions to help large infrastructure ventures, Yunus gives loans of as little as A320 to the destitute. A typical borrower from his bank would be a Bangladeshi woman (94 per cent of the bank's borrowers are women) who has never touched money before; all her life, her father and husband will have told her she is useless and a burden to the family; finally, widowed or divorced, she will have been forced to beg to feed her children. Yunus lends her money -- and doesn't regret it. Kept on the straight and narrow by a mixture of peer pressure and peer support, she uses the loan to buy an asset which can immediately start paying income -- such as cotton to weave, or raw materials for bangles or a cow she can milk. She repays the loan in tiny weekly instalments until she becomes self-sufficient. Then, if she wants, she can take out a new, larger loan. Either way, she is no longer poor.

His bank provides no training, no education, no infrastructure for its clients. "I firmly believe that all human beings have an innate skill," says Yunus. "I call it the survival skill. The fact that the poor are alive is proof of their ability. We do not need to teach them how to survive: They know this already. Giving the poor credit allows them to put into practice the skills they already know. And the cash they earn is then a tool, a key that unlocks a host of other problems."

The Grameen Bank ("rural bank" in Bengali), which Yunus has built over the last 20 years, is today the largest rural banbk in Bangladesh. It has over 2 million borrowers and works in 35,000 villages throughout the country. Assuming that each borrower has six dependents, it is possible that 10 per cent of the population of Bangladesh (or 12 million people) now live directly from the benefit of Grameen loans. By 1994, the bank had lent a total of A3650m; in 1995, it made loans of A3250m. By 1998, it plans to increase its lending to A3650m a year. The bank actively seeks out the most deprived in Bangladeshi society: beggars, illiterates, widows. Yet it claims a loan repayment rate of 99 per cent. Most western banks would be delighted with such a bad debt ratio. And, since 92 per cent of its shares are owned by the borrowers themselves (the balance is owned by the government), it truly is a bank for, and of, the poor. Each borrower is issued with one non-tradeable share and has to start a saving scheme as a form of insurance against disaster. "What Yunus has achieved is simply brilliant," says Bruno Lefevre, who just completed a study of Grameen for UNESCO.

The man whose vision has made this all possible is a soft-spoken, bespectacled ex-professor, who lives and dresses simply -- he earns only A3160 a month and is, in public, unassuming and shy. In private Muhammad Yunus is funny, charming and approachable. His best work is done in a two-bedroom apartment at the bank's headquarters in Bangladesh's capital, Dhaka, where he lives with his wife and 10-year-old daughter, Deena. He does not own a car, and, although he was recently persuaded to get a credit card for hotel bookings, he has never actually charged anything to it.

Yunus was born in 1940 in Chittagong, the business centre of what was then Eastem Bengal. His father, a goldsmith, did well for himself and pushed his sons to seek higher education. But his main influence was his mother, Sofia Khatun, who had 14 children, of whom five died in childbirth. "Mother always helped any poor who knocked on our door," he explains. "Thanks to her I always knew I would have a mission in life, though I didn't know what form it would take." Tragically, a congenital illness reduced her mental abilities in later life.

In 1965, he was awarded a Fulbright scholarship and went to do a PhD at Vanderbilt University in Nashville, Tennessee, where he stayed for seven years. Returning in 1972 to become the head of the economics department at Chittagong University, he found the situation in newly independent Bangladesh worsening day by day. Tbc terrible man-made famine of 1974, which by some estimates killed 1.5 million Bangladeshis, changed his life for ever. "While people were dying of hunger on the streets, I was teaching elegant theories of economics. I started hating myself for the arrogance of pretending I had answers. We university professors were all so intelligent, but we knew absolutely nothing about the poverty surrounding us. Why did people who worked 12 hours a day, seven days a week, not have enough food to eat? I decided that the poor themselves would be my teachers. I began to study them and question them on their lives."

Yunus spent most of 1975 and 1976 leading his students on field trips to the nearby village of Jobra. It was easy to see the problem, but what was the solution? He introduced improved rice-farming techniques and established a farmers' cooperative to irrigate during the dry season. Soon he realised that targeting farmers was not helping the truly destitute underclass -- the landless, assetless, rural poor.

Then he made his big discovery. One day, interviewing a woman who made bamboo stools, he learnt that, because she had no capital of her own, she had to borrow the equivalent of 15p to buy raw bamboo for each stool made. After repaying the middleman, she kept only a lp profit margin. With the help of his graduate students, he discovered 42 other villagers in the same predicament.

"Their poverty was not a personal problem due to laziness or lack of intelligence, but a structural one: lack of capital. The existing system made it certain that the poor could not save a penny and could not invest in bettering themselves. Some money-lenders set interest rates as high as 10 per cent a month, some 10 per cent a week. So, no matter how hard these people worked, they would never raise themselves above subsistence level. What was needed was to link their work to capital to allow them to amass an economic cushion and earn a ready income."

And so the idea of credit for the landless was born. Yunus's first approach was to reach into his pocket and lend each of the 42 women the equivalent of A317. He set no interest rate and no repayment date: "I didn't think of myself as a banker, but as the liberator of 42 families."

Immediately, Yunus saw the impracticality of carrying on in this way, and tried to interest banks in institutionalising his gesture by lending to the poorest, with no collateral -- Bankers laughed at him, insisting that the poor are not "creditworthy". Yunus answered, "How do you know they are not creditworthy, if you've never tried? Perhaps it is the banks that are not people-worthy?"

Undeterred, he started an experimental project in Jobra, the village he and his students had been studying, and staffed it with his graduate students. Between 1976 and 1979, his microloans successfully changed the lives of around 500 borrowers. But it was hard work combining the project with his full-time job as a Professor, and he continued to lobby the state-owned Central Bank and the commercial banks to adopt his experiment.

In 1979, the Central Bank was won over and arranged for the Grameen project, as it was then called, to be run from the branches of seven state-run banks -- initially in one province, and, by 1981, in five. Each expansion confirmed the effectivenesss of micro-credit: by 1983, Grameen had 59,000 clients in 86 branches. Eventually, Yunus decided to quit academia and go it alone. Grameen was incorporated as a separate legal institution in 1983, and since then it has moved fast -- some would say too fast -- to expand its operations.
Grameen is not noticeably "bank-like". It does lend money, and it does get repaid with interest. But there are no telephones in its branches, no typewriters or carpets -- most borrowers are visited by Yunus's staff in their villages -- and no loan agreements. Borrowers who are not destitute are excluded, and so, usually, are men. Yunus soon discovered that lending to women, who traditionally have the least economic opportunity in Bangladeshi society, was much more beneficial to whole families; and that women were more careful about their debts. All that an assetless and landless person must do in order to be eligible for a loan is to prove that they understand how Grameen works. Over the years, representatives of the borrower-shareholders have agreed with the bank certain principles and commitments which they will undertake to help improve their lives and their ability to meet their debts. To Westerners these may seem at best paternalistic; however, the slogans are chanted enthusiastically by the microborrowers. They pledge to abide by "the 16 decisions", a set of personal commitments such as "We pledge to send our children to school," and "We pledge not to demand or pay dowry for our daughters' marriage." The most important of these commitments is to join up with four fellow borrowers, none of whom can be a family member, to form a "group". The group dynamic provides a borrower with the self-discipline and courage needed to enter into these uncharted waters. Peer pressure and peer support effectively replace collateral: if one borrower defaults the whole group is penalised. The system also saves the bank the costly business of screening and monitoring borrowers.

Transactions are kept simple. Loans are always for a year and interest is fixed at 20 per cent simple interest, not compounded. Repayment starts the second week of the loan which, though it may sound punishing, releases the borrower from the need to produce a lump sum at the end of the year -- and typically builds her confidence. All loan disbursements and repayments are made publicly in "centre meetings" (in front of eight or 10 groups) on a weekly basis. in a country steeped in corruption at all levels of administration, Grameen prides itself on being as transparent and open as possible.
Hajeera Begum was born in 1959, in a village not far from Dhaka. Her father, a farm labourer, could not feed his six daughters, and he married her off to a blind man simply because he demanded no dowry. Hajeera and her husband survived on what little she earned cleaning houses, but she was unable to feed her three children regularly. One day she asked her husband for permission to join Grameen, but he had heard it was a Christian front organisation bent on destroying Islam. He threatened to divorce her if she joined.

Without telling anyone, she travelled to a nearby village and attended some introductory sessions where Grameen workers explained the principles of the bank. The first time the members of the group she had joined took the oral exam to show they knew the rules of Grameen, Hajeera was so nervous that she couldn't answer the questions. "All my life I was told I was no good. I was told I brought only misery to my parents because I was a woman and my family could not pay for my dowry. Many times I heard my mother say she should have killed me at birth. I did not feel I was worthy of a loan, or that I could ever repay it."

She would have given up, but the other members of her group encouraged her, and she passed the exam. At last the day came when she mustered the strength to ask for a loan of 2,000 thaka ( A335). When she received it, tears ran down her face. Her group persuaded her to use the loan to buy a calf for fattening and a share of the rice harvest to process and sell. When her father brought the calf to the house, her husband was so excited that he forgot his threat of divorcing.

Within a year Hajeera had paid off her first loan, taken a second loan and used it to rent a piece of land, planted it with 70 banana seedlings, and used the balance to buy a second calf. Today, with a mortgage, she owns a rice field, and goats, ducks and chickens. "We now enjoy three meals a day," says Hajeera. "We can even afford some meat once a week. I intend to send all three of my children to school and college, even university. You ask what I think of Grameen? Grameen is like my mother. She has given me new life."
Independent studies by the World Bank and others indicate that within five years, about half Grameen's 2 million borrowers manage to pull themselves up over the poverty line, while a further quarter hover near the line. In addition, studies of the Grameen method suggest that after a wife joins the bank, her husband is likely to show her more tenderness and respect. Divorce rates drop among Grameen borrowers, as do birth rates.

Why does micro-credit work? What theoretical framework does it rely on? Yunus avoids jargon and graphs; instead, he states simply: "Poverty covers people in a thick crust and makes the poor appear stupid and without initiative. Yet if you give them credit, they will slowly come back to life. Even those who seemingly have no conceptual thought, no ability to think of yesterday or tomorrow, are in fact quite intelligent and expert at the art of survival. Credit is the key that unlocks their humanity."

That is not to say that micro-credit solves all problems. One quarter of Grameen borrowers do not manage to repay their loans and remain trapped in poverty, often -- like the woman I met recently who had been featured four years ago on an American television programme as a "Grameen success story " -- because they are too sick or infirm. It is this 25 per cent which is now giving Yunus the most worry; often, he believes, problems arise from the lack of social infrastructure.

Meanwhile, critics of Grameen abound. The most vocal are the fundamentalists who believe the bank is anti-Islamic. These conservatives regularly spread wild rumours about Grameen: Hajeera Begum's blind husband was told that if she joined Grameen she would secretly be forced to abandon her faith. I also heard of women being told that Grameen would turn them into Christians and feed them to the tigers; or that they would be tortured, tattooed on the arm and sold into prostitution. One woman was beaten repeatedly by her family to prevent her from joining in 1987, while in 1994, in the conservative north-west of the country, a branch of Grameen was burnt down.

Yunus denies that he is in an undeclared war with Islam. Indeed, Cirameen claims to be more Islamic than ordinary banks, because it builds up self-employment, instead of forcing women to seek factory jobs away from their families. Furthermore, it does not violate lslam's ban on charging interest because its borrowers own the bank, so that in essence they are paying interest to themselves. When opponents try to prevent Grameen from entering a village, his staff have orders to remain outside, avoiding confrontation, and wait for the women to come to them.

Another frequent criticism is that Grameen charges too much interest initially 16 per cent and for the last four years 20 per cent. Yunus's answer is simple: if anyone can run a bank for the poor and charge less, please go ahead and do so. He has promised to reduce interest rates if and when he can. This is significant, because in l995, for the first time in its existence, Grameen finally made enough profit to operate on a fully commercial basis without the need for any more preferential loans (which it has received in the past from Bangladesh's Central Bank and sympathetic banks in the West), or grants from charitable trusts such as the Ford Foundation. Yunus also intends to pay cash dividends to his borrowers.

Within the international development community, many people working in traditional aid agencies distrust Yunus's self-help philosophy. They argue that what keeps poor people trapped is inadequate social and welfare policies. It isn't micro-loans that are going to bring water, sanitation, health care and schools to desperate communities. The success of microcredit is distracting governments from their responsibilities, they say. Even those who generally approve of him sometimes ask why Yunus's programme needs to be profit-making at all.

Yunus answers this last point with the observation that any institution for the poor that is not self-sufficient is bound to be hurt by reliance on donors: "It is like telling a patient that he can breathe by himself for 23 hours a day, and the balance of the time the govemment will provide the oxygen. That means you are at their mercy. Any time a politician changes his mind, or a bureaucrat forgets, you die." Many aid programmes, he says, are just trying to make poverty tolerable rather than to eliminate it.

Despite the opposition, Yunus's method is gathering supporters. Grameen is being copied in 52 countries. The methods are adapted to suit local conditions, but the solution of creating a counter-culture that empowers individuals with their own capital is the same.

The United States alone has over 500 Grameen spin-offs. Englewood is a murderous crack-ridden ghetto on the south side of.Chicago, where you would never imagine a Bengali professor would have any role to play. But the Full Circle Fund, a Grameen clone created by the city's South Shore Bank, has operated there for 10 years. Here the borrowers are mostly welfare mothers: they take out loans of as little as $375 ( A3250) to buy nail-sculpting boxes; they start beauty salons, make and sell jewellery, open bookstores, create daycare centres and rehabilitate buildings. In Chicago dowries are not an issue but, as part of joining FCF, borrowers pledge not to waste money on expensive funerals.
The bank has entered into an arreement with the Governor of Illinois so that borrowers can continue to receive welfare benefits in the transitional period until they become self-reliant. To see women weep for joy when they inform the authorities that they no longer need welfare is a moving experience.

Group solidarity works well in America's black ghettos, on Indian reservations, in rural Arkansas -- wherever the social life of the poor is tightly knit. But in many urban settings in the West the lack of it has been the greatest stumbling block to the Grameen method. Maria Nowak, a worker for the World Bank who has set up Grameen replicas in Albania and in Bosnia, has not had the same success in France, where she is based. "Ther e is simply no solidarity among the poorest of the poor here," she says. "Why would a Zairean tortured in prison in her country and now living in Paris care about a fellow borrower living in a train station out of garbage bags? There is not enough social fabric left on which to hook the group solidarity." But even replicators in Asia and Africa report that it is more difficult to make microcredit work in urban areas, especially among those who have no fixed address and thus few links to their neighbours.

Yunus does not pretend to have solution for all problems. What he does say ts that by creating wealth in the countryside, Grameen can reduce the pressure on those moving to the urban slums. He also points to the success of the newly formed Shokhti Foundation, which has 118,000 micro-loan borrowers in the shanty towns of Dhaka; and to the Self Employed Women's Association (SEWA), which has many more in Indian cities.

It has also been suggested that microcredit cannot flourish in Westem countries without Bangladesh's long history of self-employment. But Yunus believes that self-employment is the future. He has visited China, where Grameen loans have helped starving peasants who have too little to keep warm in winter; he has travelled to South Africa and met with the poor who jump at the chance to start their own car repair workshop or timber-sawing business, or plant wheat. All this has convinced him that, as Jan Piercy, US Executive Director of the World Bank, puts it: "Creating jobs requires huge investment, management, overheads ... It is extremely complex and time-consuming to set up, whereas self-employment is inunediate. It may be tiny, but each tiny bit contributed by the millions adds up."
It is Yunus's very pragmatism, and his refusal to be cornered by ideology, which his supporters say may prevent him from getting the Nobel Prize for economics -- which usually rewards theoretical work. But Yunus is far too ambitious for Grameen to worry about a mere prize. What he has set his sights on is the total eradication of poverty from the world and to hear him discuss it is spine-tingling: "There are 1.2 billon poor in the world. Grameen has reached 2 million of them, our copycats service another 1.5 million in Bangladesh. Our international replicators have 2.5 million borrowers. That means so far, counting dependants, we've helped 36 million. If we can reach 100 million, that will be a critical mass. The rest will be easy.

"People say I am crazy, but no one can achieve anything without a dream. When you build a house, you can't just assemble a bunch of bricks and mortar, you must first have the idea that it can be done. If one is going to make headway against poverty, one cannot do business as usual. One must be revolutionary and think the unthinkable."
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