The Bright Hope of Microcredit

Can a man make a difference in the world with just twenty-seven dollars?

Muhammad Yunus did.

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 £17 [$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 (“The Autobiography of Muhammad Yunus”, Grameen Bank).

From that small beginning grew the power of microcredit.

Microcredit is the extension of very small loans to the unemployed, to poor entrepreneurs and to others living in poverty who are not bankable. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimum qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of financial services to the very poor; apart from loans, it includes savings, microinsurance and other financial innovations (“microcredit,” Wikipedia).

Following that small success in loaning approximately twenty-seven dollars in loans to a group of impoverished women in Bangladesh, Yunus went on to found Grameen Bank, a bank which has loaned approximately 5.72 billion dollars in loans of an average of $100, of which 5.07 billion has been repaid. The loan recovery rate is over 98%—an astoundingly high rate for a bank. More importantly, millions of families have become economically self-sufficient through the efforts of the bank. Because of their success, numerous microcredit operations have risen up in other struggling areas of the globe.

For his efforts, Muhammad Yunus along with Grameen, has been awarded the 2006 Nobel Peace Prize.

With the award, Yunus has received a barrage of media attention. Among the most insightful news reports (some of which are older but have been reissued in the wake of the Nobel Peace Price) on Yunus and the microcredit phenomenon are:

• “Banking on People,” The Newshour with Jim Lehrer (PBS)
• “Working Through the Concept of Micro-Finance,” Morning Edition (NPR)
• “The Economic Fruits of a ‘Microcredit’ Laureate,” Day to Day (NPR)
• “Loan, Bank Work Bring Nobel Prize to Bangladeshi,” All Things Considered (NPR)
• “The birth of micro credit,” CNN.com

I was fascinated by the story of Yunus and Grameen Bank when I first learned of their work through The New Heroes, a PBS miniseries documenting the work and successes of various social entrepreneurs. I was even more thrilled to learn of the Nobel Peace Prize a few days ago. Economic stability is crucial to social stability and true peace, and I’m glad that the Nobel Peace Prize committee recognized this and broadened its criteria in awarding its prize.

The story of Yunus and his pioneering use of microcredit fascinates me for a number of reasons. Some pundits have suggested that the performance of Grameen Bank indicates that we should take a second look at the value of traditional charity. Perhaps. But I believe it shows even more clearly the need to reexamine our belief in conventional economic models.

Grameen is not a charity. Like all banks, they are a business enterprise. However, they do not operate in the typical manner of a business enterprise. In conventional economic wisdom, self-interest is the reigning principle. Individuals and organizations are encouraged to pursue maximum profit; “Greed is good.” Traditional financial institutions therefore do not loan to those with no collateral. Seeking out the highest potential return,They loan to wealthy financial interests (ironically, the international banks focusing on that traditional market experience a much higher default rate than Grameen with its much “riskier” investments). In conventional economic theory, this is perfectly acceptable—even virtuous. As each entity seeks to maximize profit, all parties benefit. Everyone wins.

The reality is less attractive. Certainly the corporate interests reap the rewards of such a system. But we’ve seen little indication that “developing” nations are actually developing. Most find themselves further impoverished, with spiraling national debts and the gap between the rich and the poor increasing at breakneck speeds.

Yunus and other social entrepreneurs offer a better model. They endeavor to return the word “enlightened” to the phrase “enlightened self-interest.” Where traditional businesses seek profit, Yunus sought a means by which to aid his community. In doing so, he was able to establish a profitable business. How much better would our society be if most entrepreneurs followed that example? How much would we accomplish if all our businesses set about first and foremost to provide a service or product of genuine moral or ethical value to society, with profit being merely the a byproduct of their efforts?

Many mainstream economic apologists like to rightfully point out that the U.S. and international financial institutions like the World Bank pour a great deal of money, both loans and other, into developing nations. What they neglect to mention are the conditions typically attached, and where that capital is targeted. Much of the aid is very consciously intended to bind those nations to global markets and “free-trade” principles as established by the reigning corporate interests. The balance of power in such relationships is weighed heavily in favor of the global corporations. Traditional cultures are eviscerated by the ubiquitous commercial culture of globalization. Far from helping the populations of those nations become more independent, they create an institutionalized dependency. The livelihood of the communities becomes dependent on the interests of corporate decisionmakers with no stake in the success of the community, and the people are subject to the caprice of global markets. Labor in all nations find themselves in a race to the bottom as global capital runs around the globe like quicksilver to whomever can offer the most enticing market (bearing only a pretense of Adam Smith’s “natural advantage”) at any given moment.

While this globalization model is failing miserably to lift the masses out of poverty and into self-sufficiency, Grameen is finding remarkable success through helping the poor find a place in local markets. The money they borrow goes to purchasing a cow in order to sell milk in their neighborhood; or to purchase a barn of chickens, so that the family can harvest the eggs to sell at the local market; or to purchase a wireless telephone for the use of which the individual can charge their community a small fee. These people both serve their local community and patronize it. Their money is largely kept within that community. They are more truly independent.

Can we learn from their example? Obviously, purchasing a cow or some chickens is not a practical form of business in most Utah communities. But the principle of local entrepreneurship is still a valid one here in Utah. Creating an attractive economic environment for out-of-state businesses was a major part of Governor Huntsman’s economic policy agenda in his campaign, with such conventional suggestions as tax holidays and public funding of employee training. Why not instead foster local entrepreneurs, partnering with such organizations as Salt Lake City’s Vest Pocket Coalition?

In serving the poor in Bangladesh, Yunus focused on the segment of the population that has been the least empowered and the most economically vulnerable in virtually every culture throughout history. Women have always faced greater restrictions to their property and civic rights. Not only did Yunus’ concentration on women help to empower and protect this historically vulnerable segment of the population, but Yunus found that directing his efforts towards women produced far better results in terms of alleviating poverty in general.

Women are very cautious with the use of the money, but the men were impatient; they wanted to enjoy right away. They will entertain friends, they will go to the movies, they will do whatever they could to enjoy for themselves personally. But women didn’t look at it personally. Women looked at it for the children, for the family and the so on, and for future (Muhammad Yunus, “Banking on People,” The Newshour with Jim Lehrer).

I am a firm believer that government involvement is crucial to helping alleviate poverty. But despite the insistence of the conservative noise machine, neither I nor the vast majority of liberals believe that government action is sufficient. We understand that there must be concerted efforts from the private sector as well; that we must find ways to personally contribute to the effort. Yunus has provided a great model for action. The success of Grameen Bank provides proof that we do not need to accept global epidemics of poverty as unavoidable facts of life, and that corporatization and globalization are neither as effective nor as inexorable as their proponents would have us believe. If we use our human ingenuity and capacity for compassion, we can make a long-term difference in the world. There are better ways out there which can provide for a broad-based prosperity, in which all partners share in the responsibility and the blessings that come from such cooperation. I believe that such a vision is possible not only in foreign nations, but here in the U.S, and in Utah. And because terror and war thrive on social instability and despair, that is the best shot at winning the “war on terror” we will ever get.