As I’ve been investigating ways to re-distribute wealth, I’ve thought I’d read up on the Grameen Bank and their micro loans. Micro-credit is one of the best ways of tackling poverty that I’ve come across, and I thought I’d tell you about it. Grameen, which means village, was started by Bangladeshi economics professor Muhammad Yunus in the 70s. Originally run as an experiment, it is now one of Bangladesh’s most important financial institutions, the Grameen model has been replicated worldwide, and Yunus won the Nobel Peace Prize last year for his efforts.
The Grameen innovation was to put enough faith in the destitute to lend them money. What bank would lend a fiver to a beggar? Nobody would, because you wouldn’t see it again. You could give them a fiver, but not lend it. Muhammad Yunus thought otherwise – giving people money is undignified, and encourages helplessness and dependence. A loan gives people responsibility, it shows faith in them, it values them as real people with real potential. People can borrow small amounts and pay them back, a tiny amount a week, over a long period of time.
Let me give you an example of how it can work. Where I grew up in Madagascar, there are children working in the street all through the capital city. When I was about 14 or 15 I saw a boy about my own age leaning against a wall, with a pair of bathroom scales at his feet. This was his business. People don’t have scales of their own in Madagascar, so they could stop in the street, pay the boy a penny, and weigh themselves. I remember this boy well, because I thought at the time that in a different life that could have been me. I often imagine him as a case study when I’m reading about development initiatives.
This is how this boy’s life would have worked: every day he would pick up the scales from their owner. They wouldn’t be his. They’d belong to a neighbour or an uncle or something. He would stand on the street all day, starting early to get the people on their way to work. In the evening he would return the scales, and pay the owner a percentage of his earnings. The percentage he’d get to keep would be tiny. If it were enough to save, he would be able to consider leaving and trying to get a better job. If the owner can keep it to the barest minimum to live on, he keeps his little bathroom scale business ticking over, but the boy is little more than a slave. This is often how small businesses work in less economically developed countries – taxi drivers may not own their own cabs, shoe-shine boys may not own their brushes, and they cannot earn enough to take the risk of trying to change anything. That’s the poverty trap.
If there was a micro-loan company in the city, they would be able to lend the boy the £3 necessary to buy his own set of scales. He would then be able to keep all the money, paying back 10p a week to the bank. He would double his income at a stroke. The extra income would allow him to diversify, maybe in time to buy a pair of scissors, a stool and a mirror, and start cutting hair. A couple more loans like that and he’d practically have a salon. It can be as simple as £3. Yunus came up with the system when he realised he could lift an entire village out of poverty with just $37, spread between 42 different borrowers. With a tiny amount of capital, people could buy the materials and tools they needed for business, for cooking snacks, weaving mats, repairing clocks or bikes, raising chickens, opening a little shop.
These little loans are the essence of the Grameen Bank, and they’ve made it work by getting borrowers to form support groups, using positive peer pressure to make sure people keep up payments. They try to lend to women more than men, as women are more likely to use money well, on children and housing, and have less access to jobs. (In Bangladesh, many women are very restricted in where they can go and who they can talk to, so small home businesses are crucial.)
I’ve called this entry ‘upside down banking’, because the Grameen model has completely reversed priorities to normal banks. A few big loans are much more profitable than thousands of little ones, and you want to lend to educated, reliable people, not the illiterate and destitute. Banks are normally impersonal institutions interested in money, but Grameen bank managers meet the borrowers at their homes, know all their stories, and hold weekly community meetings. And usually you would be turned away from a bank for having a poor credit rating. Grameen turns away people who have too much money. It is a business oriented to the needs of the least.
As Muhammad Yunus says: “It’s not people who aren’t credit-worthy. It’s banks that aren’t people worthy.”
Read more about micro-loans:
- Read ‘Banker to the Poor – the story of the Grameen Bank’ or one of the many other books on micro-finance.