The global financial crisis has highlighted a curious success story: A bank that doles out loans to some of the world’s poorest, least-creditworthy people continues to have a payback rate of nearly 100 percent.
Nobel Peace Prize winner Muhammad Yunus, known as the “banker to the poor,” quips that the Grameen Bank he founded owes its success to “sub-sub-subprime borrowers” who also own nearly all the bank’s equity.
When Yunus approached traditional banks over 30 years ago about lending to the poor in Bangladesh to start small businesses, he was told it could not be done.
But since 1983, the bank has lent more than US$8 billion to nearly 8 million people in Bangladesh who have had a 98 percent repayment rate. About 4 million more have been similarly helped through partner organizations in 38 other countries — with an average repayment rate of 95 percent.
Yunus thinks his model could teach big commercial banks some lessons.
“We have now shown that the poorest of the poor can be creditworthy,” he said in an interview during a recent trip to Bangkok. “Our loan repayments are as high as ever.”
Grameen takes on clients who have no collateral, no credit history and no lawyers. The vast majority of them are women. Most take out loans for US$200 or less each time.
Yunus attributes micro-lending’s success to a system of “moral responsibility” that makes approval and repayment of the loan the concern of the community as well as the individual borrower.
Here is how it normally works. A group of five prospective borrowers from similar social and economic positions come together to determine an appropriate loan for each. The request then goes before a larger council of borrowers, who are also shareholders in the bank, and finally to the bank for approval.
It’s not entirely surprising that Grameen and other microfinance institutions have been largely unscathed by the financial turmoil, said Mayumi Ozaki, a microfinance specialist at the Asian Development Bank. They generally support tiny businesses such as retail shops, vegetable growing and craft making that are not affected much by a global trade slowdown.
But the success of Grameen is also attributed to building relationships and trust.
“Microfinance loan officers visit their poor clients frequently,” she said. “They have good knowledge of the creditworthiness of their clients, and the clients as well value the trust and have a good credit discipline.”
Ozaki says it is difficult to draw too many lessons for big commercial banks, whose transactions are usually much larger and more complicated. But the success of microfinance “shows that successful banking operation on whatever scale is about understanding the risk and managing it well and not overreaching,” she said.
Such overreaching, as well as lax oversight, contributed to the US credit crisis.
One big problem in the US was that lenders made risky loans to people with shaky credit under the false assumption that housing prices would keep rising. Those loans were then packaged into securities and sold to investors around the world. When borrowers started defaulting in growing numbers, financial firms were left with huge losses. Scores went out of business.
US government regulators, meanwhile, had little power over mortgage brokers and other firms that catered to so-called subprime borrowers. Only now are lawmakers talking seriously about stricter regulations for the mortgage industry.
Yunus said at Grameen: “We know the limits of our operations and we know how much risk the bank and our clients can take.”
A focus on consumption, rather than income-generating activities, contributed to the US credit fiasco, he adds.
Grameen also has been successful because it’s grounded in what he calls “the real economy,” rather than “fantasy economy” of ever-climbing asset prices. A loan for a goat, for example, produces tangible benefits that can support a family.
“The closer you are to the real economy, the safer you are,” he said.
Grameen’s model has been replicated successfully in more than 100 countries, including the US. Established in the US since early last year, Grameen America lends investment capital to people who otherwise would not have access or would have to rely on money from pawnshops and loan sharks.
The failure of traditional banks to provide this kind of credit is a “big hole” in the US financial system where millions cannot open bank accounts, according to Yunus.
The global financial meltdown “has given us an opportunity to create a financial system that is more inclusive,” said Yunus, who was in Bangkok to launch the Yunus Center in partnership with the Asian Institute of Technology, a university, aimed at poverty reduction in the region.
Yunus’ latest project is advocating what he calls “social business,” which combine altruism with business models to bring corporate efficiency and innovation to help the poor. The goal is to solve social issues and not to maximize profits.
But unlike charity which has no mechanism to regenerate its funding, the business must recover its full costs and recoup its investment.
Joining with multinational companies, Grameen has successfully launched a yogurt business, Grameen Danone, which provides malnourished children with a low-cost source of nutrition. Grameen Veolia has built several water treatment plants that provide clean drinking water to the poorest in Bangladesh, where some groundwater is contaminated by arsenic. BASF Grameen provides cheap treated mosquito nets to help prevent malaria.
Despite cynicism about whether such cause-driven projects could be done on a large scale with no profit incentive, Yunus remained optimistic. He has faced plenty of naysayers before.
“When things fail, then it’s time to ask questions, fix the problems and redesign the system so it works for everyone,” he said. “That’s the challenge of the day.”
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