"If we are looking for one single action which will enable the poor to overcome their poverty, I would focus on credit”. (Dr Muhammad Yunus)
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Twenty five years ago, Muhammed Yunus, a Bangladeshi economics teacher, was visiting a village when he met a woman who made bamboo stools. She couldn’t afford to buy the bamboo to make the stools, so she had to borrow the money from the bamboo sellers and then pay them a large part of the profit from each one she sold. There was so little money left for her to keep that she couldn’t afford to buy more bamboo, so she had to borrow more money. And so the cycle continued with no way out for her. She couldn’t borrow money from friends or family because they were as poor as she was. She couldn’t borrow from the bank because she had no collateral (property or land) to guarantee that she would pay back the loan.
Yunus went around the village and found forty-two people who were in the same situation - trapped in a cycle of poverty with no escape. When he added up the amount of money that they needed to break free of the cycle, it came to just twenty-seven dollars. As Yunus says “I felt ashamed of myself for being part of a society which could not provide even twenty-seven dollars to forty-two hardworking, skilled human beings.”
He lent them the money and told them to pay it back whenever they could. He got all of it back, so he went to other villages and did the same thing. He always got his money back. The official banks didn’t want to get involved in what he was doing, so Yunus started his own bank. The Grameen bank was born, and with it a new approach to lending money – ‘micro-credit’.
The conventional banking system is based on the principle that the more you have, the more you can borrow. Grameen gives priority to those who have nothing, particularly the poorest women. The loans are small and repayments are made in small amounts spread over a year, with a built-in insurance scheme so that the family doesn’t become responsible for the loan if something happens to the borrower. There is no legal contract between the bank and the borrower, and no danger of legal action if the repayments are not made – the relationship is based on trust and good faith.
Repayment rates are very high for two main reasons. Firstly, borrowers know that they cannot borrow again if they don’t repay the first loan. And secondly, they must join a group of other borrowers who all share some responsibility for other members’ loans and are encouraged to make group decisions. So there is considerable peer pressure and support from the group to encourage them to pay it all back.
Another important difference from conventional banks is that Grameen has a social programme. The system encourages the borrowers to do practical things to improve their living conditions, health and level of education. These are known as the ‘Sixteen Decisions’ which include, for example, not continuing the dowry system, growing fresh vegetables, organising clean drinking water and good sanitation, education for children, and being ready to help each other whenever necessary. Conventional banks would not consider this to be any of their business.
The bank now lends over a billion dollars to more than two million borrowers, 96% of them women, and involving more than half of the villages in Bangladesh. The repayment rate is 99%. The rural economy of the country has improved greatly since the bank started. And the success has spread. This year it was estimated that there are now over 7,000 microcredit organizations in the world, lending to over 16 million of the poorest people.
Grameen’s success in Bangladesh has also shown that the developing world has lessons to teach richer countries like the USA and Britain. Both countries have begun to encourage microcredit schemes based on the Grameen model, in an attempt to deal with their own levels of poverty.
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Is credit a problem where you live? Do you think that banks are fair on their customers or do you think they should be more interested in helping people and less interested in making profit? Send us your opinions.
Amrendra Kumar writes “What I think about this issue is that what Mr. Younus has done is really great stuff. I am from India and we do have the same kind of government controlled Grameen Bank, but it has not been so popular among the real poor from Indian villages as getting credit from the above bank is a very difficult task. If you have decided to get a loan from a bank then be ready to pay 10% of the credit's amount to its various employees as a bribe and then you will get your credit accepted and not have to put up with months and year of harassment. So you can imagine how a simple Indian farmer/villager cannot even think of receiving credit from our Indian bank. I definitely appreciate Mr. Younus for his Grameen bank in Bangladesh. We indeed require more enthusiasts like him to come forward and be an icon.”
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Ameer writes “I want to say that the banking system has many things wrong with it. The worst is lending money to others to get more money by using the interest system. The poor are increased by this system and it leads to many crimes. Prices are becoming high for the same reason. Those people who deposit their money in the bank only want to get more money, not to help others, so they never think of the good ways to improve the life of people but to make people's lives more difficult. They live comfortable lives by exploiting the needy persons.”
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Eric Ramirez Rodriguez writes “In Mexico the poor people do not have bank credit, so the customers of the banks in Mexico are not poor. Why should the banks in Mexico help their customers? Also, if the banks make more profits, they have to pay more taxes and the government should help the poorest people with those taxes.”
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Nina writes “I live in Ukraine. My country is located in Europe, and it’s not a secret that the cost-of-living index applies to third world countries (in social meaning). The main problems of the Ukrainian credit system are the low level of solvency of Ukrainian people and high interest rates. For example: the average salary of an ordinary employee is $150 per month and the interest rate for a car is 15% per year (not including hidden dangers). The imperative prepayment is 20% of the car’s value. If the person can’t pay (for more than 2 months) the bank takes away the car and some share of the paid loan money. It’s scary.”
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Nguyen Tuan Anh writes “Great article. I already knew about this model. But after reading this article I knew about it in more detail and felt its significance. Vietnam, my country, is a poor country and I think the Grameen model is actually meaningful no matter which country if is in. There are lots of banks for the poor in Vietnam based on the Grameen model. They give the poor a hand to overcome obstacles. Eliminating hunger and reducing poverty is an important policy of our government.”
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Petar writes “I live in Serbia. In my country foreign banks have played a leading role since 2001. Really, my opinion is that they only have in mind financial considerations. I say that because in my country banks charge more than 15 per cent interest per year for small credits.”
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Borgia Hounkpatin writes “Here in Benin credit is like a daily food problem and the number of those who need it (especially women) increases every year. The reason is simple; they need cash for their small business. And the government cannot solve this problem because of its limited means. Banks and others micro finance services take advantage of this situation by giving them credit against collateral. Sometimes it is very difficult for them to pay back because the interest rate is too high, because it is up to financial service to set it. Finally, even if, through banks and micro finance services credit is given, some problems stay and these women do not see any improvement of their conditions.”
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Daniel Crespo from Venezuela writes “I would like to express my concern about this article.
Venezuela is located in South America, and is a rich country because we have oil, minerals, natural gas and incredible people. Despite our richness we are poor people and the poverty every day is worse for several reasons:
First of all, the government is always involved in corruption affairs, for this reason, Venezuela does not have a good educational system, health system and a good economic climate.
Secondly, Venezuelans expect everything from the government and we do not believe in the power of working. In addition, the majority of the time we are thinking of our underdeveloped country. Fortunately, Venezuelans feel more confident and able to improve our quality of life. As a result, we have more money to invest and get microcredit from banks and they are more fair on their customers. It seems to me, nowadays, banks are very interested in their profit sthat help people to progress economically so I strong disagree with that because Venezuelans have demonstrated that they are responsible people with a huge capacity to work hard and return the money back completely to banks, but bankers haven’t realized that.”
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Marisa Lu writes “Firstly, I would like to said thank you for your weekly article, it's very valuable both in the contents and pictures for me, I always look forward to seeing the updated article, good job, really. I am not only learning English but learning knowledge about it.
Based on this article, I admire the spirit behind the Grameen Bank, it's trust and share. For most bank systems, that door is not open for poor people, that's why loan sharks appear. The Grameen bank is like some kind of dream that needs passion and courage to support. I hope this good system can run in my country.”
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Sarada Chamarthy writes “Credit is not a problem in my place. But I feel it has become established that eligibility to get credit is more if you possess more money and less if you possess less money. Only the persons who have collateral securities can get loans. The improvement of the economy of any country is mainly dependent on improving the economy of the down trodden. It is necessary to bring the people below the poverty line to above the line. If the down trodden are taken care of, if they are provided proper assistance, the economy of the country will be strengthened.
The Grameen Bank concept is a wise concept. The people living in such areas are hard working. They are prepared to do any amount of work but not able to do anything due to the lack of even small investments. Instead of lending millions of dollars to the industrialists who are already wealthy, lending to the poor people will help a lot in increasing their standard of living and in turn the standard of living of the country.
I feel the banks should be more fair to their customers. Their purpose may be commercial. Even then they should be more interested in helping the people. Lending smaller amounts in large numbers with lesser rates of interest yields more profit than lending huge amounts in smaller numbers with higher rates of interest, if it is organised properly.”
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International Year of Microcredit 2005
BBC: Microcredit
How Credit Cards Work
If you enjoyed this article, why not read our article on Cooperatives?
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