By Philip Alexander
Through microfinance, Muhammad Yunus has turned conventional banking wisdom on its head. Lending to the poor has become a powerful tool for social and economic change.Through microfinance, Muhammad Yunus has turned conventional banking wisdom on its head. Lending to the poor has become a powerful tool for social and economic change.
Sending money to those too poor to have assets as collateral was not a new concept in the 1970s. But conventional banking wisdom assumed it to be either a philanthropic activity, or a high-risk one with heavy default rates. Muhammad Yunus turned that received wisdom on its head introducing the concept of microfinance as a self-sustaining business model.
In fact, Grameen itself started out in 1976 with funding from the government, the central bank and state-owned banks, born from a research project by professor Yunus’s team at Chittagong University in Bangladesh. From 1983, the resulting Grameen Bank project became independent, with the state retaining a stake of just 10%, while the rest of the bank is owned by its customers.
Yunus’s philosophy has always gone well beyond the commercial, promoting microfinance as a driver for wider social change in addition to poverty eradication. In this respect, although built partly on traditional village cooperative systems, Grameen has also sought to modernize social structures. In particular, it has pursued greater economic equality for women, who account for 97% of its borrowers, and Yunus enshrined 16 principles for the bank that included discouraging the practice of marriage dowries.
From the ground up
Even though microfinance is beginning to operate on a vast scale, Yunus is keen to remind his enthusiastic audience that it needs to do so from the ground up. In this context, he explained to Emerging Markets earlier this year that basic legal and regulatory systems needed close attention. “Conventional banking law is like the architecture for a supertanker. All we need is an architecture for smaller boats that can go into shallow waters. That is what microcredit is about,” he said.
“It’s important to tell governments that they should not get involved in direct lending to micro-cap companies because it is very damaging and undermines the private sector,” says Elizabeth Littlefield, CEO of the Consultative Group to Assist the Poor (CGAP), a microfinance industry organization housed at the World Bank.
Once the message of microfinance as an engine of private sector growth is understood, the potential is vast. Credit ratings agency Standard & Poor’s believes the sector could grow almost 15 times over the next decade, from $17 billion today.
Grameen itself has grown from a loan portfolio of less than $500 in one village in 1976 to one of nearly $500 million in August 2007, covering 5 million customers across almost all of Bangladesh. The value added by enabling micro-enterprise is estimated at between 1% and 2% of the country’s total GDP.
The poor always pay back
Yunus’s motto that “the poor always pay back” has been proven time and again, with Grameen’s overdue loans consistently less than 3% of the total, and charge-offs less than 2%. Such a performance is built on hard work and detailed knowledge of the circumstance of every borrower, says Enrique Ferraro, managing director of Accion Investments, which has stakes in microfinance firms around the world.
“You must have a very good methodology to evaluate the maximum possible borrowing ability of each household. You don’t want to lend them less and prevent them using the money they need, but certainly you don’t want to lend them more just to promote consumption based on indebtedness.” It is a model that some sub-prime lenders in the US might wish they had used.
Inevitably, with conventional banking systems excluding the vast majority of the population in so many developing countries, Yunus’s message began to find a willing audience outside Bangladesh. Even established rural lenders like Bank Rakyat Indonesia were influenced by the changes inspired by Yunus’s ground-breaking Grameen Bank in Bangladesh.
“Before the 1970s and Grameen, we were financed mostly by the government or social agency funds, extending loans at subsidized interest rates. It was only from 1984 that we aimed at becoming a working commercial bank,” says Sulaiman Arif Arianto, managing director of Bank Rakyat’s microfinance unit and a UN advisor on inclusive banking.
Spreading the message
Today, Grameen is an umbrella for numerous other development activities including irrigation and telecommunications dissemination. And with a Nobel Prize to his name, Yunus has not lost his appetite for spreading his message. He is advising the multilateral organizations and helping promote microfinance projects in some of the largest potential markets of all, such as India and China – earlier this year, he told Emerging Markets that he was holding discussions “at the highest level” with the People’s Bank of China and the China Banking Regulatory Commission.
Unsurprisingly, he is also drawing major global financial institutions in his wake. “From a commercial perspective, we are seeing that microfinance is viable as a business,” Citigroup’s global microfinance director, Bob Annibale, tells Emerging Markets. Citigroup has created structured products for use by the microfinance industry, for example to allow Grameen-backed institutions in India to source international funds while hedging foreign exchange risk.