Banker to the Poor

If you want to make money on the stock market all you need to do is to remember to 'buy high and sell low'. Correct advice on what to do, but ultimately useless since it does not tell how. Similar is the concept that 'free market economics and education' is the answer to the problems in developing countries. Pray tell me how?

Muhammad Yunus's book 'Banker to the Poor' is an extraordinary tale of an extraordinary person doing rather ordinary things for the most ordinary of people. It is a story of great courage and determination in the pursuit of an idea that was considered to be doomed from the start.

Muhammad Yunus is a patriot, who gave up a professorship in the U.S. to return to his country in 1971 following independence to help rebuild the new nation of Bangladesh. He got disillusioned with his first job at the Planning Commission and accepted professorship at Chittagong University. All along Yunus was really hunting for a cause. Before he hit upon the idea for Grameen in 1976, Yunus tried a number of things to help the villages around Chittagong university.

If Yunus hadn't been the head of the Department of Economics at Chittagong University, he would have been booted out by the bankers and officials when they first heard his hare-brained scheme to lend money to poorest people, ones who had no credit history or collateral. It was a scheme that was not only against all banking principles, but also against plain logic. The said that the poor would simply use the money for their own needs and not for a business and the project would surely fail.
Yet, he persisted and they lent him some money for a pilot scheme.

Only upon reading the book did I realise that in addition there were also social conditions that Yunus had to fight against. Yunus knew that he needed to target women to really make a difference. In Bangladesh most women observed purdah, left all economic decisions to the male in the household, so even getting them take the credit that was being offered was hard. On one hand were the religious right who claimed that women running businesses and taking loans was against Islamic law. On the other hand were the communists who insisted that this was 'capitalist' plot to rob the poor of their despair and rage.

Yunus is a devout Muslim, but not an Islamist. He tries to shy away from 'isms' and and he writes:

I am not a capitalist in the simplistic left/right sense. Bu I do believe in the power of the global free-market economy and in using capitalist tools... The able-bodied poor don't want charity. The dole only increases their misery, robs them incentive and, more important, of self-respect.
Povery is not created by the poor. It is created by the structures of society and the policies pursued by society. Change the structure as we are doing in Bangladesh, and you will see that the poor change their own lives.

It wasn't that Yunus simply had faith in the poor, he saw them differently. He did not see the poor as beggars but as potential entrepreneurs. Yunus did not patronize them gave them a thimbleful of help and hope and they responded. But why were the poor so much better at returning the money that Grameen lent them? Because that was their only chance to get out. It wasn't charity that they were seeking, all they wanted were the barest means for self-empowerment.

In hindsight all this seems quite logical, but many such schemes have failed to take off in other places. Why? Understanding a good idea is one thing, but implementing it is another. There is nothing small or simple about microfinance. It requires very specialized skills, lots of energy, and an acute understanding of local conditions. Grameen's success can be credited to the remarkable innovation and adaptability of their schemes. After every project Yunus and his team refined their program. In the early years, new hires were chiefly asked to observe and then criticize current schemes, and then they were asked to give their own ideas and suggestions for improvement.

Yunus isn't much of a believer in the 'trickle-down' theory and for a long time opposed the World Bank. Even schemes to directly help the poor are flawed. According to him, almost 75% of aid money is spent on commodities, technologies, and salaries of experts from the donor country itself. The rest of the money, if not embezzled, is spent on making the locals dependent on donor technology as opposed to harnessing local tools and technology effectively. And in most cases all development benefits and advantages are always captured by the privileged.

He mocks the per capita system of assessing economic growth. In his opinion, a correct measure of a country is assessing the per capita growth of the bottom 50%, more realistically the bottom 25%, of the population.

Microfinance, the hare-brained scheme of 1970s has now attracted the attention of the largest and biggest banks. With 97% of the loans being honored, they see it as another way to make a profit. While they can't realistically be expected to match the evangelical zeal of Yunus and his Grameen Bank, they still need to lend to the poorest. Currently, as the Economist recently reported, these banks are still vary of lending to poorest and are mostly lending to institutions, like Grameen, who have a proven track record. Ironic, huh?

It is easy to dismiss Yunus's aim to eradicate world poverty by 2050. In the 25 years of the Grameen bank's existence, it has not made much of dent in eradicating poverty in Bangladesh and there are no comprehensive studies to show that microfinance really alleviates poverty. But, it did make a difference to 6.6m of its borrowers. It did change the idea of how banking for the poor works. How many of us really are interested in being part of a solution?


Ashutosh said...

I personally was very impressed with Yunus's idea, although I don't know if it really would be a panacea for all poverty.
Check out his 1 hr interview with Charlie Rose on Google's really good.

Saket said...

Actions speak louder than words. Yunus is a really inspiring person in that regard. Just understanding a difficult problem and complaining about the factors that aggravate is one thing, but to find a worthwhile solution and implement it is quite another. India too needs patriots like Yunus.

Vivek Gupta said...

I don't mean to knit-pick but you mean 'buy low and sell high.' In practice though what you said is what occurs more frequently:).