Tuesday, December 26, 2006
Muhammad Yunus - financial seed corn grows into a world poverty beater
Posted by David Smith at 10:00 AM
Category: David Smith's other articles

muhammad_yunus.jpg

The queue of distinguished achievers passing through Oslo at this time of year to receive their Nobel prizes always includes an economist or two. The Nobel prize for economics (more correctly the Bank of Sweden prize, which was added to the Nobels) goes to eminent theoreticians.

This year a Nobel went to an economist who is anything but a theoretician and the prize he received at a ceremony this month was for peace, not economics.

Muhammad Yunus, a 66-year-old Bangladeshi, was an economics professor at Chittagong University in 1974 when he had his moment of epiphany.

“I found it difficult to teach elegant theories of economics in the university classroom in the backdrop of a terrible famine in Bangladesh,” he said. “Suddenly I felt the emptiness of those theories in the face of crushing hunger and poverty. I wanted to do something immediate to help people around me.”

Those people, he discovered, were struggling to make ends meet at even the most basic level and were prey to unscrupulous money lenders. Next to the university campus was a village in which 42 people had borrowed tiny amounts from money lenders but at crippling terms. Yunus took on these loans, a total of just $27, to liberate them from the lenders.

The scheme spread. Banks were drawn into lending money to local poor people after Yunus agreed to act as guarantor. Despite their lack of creditworthiness on every conventional measure, acting as guarantor cost him very little. As he put it: “The poor paid back their loans on time every time.”

The involvement of the banks helped but Yunus was still not satisfied with the level of lending so he set up Grameen Bank (it means village bank) to provide loans. Grameen Bank was jointly awarded the Nobel peace prize with Yunus.

The rest, almost, is history. Grameen Bank provides loans to 7m poor people, 97% of whom are women, who are targeted because they tend to be more responsible borrowers and focus on the needs of their children. The loans range from house purchase and education through to micro enterprise, enabling the poor to set up as small businesses.

Defaults, according to Yunus, are tiny, just 1%, despite relatively high interest rates: typically 16% to 20%. Three decades on an idea — microcredit or microfinance — that began in the small Bangladeshi village of Jobra, has spread around the world.

Bill Clinton, a champion of the award of the peace prize to Yunus, set up a Grameen-style scheme in Arkansas when he was governor. The idea has taken the development world by storm.

The United Nations declared last year as the year of microcredit.

No large-scale development programme worth its salt lacks a microcredit scheme. Yunus recently held talks with Gordon Brown, the chancellor, in London, presumably with microcredit on the agenda.

It appeals to those who believe that straightforward aid does not give poor people the right kind of self-help incentives and that instead they need to be lent the resources to pull themselves out of poverty.

There are many microcredit schemes in Britain. South Coast Money Line, in Portsmouth, lends small amounts, typically £500, to people who cannot obtain loans from conventional banks or mainstream finance providers.
The loans, often to people on benefits, are to pay for essentials or home improvements. Its interest rates can be as high as 24% and the repayment record is not as good as Grameen Bank; about 11% of loans have been written off. But part of the deal is that borrowers get help in managing their finances and avoiding falling into difficulties in future.

“Muhammad Yunus is an inspiration to the international microfinance movement,” said Simon Frost, its managing director. “Poverty in this country is different from Bangladesh. But he is trying to give people a leg-up and help them achieve independence and sustainability and that is what we are trying to do.”

As with any successful movement, microcredit has its critics. Thomas Dichter, an American critic of development efforts in the Third World, says that the “hype and urgency” surrounding it is not justified.

“Microcredit is an almost perfect case of a phenomenon that has come to characterise much of development assistance — a widening gap between reality and propaganda,” he said. “For while the promise of microcredit is irresistible — help the poor out of poverty using their own entrepreneurial energies and in the process get our investment back — the hoped-for poverty reduction impact of microcredit remains elusive.”

Critics say that small loans help poor people to get by but do not lift them out of poverty. Many poor people would prefer jobs to setting up their own small enterprises, indeed many are not capable of successfully running micro businesses. Microcredit is also accused of ignoring those at the bottom of the heap, the poorest of the poor.

Yunus acknowledges some of these criticisms. Jobs are often the best solution to poverty, he argues, but in the absence of them micro-enterprises are a second-best alternative. Microcredit, he concedes, is not a silver bullet or panacea but something that should be used in conjunction with other development assistance. The debate will continue, but microcredit will remain flavour of the month for the foreseeable future.

There is another potential threat looming. In California’s Silicon Valley, they know that it is possible to invent things that are both popular and make lots of money.

Two years ago Yunus went to the valley to evangelise on behalf of microcredit and hoped to raise some money. Among the guests at a weekend seminar he gave were Sergey Brin and Larry Page, the multi-billionaire founders of Google, and Pierre Omidyar, the young software engineer who in the 1990s set up eBay, the internet auction site.

Omidyar, who used his eBay billions to set up a charitable foundation, was taken with the idea of microcredit but also thinks, despite its great success, that it is not ambitious enough. As long as it is seen as part charitable, part development aid, it will remain limited, he argues.

The way to really make it succeed, according to him, is to raise large sums on the world’s capital markets and allow people to make a decent profit on the lending. That way, the number of people lifted out of poverty by microcredit, instead of tens of millions, could stretch into the billions.

Yunus is uncomfortable with this. “Why do you want to make money off the poor people?” he said recently. “You make money somewhere else. Here, you come to help them.”

The genie, however, is out of the bottle. Yunus gave the world microcredit when it was so badly needed. Whether he can keep control of it is another matter.

From The Sunday Times, December 24 2006

Comments

“Why do you want to make money off the poor people?” he said recently. “You make money somewhere else. Here, you come to help them.”

While Yunus may be satisfied by the fruits of his charitable endeavors, others may need to be "induced" to give up their money. In the loanable funds market, the interest rate would simply be determined by the supply of loanable funds and the demand for loans. No one is trying to gouge the poor. Just the market working its invisible magic.

Posted by: Biomed Tim at December 28, 2006 06:56 AM