Trust-based lending by the inventor of microcredit

This week we got to see the founder of Grameen Bank, Mohammed Yunnis speak in person at the Fairmont Hotel in downtown SF (Commonwealth Club). He pioneered a new form of banking that can be called “trust-based” or “community-based” lending, which is contrast to the worldwide banking system based on “collateral” and “credit-histories.” For this he won the Nobel Peace Prize in 2006. See this FAQ http://www.grameen-info.org/bank/GBGlance.htm

    In 1976, he was a economics professor an Dhaka university where he found the theories he was teaching had little practical applicability to the poverty he was seeing outside the university. So he decided to do what he could. He lent small amounts of money (~$500) to poor people and they became very happy. Then he asked, why doesn’t the bank do this?

    For months he struggled to get banks to lend to the poor, but found them to be uncooperative. Since poor people didn’t have credit histories + collateral the banks were unwilling to lend money. His insight was to turn those assumptions on their head by lending to people with no money and history of taking loans. He sought out poor women who were afraid of taking money, and tells his employees that those are the people they should loan to.

    No lawyers. By challenging all the “assumptions” he came up with something completely new. He said that the current banking system has lots of money and is setup to loan large amounts of money to people who already have money. That architecture doesn’t scale down to vast majority of people who need it. Using the analogy of ships, he said the modern banking system is like a large supertanker. For poor people you need a system more like a dinghy boat, and if you scale down a supertanker architecture to that size it would sink.

    Grameen Bank does not require any collateral against its micro-loans. Since the bank does not wish to take any borrower to the court of law in case of non-repayment, it does not require the borrowers to sign any legal instrument.

    Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. Repayment responsibility solely rests on the individual borrower, while the group and the centre oversee that everyone behaves in a responsible way and none gets into repayment problem. There is no form of joint liability, i.e. group members are not responsible to pay on behalf of a defaulting member.

    Social business. Yunis described the concept of “social business” intended simply to help people, which can exist alongside profit-maximizing businesses and often work in synergy.  Related, see January 24 front page article on Gates speech at Davos, “Bill Gates Issues Call For Kinder Capitalism”

    “If we can spend the early decades of the 21st century finding approaches that meet the needs of the poor in ways that generate profits for business, we will have found a sustainable way to reduce poverty in the world,” Mr. Gates plans to say.

    Everyone is an entrepreneur. Yunis explained that all people are entrepreneurial by nature, and it is the system that either brings it out in them or not. Grameen Bank has been able to convert tens of thousands of beggars into door-to-door salespeople who earn a living – since they visit those house anyways, why don’t they take along something to sell and make money? It turns out beggars have unique knowledge of when particular people are home, and and household demographics that is useful in selling.

    Begging is the last resort for survival for a poor person, unless he/she turns into crime or other forms of illegal activities. Among the beggars there are disabled, blind, and retarded people, as well as old people with ill health. Grameen Bank has taken up a special programme, called Struggling Members Programme, to reach out to the beggars. About 98,500 beggars have already joined the programme. Total amount disbursed stands at Tk. 102.27 million. Of that amount of Tk. 69.74 million has already been paid off

    There are many other programs (scholarships, cell phones, loan insurance, etc) described on the website. Some facts,

    • Total amount of loan disbursed by Grameen Bank is US $ 6.55 billion
    • Loan recovery rate is 98.35 per cent
    • Total number of borrowers is 7.34 million, 97 per cent of them are women
    • Grameen Bank finances 100 per cent of its outstanding loan from its deposits. Over 58 per cent of its deposits come from bank’s own borrowers. Deposits amount to 139 per cent of the outstanding loans
    • Ever since Grameen Bank came into being, it has made profit every year except in 1983, 1991, and 1992.
    • Grameen Bank has 2,468 branches. It works in 80,257 villages. Total staff is 24,703.

    I expect the Commonwealth Club audio transcript should be available in a few weeks. Here are some funny short clips from where is interviewed on the Daily Show (2006) right after recieving his nobel prize where he uses the phrase “trust-based lending.” He was also interviewed a few weeks ago by Steve Colbert (2008). Speaking to Colbert, Yunis remarks that the current home loan default crisis in the US was caused not by the people who took the money but rather by the banks who didn’t understand how to lend money.

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    One Response to “Trust-based lending by the inventor of microcredit”

    1. Kiva: The Ebay for Microfinance « Sri Spot Says:

      […] Yunis was first 30 years ago, and today there are 10,000 MFIs worldwide. He estimates there are 500M people needing loans like this, and only 100M have been reached through traditional microfinance to-date. Access to capital is still a bottleneck he says. Note: Kiva is prevented from operating in India due to their bank regulations. […]

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