By Author and Contributor
How to help the most disadvantaged populations order to take them out of severe poverty without entering into a welfare logic?
This is the challenge taken-up by Muhammad Yunus, a Bangladesh economist and civil society leader who was awarded the Nobel Peace Prize for founding the Grameen Bank and pioneering the concepts of microcredit and microfinance.
Microcredit basically consists of very small loans to poor borrowers who lack collateral, steady employment and a verifiable credit history. It is designed to support entrepreneurship and alleviate poverty.
Bangladesh is one of the world’s poorest countries. In 1976, while visiting a small village called Jobra with his students, Muhammad Yunus realizes that his action as a social entrepreneur needs to be oriented towards the neediest people in the village. He noted that the vast majority of them are unable to deal with traditional banks because they are considered non-creditworthy. For Yunus, this inability of access to credit is the source of all exclusions. It is a vicious circle since villagers are not able to invest in order to improve their financial position. They are trapped in poverty.
But Muhammad Yunus found a way for them to escape. Some believe lack of efforts and complacency to be the true underpinnings of economic inequality. But, according to Yunus, “poverty is very rarely due to personal problems, laziness or lack of intelligence, but always the prohibitive cost of capital, even in very small amounts. What they lack in fact structurally is access to small capital, repayable at fairer rates and over greater time to finance micro-projects”. Indeed, despite their hard work, they cannot change their financial situation if all their resources are wasted in paying excessive interests. They need to enter the economic loop and generate their own income.
Because regular bankers do not take him and his idea seriously, he decides to spend 850 thakas (24€) from his own money. Those loans were aimed to finance small-sized projects of 42 women among the poorest in Jobra. This is enough for them to buy a hen and generate income from the daily sales of eggs for instance. On the due date, Muhammad Yunus has been entirely reimbursed.
This first experience being a success and since local bankers consider that those kind of loans are too risky, Yunus quits his job as a professor and becomes a social entrepreneur. He creates the Grameen Bank (“Village Bank” in Bengali).
A quarter of century later, results have convinced the skeptics. In Bangladesh, one job out of four is related to microcredit financing. The Bank operates in more than 50,000 villages and has lent more than 10 billion euros to his customers, 97% of those being women. Indeed, experience shows that they are more responsible and trustworthy than men… Thereby, Grameen Bank also contributes to a revolution in thinking in this Muslim country of strong patriarchal culture.
Grameen Bank does not establish any written contract, does not prosecute those who cannot reimburse, neither ask them for any kind of collateral or deposit. The only condition to be eligible to micro-loans is to understand how it works. Still, repayment rate are around 98.9%, higher than most “traditional banks” (e.g. around 97% for French commercial banks). Today, Grameen Bank is also profitable. It counts more than 20,000 employees and had its total revenue increased by nearly 20% to 17 million euros in 2013.
Micro-credit has now been exported to more than 57 countries across the world like China, India and Bolivia, but al so to developed economies such as the United States or France. It is a very good example of how social businesses can help the needy and be profitable at the same time.
Charity is far from being the only way to alleviate poverty. As stated by Yunus: “A charity dollar has only one life; a Social Business dollar can be invested over and over again.”
Picture source: London School of Economics