Micro Lending and the Decline of Poverty
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Muhammad Yunus
Last night I caught a fascinating interview with Muhammad Yunus [book: Banker to the Poor: Micro-Lending and the Battle Against World Poverty].
Mr. Yunus started a bank in one of the world’s poorest countries. His first loan was for $27 dollars and it was shared between 42 people…and it made a big difference in their lives.
He gave loans to people who have no collateral, he busted the business model of every major bank that came before him by challenging the “truism” that poor people were not credit-worthy, and he did it with trust and hand-shake loans.
The video below is just a teaser for an hour long video [costs about $2.99 from Google Videos - now free, see update at the bottom of the post] but it will give you the idea of how Mr. Yunus got started.
Mr. Yunus’ bank [Grameen], which lends money, based on only trust to the poorest people in the world who have zero collateral, has a 98% repayment rate. I’m guessing that traditional banks are just a weeee be jealous of that number.
So how did he do it?
He gave the highest priority to the people who needed the loans the most. The poorer you are the more likely you are to get a loan. This decision was based on the belief that these people had a sincere desire to build a life for themselves and that they realized that a loan was a golden opportunity to create something of lasting value.
Compare this to charity or a donation that does not have to be paid back… Mr. Yunus realized that a loan taught the borrower a lot more and therefore created a more powerful and independent person. The gained pride, strength and confidence in their abilities when they successfully paid off a micro loan. Then they were ready for the next step financially.
Lending to the Poorest was only Part of the Equation
The percentage of loans in a traditional western bank by gender?
Men = over 90%
Mr. Yunus’ bank wanted to do something radical and make half of its loans to women. But then they began to notice something amazing:
Loans made to women were doing a much greater good to the borrower’s family than loans made to men!
Yikes, I’m sad to say that it makes sense. Mr. Yunus’ bank tossed the 50/50 lending ratio out the window and now lends 97% to women.
The poverty rate in Bangladesh has decreased 25% since Grameen began its micro lending practices, and is on target to reach 50% by 2015.
An amazing story…on December 10, 2006 Mohammad Yunus will receive the Nobel Peace Prize in Oslo, Norway. Yes, the peace prize, undoubtedly sending a message about the relationship between poverty and peace.
UPDATE: Very cool news on this post, since I originally posted, VISA has sponsored the full length Yunus Microlending video and so now you can watch it for free in one of 100 different languages. Thanks to Maria for the tip.
Wow! Great find.
Ramit, over on I Will Teach You to Be Rich did a Friday Entrepreneur spotlight on a non-profit that was doing the same thing.
[...] Jon from Art of Money posted a great write up about Micro Lending and the Decline of Poverty in Bangladesh after watching an interview with upcoming noble peace prize recipient, Muhammad Yunus. [...]
[...] 6:59 am - Mon 20 Nov 2006 « Micro Lending and the Decline of Poverty [...]
Microcredit In China — Keeping The Power From The People…
Co-blogger Steve Dickinson and I were discussing microcredit in China the other day. Steve relayed how one of his students in a China law class he taught in Italy a few months back who headed up a leading microcredit agency…
I keep hearing more and more of microlending—your post inspired me to write my own on Small Failures. Seems like a really incredible way to shift the economic paradigm in the U.S. I found some interesting pros and cons during my research, which leads me to believe that like most of the institutional “changes” made in this country, a U.S. microlending industry could work wonders in theory, but would require a complex approach that seems to be beyond the change-makers here. Hopefully I’ll be proved wrong and it’ll take off!
Hey great post. Personally I’m very involved with Kiva.org, which I highly recommend. I enjoy it so much I made a blog all about it. Please visit sometime. It’s http://gokiva.blogspot.com
Adam
I admire Mr. Muhammad Yunus’ accomplishments and more importantly, his sincerity in addressing the issue of poverty in Bangladesh. Now the corporate world has come to realize the potential of a particular class that it has created thru years of colonization, slavery and inequality. I don’t question Mr. Yunus’ motives, but I do question the motives of these born-again-do-gooders spearheaded by World Bank.
I’ve been involved on a microlending financing in a small community in the Philippines. For more than ten years of my involvement I am proud to say that we’ve contributed to upgrading livelihood of our 300 clients. But I cannot, with all conscience, say that we’re the answer to alleviating poverty in this community. As hard working our clients are, they have to work six days a week (and seven days is not out of ordinary) and a day’s missed at the marketplace is a financial disaster for both the clients and the microlending.
The bigger picture that we need to see is on ethical issues of corruption and cronyism (World Bank - are you listening?)which breed social dysfunction. Better Health care and public education systems are much to be desired. Transportation infrastructure in dire need of help. I don’t think microlending can (or will) address these issues. It all boils down to eradication of government corruption and inefficiency.
It’s a shame what happened to Bangladesh. I hope the world steps up and helps them.
[...] Pitfalls of Microlending (Boston.com) Micro Lending and the Decline of Poverty (ArtofMoney.org) ESR Review (Brigham Young University) The Hidden Wealth of the Poor (The [...]