Mohammad Yunus

Microfinance:Mohammad Yunus

What is Microfinance?

Microfinance

According to The Economist, microfinance has a broad range of definitions. It could mean anything from the alms provided by a priest to the services provided by the state banks and the credit unions to their poor clients. One of the definitions appropriate for our project is the different kinds of financial services like insurance, deposit accounts and loans provided to individuals and households with low income and the poor. The aspect of microfinance which differentiates it from other kinds of financial services is that no collateral is required as a security for a loan. Reputation is the basis on which money is provided. Many countries in the developing world do not have a formal system of property rights and this prevents them from providing proper collateral. Therefore, traditional financial services cannot be provided to the poor in these countries making microfinance incredibly invaluable. Without microfinance, the only way for the poor to procure loans would be to seek the services of the money lenders many of whom end up charging them an exorbitant fee and exploit the clients who may not be able to repay the loan on time.

What is Micro-credit?

Microfinance refers to the financial products like loans, savings, insurance and transfer services which are aimed at low-income people while microcredit is defined as the small loans made by a bank or other such institution to its poor clients. It is often offered without any collateral through group lending. Microcredit focuses on the building capabilities of a micro entrepreneur, employment generation, trust building, and assistance to the micro entrepreneur on initiation and during difficult times. Its an instrument for socioeconomic development.

History of Microfinance and Microcredit

Microfinance started in an informal manner during the 18th and the 19th century in numerous European countries. From the very beginning, microfinance was a form of intermediation between microsavings and microcredit. Slowly, over a period of time, regulations, recognition and mandatory management evolved. Finally, during the 20th century it became a part of the banking sector. In Asia, microfinance seems to have a longer history. However, there is not much information about the chit funds in India, hui in China, arisan in Indonesia or the paluwagan in the Philippines. In the financial sector development, the financial institution which have indigenous origin have been mostly ignored. The chit funds of India which are supervised and the highly diversified rural and microfinance sector in Indonesia are two exceptions. Microcredit revolution came into play in 1970's since the poor were catered by unsupervised cooperatives and credit NGO's. The whole concept of providing credit to the poor is credited to Dr. Akhtar Hameed Khan, founder of the Pakistan Academy for Rural Development and pioneer of the idea of microcredit.

Mohammad Yunus

Mohammad Yunus with the Nobel Prize-Poverty does not belong in civilized human society

Mohammad Yunus

Mohammad Yunus interacting with poor village Women

The most famous successful application of microcredit can be attributed to Dr. Muhammad Yunus, a Bangladeshi banker and economist. In 1974, the year when Bangladesh fell under the grip of a famine, Yunus led a group of students on a field trip to a poor village in Chittagong district. There they interviewed a young woman with three children who made bamboo stools for a living. They learnt that she had to borrow the equivalent of 22 cents to buy raw bamboo for the stools she made and that after repaying the middleman, she made a profit of just 2 cents. Yunus immediately felt something was wrong. “How can somebody who makes such beautiful bamboo stools live under such abject poverty?” he thought. He knew that if only she could borrow money for her raw bamboo at a fairer rate, she would not have much difficulty to amass enough money to break the cycle of poverty and raise her family above the subsistence level. But the existing economic system made that almost impossible. The banking system was extremely unfriendly to the poor and illiterate. Under that system, the poor would never be able to save and invest in expanding their economic base. They would always be condemned to live a life of poverty, of hand-to-mouth survival. And all this because they did not have a tiny amount of money to get started. This knowledge shocked Yunus. He felt theorizing about millions of dollars in his university courses was futile if for lots of people, the problems of life and death were posed in terms or cents. He was angry, angry at himself, at the economics department and thousands of other wise people who had ignored this problem. He had never heard of people suffering for lack of 22 cents. As a first attempt to help the poor, Yunus lent the equivalent of $27 from his own pocket to 42 women in Chittagong district. He did not have to wait long for the result to appear. He soon found out that with a small amount of money it was possible not only to help the poor survive, but also to create the spark of initiative and enterprise required to bring themselves out of the cycle of poverty for good.

Going against the advice of banks and the government, Yunus kept on lending micro-loans, and in late September 1983 , Yunus founded the Grameen bank. This bank, which simply means “The village bank”, was based on the humble principles of solidarity and trust. Grameen's 60 % of the shares were supposed to be allocated to the borrowers and 40 % to the government. However, when Grameen was approved by the government, Yunus noticed that the figures were reversed. This highly perturbed him and within two years Yunus got it changed with 75% of the shares belonging to the borrowers and 25 percent to the government. In 1980’s Grameen's expansion program added approximately 100 branches every year. Today, in Bangladesh, Grameen Bank has 1,084 branches, with 12,500 staff serving 2.1 million people in 37,000 villages. On an average working day, the bank collects $1.5 million in weekly installments. 94% of the borrowers are women and more than 98% of the loans are paid back, which is a higher recovery rate than any other banking system. Inspired by Yunus’ success, many others have embraced his concept. The methods used by Grameen Bank are applied in projects in 58 countries, including the US, Canada, France and Norway. Presently, over 100 million people worldwide are enrolled in various microcredit schemes. Prominent global figures, otherwise at each other's throats, such as Paul Wolfowitz, head of the World Bank, and Hugo Chávez, the leftist President of Venezuela, have commended Yunus' accomplishments.

The infrastructure used by Yunus for lending was very simple:-

Loans last one year

Installments are paid weekly

Repayment starts one week after the loan

The interest rate is 20 percent

Repayment amounts to a 2 percent of the loan amount per week for fifty weeks

Interest amounts to 2 taka per week for every 1000 taka of the loan amount

The bank workers were discouraged from being pompous. Instead, they traveled miles to meet the borrowers. There was a personal element attached to it.

Muhammad Yunus thinks that credit is the last hope left to those faced with absolute poverty. Therefore, he believes that the right to credit should be recognized as a fundamental human right. In the preface to his autobiographical book “Banker to the Poor: Micro-Lending and the Battle Against World Poverty” Yunus mentions that he deeply and firmly believes that we can create a poverty free world and that this view is not a product of a pious dream but a concrete result of experience gained in the work of Grameen Bank.

In 2006, Muhammad Yunus, along with Grameen Bank, was awarded the Nobel Peace Prize, for his efforts to eliminate poverty and create economic and social development. Giving this prize to Yunus and Grameen Bank is an acknowledgement that peace is impossible in a world full of poor people. In the prize announcement the Norwegian Nobel Committee mentioned:

“Muhammad Yunus has shown himself to be a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries. Loans to poor people without any financial security had appeared to be an impossible idea. From modest beginnings three decades ago, Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever more important instrument in the struggle against poverty.”

Yunus has won a number of other awards, including the Ramon Magsaysay Award, the World Food Prize, the Sydney Peace Prize and the Ecuadorian Peace Prize. Moreover, Yunus has been awarded 26 honorary doctorate degrees, and 15 other special awards. Bangladesh government has issued a commemorative stamp to honor his Nobel Prize and in January 2008, Houston, Texas declared January 14 as "Muhammad Yunus Day."

Banker to the poor: Mohammad Yunus in an Interview: http://www.youtube.com/watch?v=YxpTFwQx-A8

Conclusion

Grameen Bank was not only highly successful in reducing the poverty level but also in empowering the downtrodden women of Bangladesh. Yunus' idea of lending money to groups of people promoted solidarity among women, which gave them more social power. Grameen Bank challenged the conventional banking practice by getting rid of the collateral required for loans. Solely on the basis of mutual trust, accountability, participation and creativity the bank was established. Yunus’ concept of micro credit has been used worldwide and has been very successful to reduce poverty. Mohammad Yunus always stressed that charity is not the solution to poverty, that it is a way to shrug our responsibility. People go about with their lives without being concerned about the poor. The real solution would be to create a platform which will provide everyone with a fair chance. Equality in opportunity needs to be created, instead poverty is handed down from one generation to another. A large portion of the tax payers money goes into financing programs that are managed by bureaucracies formed by the government. Therefore, social-consciousness-driven organizations, financially backed by the state and the civil society, are needed to bring about the much needed positive changes to meet necessary social goals. Yunus also stressed on the removal of protectionist measures. According to him, it is the rich who benefit from it. The poor would benefit more from bigger markets where there is free flow commodities, finances and people.

Sources

Banker to the Poor, Micro-lending and the Battle Against World Poverty-Mohammad Yunus, First edition,1999

http://www.microfinancegateway.org/section/faq

Does History Matter? The Old and New World of Microfinance in Europe and Asia by Hans Dieter Seibel-2005/10, University of Cologne Development Research Center

Microfinance: Harnessing enterprise to fight poverty, Edited by Tom Clougherty, Globalization Institute London, first published in 2006,

http://www.grameen-info.org/bank/index.html

Article: http://www.time.com/time/asia/2006/heroes/bl_yunus.html