November issue 2006
When Trust is the Collateral
It was the flood of 1988. I needed a boat to get to the head office of the Grameen (or “rural”) Bank. A soft spoken, unassuming gentleman, casually clad, sat at a plain wooden table. There was no air conditioning and the fresh breeze flowed freely through the open windows. My posh camera seemed quite out of place.
Dr. Muhammed Yunus shook my hands warmly and the words seemed to flow easily from his mouth. Here was a man who had created one of the most remarkable organisations in banking history.
The Grameen Bank gave money only to the poor. Loans to the landless were interest free. None of the debtors had collateral. In 1988, 75 per cent of the bank was owned by the landless who could purchase one share each for Tk 100 (about two pounds). The bank boasted 346 branches and 3,000,000 members, 64 per cent of whom were women.
Incredibly, about 98 per cent of the loans were returned. The bank was rapidly expanding, and by the following year, Yunus hoped to have 500 branches.
Yunus was teaching at Middle Tennessee State University when the Bangladesh Liberation War broke out in 1971. He helped to supply arms to the Mukti Bahini, who fought against the Pakistani army. After the war ended, he returned home to the newly created nation of Bangladesh in 1972 and began teaching at Chittagong University.
The famine in 1974 touched him deeply. The sight of death in the streets made him question the validity of the economic theories that he espoused. In his soul-searching, he mixed intimately with the villagers and learnt of their habits, values and problems. One of these villagers was a woman who made moras (bamboo stools). He was appalled when he discovered that she earned only eight annas (about one pence) for her daily labour. Here was a woman who was skilled, worked long hours and had taken the initiative of setting up a business for herself. Yet she was still being cruelly exploited.
Angered and dismayed, he sought out the reasons for this shamefully unfair situation. She did not have the money to buy the bamboo, so she had to borrow from the trader. The trader then paid a price for the finished stool that was not much more than the price of the raw materials.
With the help of one of his economics students, Yunus made up a list of 42 people in similar conditions. He paid out their total capital requirement of Tk 826 (less than one pound per head) from his own pocket. It was a loan, but it was interest free.
Aware that this was not a real solution to the problem, Yunus approached his local bank manager with an idea: give money to the poor. The man laughed. Undeterred, Yunus approached Janata Bank in Chittagong. The manager was encouraging, but felt that in the absence of collateral, a guarantee by influential people in the village would be necessary. Yunus realised that this would eventually lead to some sort of a slave trade so he eventually talked them into accepting him as the guarantor. And so, the concept of microcredit — the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans — was born.
The system worked and Yunus suggested that it was time that the bank took over the responsibility themselves. “So I tried to establish that this could be done as a business proposition,” says Yunus. “I became vocal against the banking institutions, arguing that they were making the rich people richer and keeping the poor people poor through something called collateral. Only a few people could have access to funds.” The bankers were not convinced.
“They said if I could do it over a whole district and still come back with a good recovery, then they would reconsider. I accepted their challenge. They asked me to go far away, where people would not recognise me. So I went to a far-flung district in 1978, and I started working there.”
It worked beautifully. The small loans made a big difference to the people, but the banks still dragged their feet. Yunus suggested the formation of a new bank, one owned by the people themselves. The banks were sceptical, but he got a lot of public support, and eventually in October 1983, an independent bank called the Grameen Bank was formed. The bank survived, as contrary to most other viable commercial banks, this one was truly designed to serve the people.
Dr. Yunus is modest about his own contribution. Asked if the bank would survive without him, he smiles and says: “Look at what we have achieved. Could it ever have been possible without dedication at all levels?”
Always quick to accept new innovations, Yunus was the first person to create an account when my organisation, Drik, established Bangladesh’s first email service in the early 1990s. Later, he ordered the entire Grameen offices countrywide to be networked.
The bank now has nearly 6.5 million members, 96 per cent of whom are women. The US$5.3 billion given out as loans and the US$4.7 billion recovered are figures any commercial banker would be proud of. Other successful Grameen entities under the more recently formed Grameen Foundation have also been born. Grameen Phone, a highly successful telecommunications company, has provided phones to rural women.
However, there have been critics. The high rate of interest is seen to be exploitative and there have been accusations that the methods of recovery frequently employed by overzealous bank officials have led to extreme hardship. Many feel the skyscraper that now houses the bank distances it from the poor it represents. Close links with former U.S. President Bill Clinton and American media mogul Ted Turner, and the uncritical position taken by Yunus in his public interactions with them, have also been viewed with suspicion. Regarding the criticism of his economic model, Yunus has a simple answer: “The problem has to be solved. Should someone come up with a better solution, I would happily adopt it.”
In Bangladesh, a country largely known for its natural disasters, Yunus has provided the people with a sense of pride that they desperately needed. For years now, many have hoped that he would enter politics and provide a welcome alternative to power-hungry politicians. But despite being an adviser to the 1996 caretaker government, he has so far stayed away from mainstream politics.
That this teacher-turned-banker received the Nobel Peace Prize this year is not only a source of great joy to Bangladeshis, but also an honour they feel was long overdue.