- Banker to the Poor: Micro-Lending and the Battle Against World Poverty
I borrowed this book from my friend (thanks Sumit!), so I couldn't underline the book (like I normally do). Instead, I've written up these book notes.
This is an excellent book that I highly recommend. It's a quick read and it's the first book I've read that sounds confident about eradicating world poverty in the next 25 years.
- "There are many ways for people to die, but somehow dying of starvation is the most unacceptable of all. It happens in slow motion. Second by second, the distance between life and death becomes smaller and smaller, until the two are in such close proximity that one can hardly tell the difference. Like sleep, death by starvation happens so quietly, so inexorably, one does not even sense it happening. And all for lack of a handful of rice at each meal. In this world of plenty, a tiny baby, who does not yet understand the mystery of the world, is allowed to cry and cry and finally fall asleep without the milk she needs to survive. The next day she may not have the strength to continue living." (vii)
- Yunus started the Grameen Bank, a bank in Bangladesh that pioneered the use of micro-lending to improve the lives of the poor. Micro-lending is a type of lending where very small amounts of money are lent at reasonable interest rates (low double-digits annually). Borrowers are extremely poor and often use the money to buy materials that they use to create a product to sell, such as using bamboo to make stools. Without micro-lending, the borrower would often borrow from moneylenders who charge exorbitant interest rates (as high as 10%/week), which allows the borrower to make enough money to survive but nothing more. In this way, micro-lending allows borrowers to break out of their work slavery to improve the lives of themselves and their families.
- "Grameen" means "rural", as the Grameen bank is devoted to helping the rural, landless poor
- The Grameen Bank serves 2.5M people in Bangladesh
- Yunus, an economics professor, started focusing on poverty after thousands of the poor moved to urban areas looking for food during a famine in 1974
- "Analyses of the causes of poverty focus largely on why some countries are poor rather than on why certain segments of the population live below the poverty line. Socially conscious economists stress the absence of 'entitlements' of the poor. What I did not know yet about hunger, but would find out over the next twenty-two years, was that brilliant theorists of economics do not find it worthwhile to spend time discussing issues of poverty and hunger. They believe that these will be resolved when general economic prosperity increases. These economists spend all their talents detailing the processes of development and prosperity, but rarely reflect on the origin and development of poverty and hunger. As a result, poverty continues." (35)
- Definition by the Consultive Group to Assist the Poorest (CGAP) and the Microcredit Summit Campaign Committee: a "poor" person is someone who lives below the poverty line, and the "poorest" is someone in the bottom half of those below the poverty line.
- In the Grameen microcredit scheme, the bank will not lend to you until you're part of a group of 5 borrowers. If you fail to repay the loan, the entire group suffers because they won't receive future loans. This social pressure is in part responsible for the high level of repayment.
- Also, prospective borrowers must be trained in the rules of the bank for seven days and then pass a test. Only after this ordeal are they given a loan.
- Under Grameen I, borrowers are required to deposit 5% of their loans into a group fund which any member can borrow from interest-free. In 1998, the group fund exceeded $100M, more than the net worth of all but a few Bangladeshi companies.
Grameen repayment system:
- Loans last 1 year
- Installments are paid weekly to bank workers who come to the village of the borrower
- Repayment starts 1 week after the loan
- Interest rate is low (20% for income-generating, 8% for housing, and 5% for higher education)
- Repayment amounts to 2% of the loan amount per week for 50 weeks
- Interest payments amount to 2 taka / week for every 1000 taka of the loan amount
- They've found that lending to women does more to improve a family's well-being than lending to men (73)
- Bank managers are hired straight from college and are tasked to set up a new bank in a village and run that bank (highly entrepreneurial)
- Bangladesh has a 120M people in an area the size of Florida. Instead of telling poor countries to limit population growth, Yunus thinks that international agencies and governments should focus on improving the economy in general and the condition of the poor in particular.
Grameen's 16 Decisions (135):
1) We shall follow and advance the 4 principles of the Grameen Bank - discipline, unity, courage, and hard work - in all walks of our lives.
2) Prosperity we shall bring to our families
3) We shall not live in a dilapidated house. We shall repair our houses and work toward constructing new houses at the earliest opportunity.
4) We shall grow vegetables all year round. We shall eat plenty of them and sell the surplus.
5) During the plantation season, we shall plant as many seedlings as possible
6) We shall plan to keep our families small. We shall minimize expenditures. We shall look after our health.
7) We shall educate our children and ensure that they can earn to pay for their education.
8) We shall always keep our children and the environment clean
9) We shall build and use pit latrines
10) We shall drink water from tube wells. If they are not available, we shall boil water or use alum to purify it.
11) We shall not take any dowry at our sons' weddings; neither shall we give any dowry at our daughter's wedding. We shall keep the center free from the curse of the dowry. We shall not practice child marriage.
12) We shall not commit any injustice, and we will oppose anyone who tries to do so.
13) We shall collectively undertake larger investments for higher incomes
14) We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her.
15) If we come to know of any breach of discipline in any center, we shall all go there and help restore discipline
16) We shall introduce physical exercises in all our centers. We shall take part in all social activities collectively.
- Most hand-outs endeavor to train the recipients; Grameen bank hands out cash without any attempt to provide skills training.
- According to Yunus, "the poor are poor not because they are untrained or illiterate but because they cannot retain the returns of their labor. They have no control over capital, and it is the ability to control capital that gives people the power to rise out of poverty
- Yunus believes that credit should be considered a basic human right
- Aid workers, such as those from the World Bank, are usually promoted based on how much money they disburse, not the impact of the disbursement on the quality of life. Because of this, they often spend a lot of money that doesn't even make it to the country's poor. According to a research institution in Bangladesh, of the $30B Bangladesh has received in foreign aid over the past 26 years, 75% was NOT spent in Bangladesh (it was spent on equipment, commodities, and consultants from the donor country).
- $50-55B / year is given in international aid to countries, and only 25% is actually spent in the country
- Rather than base success on changes in GNP (gross national product), international aid's success should be based on positive measurable change in per capita income of the bottom 50% of the population
- To improve the World Bank, Yunus would move the HQ from Washington DC to Dhaka, so that 1) improvements would happen faster given the close proximity to poverty, 2) people who aren't 100% devoted to fighting poverty would leave, and 3) it would reduce costs
- Amanah Ikhtiar Malaysia (Grameen replication program in Malaysia) services 42,000 families, half of all Malaysians living below the poverty line
Center for Agriculture and Rural Development (CARD), a Grameen replication in the Philipines:
- 70% of borrowers are landless and own houses worth less than $550
- 97% of borrowed money is used in income-generating activities
- Borrowers' average rate of return is 117% (144% for people who borrowed 5 or more times)
- Loans generated 163 days of employment for borrowers each year and 84 additional days for family members
- Labor productivity is 36% higher than the prevailing wage rate
- There are 65 Grameen replication projects in 27 countries, which have disbursed $444M in loans to 1.14M poor people
- Goal to reach 10M borrowers through replication programs by 2005, for which the Grameen Trust will need $2.2B
- The Grameen People's Fund - raising $100M for the Grameen Trust, which lends to replication programs, by getting 1M people to donate $100 ($142,000 raised so far)
- Welfare laws in the US create disincentives for welfare recipients to work. If they earn a dollar, it must be reported to the welfare authority and a dollar will be deducted from their next welfare check. Welfare recipients are also not allowed to borrow money from an institution (thought this law has changed in Illinois). This holds back microcredit, because borrowers are afraid after they calculate the amount of welfare money and insurance coverage they would lose if they became self-employed. Additionally, if a poor person receives benefits from a charity program, the charity program may not allow the person to be self-employed.
- In 1996, Grameen borrowers were elected to 6% of all elected government positions, which proved that once they grew in self-esteem they would readily express their opinions
- Grameen Bank Bangladesh has 2.6M borrowers and loaned $3.9B since it was started. $3.6B has been repaid, with a recovery rate of 98%. 95% of the borrowers are women. It has 1,181 branches, works in 42,127 villages, and has a staff of 11,777. The Bank no longer borrows money, as it's fully self-sufficient. The bank has made a profit every year except 1983, 1991, and 1992
- Some borrowers' capacity to borrow, invest, and repay had increased 50x in 10 years
- Grameen's goal is to make their villages "poverty-free", which means that each family has to
1) have a house with a tin roof
2) have beds or cots for all members of the family
3) have access to safe drinking water
4) have access to a sanitary latrine
5) have all school-age children attending school
6) have sufficient warm clothing for the winter
7) have mosquito nets
8) have a home vegetable garden
9) have no food shortages, even during the most difficult time of a very difficult year
10) have sufficient income-earning opportunities for all adult members of the family
- "There is little doubt that the free market, as now organized, does not provide solutions to all social ills. It provides neither economic opportunities nor access to health and education for the poor or elderly. Even so, I believe that government, as we now know it, should pull out of most things except for law enforcement, the justice system, national defense, and foreign policy, and let the private sector, a "Grameenized private sector". a social-consciousness-driven private sector, take over its other functions." (204)
- I'm not sure I agree with Yunus on this point. He received most of his initial funding from government sources, so I would certainly add "credit" to the list of services the government should provide. Additionally, it's not clear to me that social services like public education, museums, and social security, while not in the best shape by far, will be in better shape if the government backed out entirely. Yunus later argues that the government should control policies that incent entrepreneurs to get involved, but they should not actually provide the services. This seems like it could work.
- Yunus believes that hand-outs only "increases their misery, robs them of incentive and, more important, of self-respect."
- "Somehow we have persuaded ourselves that the capitalist economy must be fueled only by greed. This has become a self-fulfilling prophesy. Only the profit maximizers get to play in the marketplace and try their luck. People who are not motivated by profit making stay away from it, condemn it, and search for alternatives. We can condemn the private sector for all its mistakes, but we cannot justify why we ourselves are not trying to change things, not trying to make things better by participating in the economy.
The private sector, unlike the government, is open to everyone, even those not interested in making a profit." (205)
- Yunus proposes 2 changes to capitalism:
1) View every single human being as a potential entrepreneur, so that every person has the choice to be an entrepreneur or a wage earner. Today we view most people as wage earners, which affects the incentives and services that we offer them.
2) An entrepreneur maximizes two things: a) profit and b) social returns, subject to the condition that profit cannot be negative (often called the "double bottom-line"). Today, corporate law in the US requires maximization of profits and nothing more.
- Grameen Generalised System (GGS, or Grameen II) offers a basic loan and a flexible loan, if the borrower undergoes hardship and needs a different repayment schedule, etc. Loans can also now be for any duration, as designed by the staff member. It also includes a pension plan that the borrower must pay into if they take a large enough loan, and from which they get disbursements after 10 years. There is also a loan insurance program in case the borrower dies.
- 70% of all outstanding loans are from borrowers' savings deposits.
Branches can now receive stars, with the goal of having all branches becoming Five Star branches:
- Green stars for 100% repayment
- Blue stars for earning a profit
- Violet stars for generating a surplus of deposits over loans
- Brown stars for ensuring 100% of Grameen children are being educated
- Red stars for taking 100% of their families over the poverty line
- The goal of the Microcredit Summit of 1997 is to touch 100M families with microcredit by 2005 (26.8M people living on less than $1/day received microcredit from 1996-2001)
- Every day, 35,000 children die from hunger-related diseases
- 20% of the world's people live in extreme poverty
- Yunus' final message is that we need to encourage social entrepreneurs to eradicate poverty in the first several decades of the 21st century. This is feasible, just as slavery, apartheid, and smallpox have been eradicated. Poverty will be something that one only sees in museums.