"Remember: Your Mother Owns a Bank"

Muhammad-yumusThe Jamkid and I caught Muhammad Yunus at the Commonwealth Club in San Francisco this afternoon. Yunus is the Bangladeshi banker who received the 2006 Nobel Peace Prize for pioneering microcredit loans to women. He also serves as the godfather of social enterpreneurship – the fashionable and laudable notion that many social causes are best organized as businesses that maximizes purpose instead of profit. A social enterprise needs revenue to be financially sustainable and it needs to deploy the full range of relevant management technologies in order to scale effectively. It needs a business model to attack huge social problems. Yunus sees every social problem as a business opportunity but, like most apostles, he is longer on inspiration than detail.

Yunus is in all respects an amazing pioneer who earned his Nobel Prize. I first heard of him when Bill Clinton would scold anyone in earshot that "this guy deserves the Peace Prize". What I had not understood until today was that as Governor of Arkansas in the 1980's, Clinton had persuaded Yunus to help him set up microlending programs in Arkansas. 

Like most Nobel Peace Prize winners, Yunus has plenty of critics and detractors, but what he has done is astonishing. Having earned a doctorate in economics from Vanderbilt University as a Fulbright Scholar, Yunus decided to loan 42 families $27 during the terrible Bangladesh famine. While many of us were paying roughly this price for George Harrison's three-disk Concert for Bangladesh album, Yunus helped women to create small businesses by underpricing the local loan sharks. As a well-trained economist, he believed that the availability of reasonably priced credit would enable women to lead their families out of the pervasive poverty of rural Bangladesh. The loans were part of a research project that Yunus was conducting for the central Bangladesh Bank. 

Grameen BankWhen the experiment worked, Yunus founded the Grameen ("Village") Bank, which specialized in microcredit loans to rural women to create small scale enterprises. The loans were informal, unsecured, and undocumented. Interest was about 25%, which reflected both the cost of administering small loans and the underlying credit risk. Grameen provided many other services, including higher education loans for the families of borrowers. 

To date, the Grameen Bank has made nearly $10 billion in loans. Most of their capital has come not from deposits but from outside organizations. Early on donor agencies provided most of the capital at very cheap rates. In the mid-1990s, the central Bank of Bangladesh provided funding. Today, part of Grameen is publicly traded and the company sells bonds at above the bank rate. Overseas deposits also provide capital; Grameen now has operations in 43 countries including China, East Timor, Indonesia, India, Lebanon, Pakistan, Philippines, Saudi Arabia, Yemen, Bolivia, Dominican Republic, El Salvador, Haiti, Honduras, Mexico, Peru, Cameroon, Egypt, Ethiopia, Ghana, Morocco, Nigeria, Rwanda, Tunisia, Uganda, and the USA. Grameen has opened three branches in New York and one in Omaha, Nebraska. Yunus announced that they will open a branch in San Francisco and Washington, D.C. soon. (To be sure, the bank extends microcredit to poor American families as well and Yunus denounced pawn shops and payday lenders as "a scar on the face of your nation").


Grameen vigorously promotes a Bengali version of the Protestant ethic with "16 Decisions" that each borrower learns to recite:

  1. We shall follow and advance the four principles of 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 dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest.
  4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus.
  5. During the plantation seasons, we shall plant as many seedlings as possible.
  6. We shall plan to keep our families small. We shall minimize our 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 tubewells. If it is not available, we shall boil water or use alum.
  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 our centre free from the curse of dowry. We shall not practice child marriage.
  12. We shall not inflict any injustice on anyone, neither shall we allow anyone to do so.
  13. We shall collectively undertake bigger 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 centre, we shall all go there and help restore discipline.
  16. We shall take part in all social activities collectively.

It would be interesting to hear how these decisions evolve in different countries, but you have to imagine that the recent financial crisis might have been reduced had our bankers practiced "solidarity lending" backed by a borrowers' pledge to "minimize expenditures and collectively undertake bigger investments for higher incomes". 

Grameen requires each borrower to not only recite the 16 decisions regularly, but to belong to a five-member borrower's group. Neither the group nor its members have joint liability —  they don't guarantee each other's loans. Grameen insists that each loan is an individual member's responsibility. But group members often help out those at risk of default because Grameen has a policy of not extending new credit to anyone in a group with a member in default. The groups also create emergency reserve funds, not unlike the tradition of tanomoshi in some Japanese and Okinawan families or Mujin in Korea (it is no accident that Grameen is absent from both of these countries). 

Yunus did not discuss these principals or anything else about solidarity lending even though both are at the core of his approach to microcredit (but hey, he is crowding 70 and this was his eighth city in ten days). One can only imagine being in a borrowing group with someone earning $20/hour who announces his intention to borrow $700,000 for a new home (as happened more than once during the housing credit bubble). When banks are sworn to responsibility along with their borrowers, nobody should be surprised that things work a lot better (Grameen appears not to have felt the financial crisis). I would love to have heard Yunus speak candidly to the question of whether groups of poor women are better credit risks than groups of poor men, but his life testifies to the answer.

Grameenphone-logoYunus also avoided discussion of microlending default rates (maybe this was his polite payback for the Commonwealth Club twice asserting that he had received the Nobel Prize in Economics instead of the Peace Prize). In truth, lending to poor people is risky (hell, lending to rich bankers is risky — just ask the Federal Reserve). Grameen says that its payback rates are over 98 percent, but in 2001 the Wall Street Journal claims that a fifth of Grameen's loans were more than a year overdue (both statements are unlikely to be true unless Yunus insists that the old loans will eventually be repaid — as US banks do when they wish to avoid marking down their toxic assets). Besides, if default rates are really only 2%, how does Grameen justify 25% interest rates? Another mystery: Grameen Bank is 94% owned by its poor borrowers, most of whom are women. Why aren't the depositors the owners? They are bearing the risk. Or does the 25% interest rate include an implied warrant?). 

Grameen has expanded well beyond banking. They initiated a hugely popular Village Phone Program, through which women entrepreneurs can start a business providing wireless phone services in rural areas of Bangladesh. By serving as the local payphone, thousands of women have built businesses that not only raised their families from poverty but improved the ability of small farmers to discover price information and other critical market news that was previously not available. The Bank now sponsors more than twenty additional enterprises in energy, telecom, education, fisheries, software, internet access, knitwear, and fashion. Then there is the Grameen Struggling Members Program, which targets desparate, homeless beggars (not a priority segment in traditional commercial banking, I assure you). Basically, the bank turns beggars into sellers of trinkets, which is a step up in both livlihood and self respect. These loans are tiny ($10) and about half default, but still… 

Today Grameen has more than eight million borrowers, 80% of whom are womenThey loan $100 million dollars every month and the average loan is now $200. More than 50,000 children of poor women are today in college thanks to the student loan program. But w

ill Bangladesh have jobs for these college graduates? Yunus reminds them that this is the wrong question — they are the job creators. 

"Money is not the problem. Come up with good ideas for businesses that solve important problems and we will get you the money. 

"Remember", he admonishes the children of once destitute women, 

"your mother owns a bank".

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