In Muhammad Yunus’ book, Banker to the Poor, the journey he takes from starting up his own crediting agency to institutionalising a new bank in Bangladesh is an inspiring one. There are a heap of things that could be said about this whole story, but I just want to focus in this article about the micro-credit system and how and why it works.
A basic human right
Perhaps the most interesting point that Mr. Yunus makes is that he believes the provision of credit should be like food, shelter, and water – a basic human right. That’s quite a statement, but when you fully realise the power that having credit provides affords you, you begin to grasp how difficult life might be for you if all your requests from financial institutions for credit were rejected. Think about it… imagine you could never take a loan. If you were born into a poor family that has very little capital to begin with, just being “poor” automatically stereotypes you as being one who isn’t a suitable candidate for a bank loan. How do you get your start in life? Where do you get the money needed to allow you to make money to live on, if not from a bank? A very difficult predicament to be sure and one that leads the poorest people down a path of spiralling destitution.
Not being worthy of quality institutional credit, the poor must turn to private vendors who charge exorbitant interest rates on short term loans that lock them into cycles of hard labour with just enough return to sustain them day over day, if they’re lucky.
It’s easy to take your position of wealth for granted since you’ve probably never had to worry about having nothing. I know I do. I also know for me that however hard it gets, it will likely never reach the stage that I’m living day-to-day, hand-to-mouth - I was fortunate to be born into a societal class that didn’t have this problem. While I have to work to maintain this, I am afforded the luxury of being given credit on the understanding that I am “worthy” to receive it and I will in all likelihood return it. I don’t know how I would handle being born into poverty so deep where the only way out is to be given a little bit of capital to make a living, and I can’t even get that much. Now I understand and appreciate how poverty really is a cycle that is difficult to break.
What is micro-credit?
It’s exactly as you would imagine it to be. It is the provision of relatively very small loans to the poorest in society. The sizes of these loans are probably so small to the reader as to be incomprehensible as to how this would actually help anyone. And therein lies the root of the whole problem inherent in our wonderfully capitalist system. Modern day economics, as explained in the book, doesn’t include the poorest members of society. It assumes that as the major figures such as “per capita income” and GDP continues to increase, so does the wealth of all strata in the society. This is apparently not the case and the poor are left increasingly farther and farther in the wake of the wealthy.
Those that live in and around and below the poverty line, the poor, in any society are deemed to be uneducated, untrained, lazy and good for not a lot. It’s assumed that “if only they’d work” they’d be okay and help the rest of society out. So if they can’t be bothered to go out and get a job, they’re obviously not worthy enough for credit – they wont pay back the loans and therefore the banks lose their money. At the time of writing of the Mr. Yunus’ book, he stated that loan recovery rate for Grameen was over 98% … and as I understand it, the “wealthy” can’t boast that much!
My point is that with this stereotyping, the poor are in a difficult position. The banks engage them as “ticking time bombs” with regards their repayments. This is where Grameen filled the gap. Instead of this antagonistic approach, they view their clients as partners and owners of the system itself. They assume they will pay back the loans, regardless of what circumstances befall the customer. Having these assumptions changes everything about how y0u interact with the clients and therefore the whole relationship is different.
But it isn’t just a matter of providing a loan to an individual for a given amount, it involves much more besides. Probably critical to the whole process is the group structure for customers. Each customer is a member of group of 5 which is one of the base requirements amongst others and this serves to create a system of peers which can pool resources and support so that no individual is left stranded with no infrastructure. There are other mechanisms in place to ensure the loans are made to individuals ensuring the greatest support for them and for the group, and that repayments are made with minimal interruption to the schedule.
Extensions and interruptions are completely accepted and accommodated by the bank. If you’re village is destroyed by a flood, the bank in this case doesn’t come down on you demanding the return of the principle because it’s scared it’ll lose it. Rather, they engage the community and worth with them so that the loan period is extended and a new plan is drawn out.
Basically I can cite more examples of the approach the bank takes, but really, the differences all extend from the paradigm through which the bank operates. It is in the clients’ interests to pay back the loans and not default since this is their only way out of destitution. Assuming that they are human beings, stuck in a difficult position and your overriding concern is to lift them out of poverty you will do what it takes to ensure that this is in-fact brought about. You work with your clients and and ensure they are in the best position they can be in to take on the loan. You know they are highly resourceful and hard working since to stay alive and raise a family under those conditions you need to be. Give them a chance to honour your agreements, accept that there are things beyond the control of you and the clients, and the system just works. Perhaps in practice it isn’t as simple as that, but it does work.
Not just the 3rd world
An interesting off-shoot from the project in Bangladesh is the fact that this micro-credit principle can be applied anywhere you have people living in abject poverty. Anywhere. And that includes the wealthiest nations in the world since, unless you’ve been living with your head in the sand, you will have noticed the poor are to be found everywhere profit-centric capitalists are operating. The only difference is the breadth of the gap between those at the top and those at the bottom. So this principle isn’t applicable only to 3rd world countries. Once you absorb the understanding of what it really means to be poor and how difficult for many varied reasons it is to break out of the cycle, then you will see that a system that is dedicated to providing credit to the poor, not the wealthy is going to work after social and cultural based adjustments to the implementation itself.
Take stock
If nothing else from this article, maybe you’ll gain a bit of a better understanding of what micro-credit is and how it works. For more in-depth understanding, please give his book a look and you’ll learn a lot more than I can provide in a few articles. Take a moment to feel how it would feel for you to be stuck without the provision of credit… have you ever been turned down for a credit card? Where does that leave you? Not only that, imagine if it wasn’t only you, but all your family and peers that were stuck in the same predicament… where and from whom could you borrow money to see you through or give you the start you need?
Something to think about.
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Tags: banker to the poor, banking, credit, Grameen, microcredit, poverty, poverty line, what is