Good morning, everyone. Thank you for coming :)
Today here at HNFC we want to tell you about a microcredit, what benefits it has for an economy and people. Also, we'll share with you the story about Grameen Bank.
Everyone knows what a credit is. We use them for several reasons: to pay for studies, to buy a house, to launch a business… Credits are here to make the economy growing and prospering. However, what does it look like in some of the poorest regions of the world? Where no financial safety is guaranteed and with a poor financial system.
The answer is: microcredit.
Microcredit is a concept invented in Bangladesh in the middle of the 1970’s. Whereas Muhammad Yunus was Professor of economics at Chittagong University (Southeastern Bangladesh), a disaster situation was lasting in his country: a terrible famine. It became really difficult for him to keep teaching economic theories while he saw people dying every day on his way to work. These scenes raised his awareness. Therefore, he decided to act on the field, instead of looking for theoretical solutions.
Creation of microcredit and establishment of Grameen Bank
Professor Yunus went to Jobra, a village next to his university and the situation was really disastrous. For instance, a women, which survived by creating bamboo objects, told him that traditional banks refused to help her to buy her raw material because she was considered as not creditworthy. It means she had to borrow money to a loan shark but he gave her a ridiculous low margin.
Muhammad Yunus decided to help these ladies to launch their own business by lending them his own money. He decided to invest directly in the system to boost it. And this experience was a success, Yunus got his investment back and had created the first system of microcredit.
Yunus proposed his concept to local banks: offer few-dollar loan to allow borrowers to create their own business, but they all refused. Therefore, he established his own organization in 1976: Grameen Bank, the first bank dedicated to microcredit.
Grameen Bank’s microcredit: Much more than a simple small loan
With the establishment of the Grameen Bank which literally means “village bank” in Bangladeshi, Muhammad Yunus created a whole system fit for the local economy in the extreme poor village of Bangladesh. By creating this system from the ground and in a local area, he enforced some principles.
First, only women are allowed to borrow money because they are the main actors of the economy and it guarantees the money is used for the benefit of businesses and for the family’s life purposes.
Then, the “bank for the poor” highlights the importance of the groups. The borrowers from the Grameen Bank are always put into groups of 5 borrowers who have similar age and economic situation and who are neighbours (or living in the same village). Every week, there is a “Center meeting”, where 10 groups of 5 people meet to pay back their interest and to see how everyone’s business is coming along. The 5 members of every group are interdependent as they pay back their interest together. The aim is for the borrowers to become responsible and reliable to each other and for the bank. To that end, the bank provides training to the future borrowers to learn how to be able to manage the additional amount of money and to pay back the interest. The bank becomes more than a lender in a microcredit system.
The first part of the training is to save rice. Indeed, a large number of people living in Bangladeshi villages are in extreme poverty situation which means, most of the time, they do not have enough rice (the main food in Bangladesh) for their whole family. Paradoxically, the Grameen Bank asks them to save a bit of rice every day, in case they cannot have some for a certain period because of natural or financial raisons. The goal is to teach to the new borrowers to have a long-term vision. This is essential to use efficiently the loan to create a small business which will enable the borrowers’ family to have more resources in the future.
The second part is the one-week training of the group. The 5 members of the created group have a training together to get to know each other well and to get close with Grameen Bank’s principles. The group is also taught basic principles for wealthy business and family life according to the “16 Decisions” of the Grameen Bank. Plus, the bank also teaches basic learning, from our perspective, as how to write a name (almost every borrower are illiterate, doesn't know how to write or read) in order to sign the loan papers for instance.
Microcredit, according on how Grameen Bank and Muhammad Yunus created it, is much more than small loans. This is not just about lending money to poor people but about giving them the opportunity to have access to their capacity because “All human beings are born entrepreneurs. Some get a chance to unleash that capacity. Some never got the chance, never knew that he or she has that capacity.” (Muhammad Yunus’ Quote)
A potentially wealthy sector
Since the establishment of the Grameen Bank, more than 1,230,000 million BDT (14,938 million USD) have been lent to almost 9 million people. Moreover, loans have been repaid in 97% of the case. It means, with the interest rate of 10% on average, it makes a lot of money and in an ethical way. However, the aim of the Grameen Bank is to help the poorest people to get out of poverty. Indeed, two third of the borrowers are now above the poverty line.
The quite-low profit made by the Grameen Bank are almost all used to pay the structure cost. Because the most important is to give to the people the opportunity to create their own business instead of looking for one. This innovative and entrepreneurial spirit is key to make an economy growing. According to Muhammad Yunus, the social business is the best way to fight against poverty, as we will see it in another article.
Written by Etiene Coltat│Independent stock analyst
Edited by Vee Venski
This article is not a promotion of financial investment. Investing money in financial instruments is risk-reward process. Losses and gains are part of financial investment process. Only invest money you can afford to lose.