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Posts Tagged ‘microcredit’

yunusMicrofinance or microcredit is a pretty cool banking fad that has been growing in Asia and parts of Europe for a while now, going back to the early 80’s.  It has caught on much more after the “founder” of the concept Muhammad Yunus won the Nobel Peace Prize in 2006.  He started Grameen Bank in India and started doling out small loans (around $100 many times) for the poorest of the poor to invest in some money making venture, whether it was to buy material in order to make clothing, or to fund purchases needed for a small store.  His intention was not to create a non-profit, or NGO… but he is also clear that he was not out to make a huge profit either.  The intent was to help the poor get themselves out of poverty.  According to Yunus though, this trait is not shared by all the banks joining the microfinance world:

If you look at agricultural banks, for example, most of the agricultural banks around the world require collateral…. Similarly, savings and loan associations say they do microcredit. Cooperatives say they do microcredit. Those who are giving agricultural loans — commercial banks — are saying they do microcredit. So we need to clarify what microcredit is in its pure form rather than everything else. Microcredit was always given to people for income generating activity. So whatever money you are taking, you are investing it to create an income source for yourself. There are many programs which give loans for buying consumer goods, and they say they are doing microcredit, they are giving money to buy a refrigerator or buy a television. We say, “No, sorry, that’s not microcredit.” So we have to sort this out.

Another aspect that I want to draw attention to — there are many microcredit programs going around advertising themselves saying, “Oh, this is a great opportunity to make money.” And they encourage people who want to make money to join in and do that. Again, we say, “Look, our purpose is not to excite people about making money. Our purpose is to help people get out of poverty. The focus is not on profit making. The focus is on helping people to get out of poverty. Those who are seeing this as an opportunity to make money have to raise their interest rate to the extent that they make a lot of money. The interest rate issue becomes a sensitive one. We are saying interest rates should be kept as low as possible, preferably to cover costs. If you want to make a little profit on top of it, it should be a very modest profit, so that it doesn’t look like this was your intention. Those who are doing that — using microcredit, microfinance, to make a lot of money — we keep saying that this is not microcredit in the sense that we do it. We came here to fight the loan sharks, not become loan sharks ourselves. This is their moving into the direction of loan sharks. We want to disassociate ourselves from them.

He initially tried to act as a mediator between banks and the poor, but the banks felt the credit risk was too high.  So instead Yunus formed his own bank in order to be able to give out loans as he felt.  How did the credit-worthiness problem work out?  Well he has a repayment rate of 99%, and this is out of 8 million customers.  I’d say that’s not bad.  It’s a unique intersection of social concern and market economics.  Check out the video if you have time.  Yunus has some views on globalization that I don’t necessarily agree with, but he certainly is coming from a perspective that I have not experienced so it’s good to hear his thoughts.

Vodpod videos no longer available.

The Economist also has a good short article about how the microfinance world is doing during the economic crisis.  Some are struggling, but Yunus’s group seems to be doing well.

FYI – the post title is meant to be read to the tune of “It’s All About the Benjamins” by P-Diddy (at least that’s how it was in my head).

(by way of Knowledge@Wharton)

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