A while ago, I had the opportunity to attend a talk by Muhammad Yunus, the founder of Grameen Bank and winner of the Nobel Peace Prize. I had expected Mr. Yunus to talk about micro-lending. But the evening held much more in store. He told the extraordinary story of building the Grameen Bank and the many hurdles he had to overcome.
Grameen Bank was one of the pioneers in lending to the very, very poor – people at the absolute bottom of the economic pyramid. The bank has helped millions of families get out of poverty and has a track record of repayment that any commercial bank would die for.
Yet the most amazing aspect of his story was how he turned the long held (and as it turned out, wrong headed) assumptions of the banking upside down.
“The poor are bad credit risks. They will never be able to repay their loans.”
“How can you make a loan to the poor – they can’t even read the loan documents or write their names.”
“You can’t earn money making loans to the poor; the amounts are too small – the paperwork costs more than the loan.”
“How can the loans be supervised and repayment enforced?”
And on and on . . . Yunus has demonstrated that such assumptions are often rooted more in the limited perspectives of traditional bankers than in hard headed economic reality. Grameen Bank was built by experiment, testing assumptions and figuring out how to work successfully in the environment of its customers.
Consider the innovative way in which Yunus operated his bank, as described in his book Banker to the Poor. First, he realized that women were better able to effectively use the loans for the betterment of their families than men. So almost all of his loans are made to women. Second, in each village where Grameen Bank operated, it identified women who could productively use the loans and set them up as a self governing body – a lending circle – to issue and track loans. Only one woman could receive a loan at a time. Until that loan was paid back, no other loans could be made. The women had a strong incentive to ensure loans were repaid in full and on schedule without the bank having to intervene. Third, Grameen helped its clients pioneer new business models – e.g. the cell phone ladies of Bangladesh. Finally, Grameen provided ways for these women entrepreneurs to save and invest in the education and health of their children. This allowed the multi-generational cycle of poverty so common in many developing nations to be permanently broken.
The lessons from Yunus’ accomplishments seem even more relevant given the financial missteps of many of America’s largest corporate borrowers and lenders in evidence today. Grameen Bank was also built on the passion of its founder and employees. And its success demonstrates that passion can topple even the most formidable assumptions.
Muhammad Yunus has now set his sites on revolutionizing the wider world of commerce by promoting the concept of social businesses – enterprises devoted to doing good and creating wealth for the extended communities they serve. As social entrepreneurship gains ground, I wonder what other bastions of received economic truth will fall by the wayside.