Grameen Bank: An Idea That Works

I submitted this piece as an op-ed to the Kitchener Waterloo Record. I’ll post if they accept it.

Political debate in Canada is stale, swinging between those who
look to government for solutions and those who look to the free market. This
pendulum has swung back and forth on all the major issues: health care,
education, industrial policy, and on and on.

The Nobel Peace Prize awarded to Muhammad Yunus and the Grameen Bank he
founded is a timely reminder that many of the most promising ideas for a better
world are about neither governments nor business. The source of these ideas is
often the periphery of societies rather than the centre, and they work from the
bottom up rather than the top down. The prize is also a reminder that new ideas
are often difficult to classify: some claim that the ideas behind Grameen are
socialist, others that they are capitalist, and others that this is an
innovative form of aid to the poor. But most importantly, pretty much everyone
agrees that this is an idea that works.

The Grameen Bank was created at a cost of $27 in rural Bangladesh to address a
very mundane problem facing poor villagers: lack of credit. Before you can grow
crops you need money to buy seeds; before you can sell milk you need money to
buy a cow; before you can sell bamboo chairs you need money to buy  bamboo.
The usual route to get this money is to go to a bank for a loan, but big banks
can’t make much money from tiny loans to poor people, and banks also face a set
of problems caused by lack of detailed information. The usual way for a borrower
to guarantee a loan is to use some of their possessions as collateral to
guarantee the loan, but poor people have no collateral — that’s what being poor
is all about — so there would be no way for a bank to be confident that its
loans would be repaid.

For a big bank to individually identify the good risks and the bad risks among
its customers would be a costly enterprise, especially compared to the small
amounts of the loans that poor people need. So even if a bank were to set up in
rural Bangladesh, they would have to charge high interest rates to cover the bad
risks, and these high interest rates make loans unaffordable for the very people
who need them. End result, no banks.

Without banks, many villagers went to local moneylenders for loans. These
moneylenders live locally and had a virtual monopoly on loans, so interest rates
were often extortionate and the borrowers were kept in a state of permanent
indebtedness. Women faced an additional barrier because they typically had
little control over the way household money was spent. So
in addition to not having any money, they couldn’t borrow
it and the rural poor were trapped in poverty.

In the 1970’s Muhammad Yunus and the Grameen Bank entered the picture with a
conviction that they could help people to break out of the credit trap by
providing small loans, typically a few tens of dollars, to help people get on
their feet. These small loans came to be called micro-credit. Despite the word
"bank" in its name, profit is not the primary goal of the Grameen Bank, but it
did seek to be self-sustaining and so it needed some new ideas to make its
convictions work where the big banks would not go.

The biggest single innovation, and one that has caught the attention of many
around the world, was that the Bank does not lend to individuals, but instead to
small groups of borrowers. For each group the members get their loan in turn,
rather than all at once, with the member most in need — as identified by the
group itself — getting the loan first. If the loan is not repaid, none of the
other members in the group get their loan.

This simple but ingenious group-lending model is a way of overcoming the
information problems that stymied the banks. The group members have an incentive
to identify reliable partners, so that they will not lose their own chance for a
loan because of a group member defaulting. The group model also helps to prevent
members from undertaking projects that are too risky, because other group
members would not go along with harebrained schemes that are likely to fail. The
fact that each member’s loan depends on the repayment of the others lends itself
to mutual support so that the early loans get repaid. Mutual support is
supplemented by peer pressure among the members of the group to ensure that each
member is committed to repaying. The group lending model is a framework that
encourages people to achieve things together that, separately, they could not.

The model works. The Grameen Bank has made loans to over 6 million poor
Bangladeshis. The repayment rate on loans is around 98%, which is a remarkable
number for people living so close to the edge. What’s more, almost all
the borrowers are women, and the loans give them a chance
to break free not only of poverty, but also of many of the social constraints
that have prevented them from having control over their own lives. The Bank is
now largely owned by its members, and ten of its 13-member
board of directors are women.

The Grameen model has been widely imitated, with a recent report saying that
over 25,000 microfinance organizations now exist, each serving on average over
25,000 low-income customers. Like any other promising new idea, it has been
built on by the industrious, exploited by the unscrupulous, and improved by the
imaginative. Some endeavours succeed and some fail. The group lending model of
micro-credit is not a panacea, but it is an innovation that has made a real
difference to millions of people.

Group lending does not fit easily into the right-wing/left-wing spectrum. Former
World Bank president James Wolfehnson claims that the award testifies to "the
power of entrepreneurialism", but the Bank is not profit-motivated — in fact it
is aimed at fixing things that the pursuit of profit alone has not been able to
fix. The Grameen Bank is not an example of "entrepreneurship" unless you extend
the idea to mean "anyone with an idea who works at it", which is a bit far
fetched. At the same time, this is a private initiative that is largely
independent of the state and which does foster small businesses, so it does not
fall under the usual umbrella of left-wing initiatives.

Being left-wing myself, I’d like to label the Grameen Bank left-wing in the
sense used by philosopher Peter Singer: it is explicitly on the side of the
weak, not the powerful, but in the end it doesn’t matter. What does matter is
that it works.

The success of the Grameen Bank reminds us that
many of our most influential ideas start with small groups
a long way from the centres of power and influence, finding ways for people to
work together to solve immediate, concrete problems. The
most influential ideas about how to make cities more livable started with Jane
Jacobs looking out of her kitchen window in Greenwich Village, and it was Jacobs
who said that "new ideas need old buildings" — that they come from the
unfashionable parts of town where rents are cheap.

In the middle of all the debate over health services and
social services the feminist movement created sexual
assault centres and other crisis services for women, addressing a whole set of
needs that were not being met within the established framework.
Innovations in open source software production such as
Linux, and in open content production such as Wikipedia have started
independently of governments or markets. The
anti-sweatshop movement has led to the creation of independent
workplace-monitoring organizations that are a necessary step in pushing
companies to implement good working conditions.  The list is long and
diverse, and each of these initiatives has gone through times when it is not
taken seriously, has been torn apart (or nearly so) by internal dissent, and has
faced tough and sometimes unresolved decisions about how to work with existing

But each idea has made a difference, and each provides far more inspiration than
the stale "government versus markets" debates we hear so much.

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