Beyond a certain point, stuff doesn’t matter; people do. This was the assumption of economist Mohammad Yunus when he began to teach economics in Bangladesh. But he soon realized that modern economics, which is rooted absolutely in the Enlightenment, cares only about stuff and little about people. Take a bank loan as an example. In the modern world, to get a bank loan one has to have collateral. (And remember, a good credit score is an indication of past performance with your stuff as well as other people’s stuff that you had previously borrowed. In short, collateralizing a loan with a good credit score still boils down to stuff.)
But desperately poor people don’t have stuff for collateral, so they can never get a bank loan to get the stuff they need to make enough profit to eke out a living (as well as pay back the loan). As a result, Business and Banking (see the previous essay) are only open to people who already have stuff. In short, Business and Banking (and therefore Bureaucracy) is pretty much all about stuff (and the amassing of power by a handful of bankers, businessmen and bureaucrats).
Mohammad Yunus, being Bangladeshi, didn’t see the world that way. Ultimately, in Yunus’ non-Western world view, the world is not about stuff, it’s about people, and more specifically, it’s not about individuals (which is the Enlightenment ideal) but rather about communities (people connected to each other).
Based on this assumption, he began loaning money for economic development to groups of people (never to a single individual). The rules of Grameen Bank (the bank Yunus founded) are as follows.
- Loans are only made to women who are below the poverty line. (That’s a long story, but in a word, in an Islamic society, women are the poorest of the poor because they have no rights, so that’s who Yunus focused on.)
- Only groups of people (specifically groups of five women) can get loans (five loans for five different women who are responsible to each other). If any one individual defaults on a loan, the other four are ineligible for any more loans. This accountability system of one person to others is the “collateral” that assures repayment. In another time we might have called it “one’s good name” here in the Midwest.)
- The loans are very small (just a few dollars in Bangladesh, from $500 to $3,000 in the U.S.), are paid back on a weekly basis, and are short term (one year) loans.
- Husbands can get loans to start a business but the loan is through the wife and in the name of the wife, giving her power to make sure he stays on target.
This system has been wildly successful in certain parts of the world. The default rate is well below 3% (and below 1% in the United States). Yunus and his supporters claim that it is bringing hundreds of thousands of families out of poverty around the world. (Actual statistical evidence is hard to come by, largely because of the part of the world where Grameen Bank works. The evidence is anecdotal.)
In spite of success (and maybe because of it) not everything’s rosy in microfinance. Grameen Bank reportedly charges around 20% annualized interest in Bangladesh. Occasionally accusations of loan-sharking are made against Grameen Bank. Ironically, Yunus got his start counteracting the loan sharks of Bangladesh who charge 70% – 100% interest. According to Yunus, because of the decentralized nature of the business (each group of five women paying their money each week at a meeting, etc.) the overhead is quite a bit higher than a traditional bank, the interest rate is necessary to break even.
Other groups have gotten into the microfinance boom, but are trying to make as much profit as possible. (Grameen Bank is nonprofit.) It is therefore not unheard of for microfinance banks in the third world to charge 70% or even 100% annualized interest. In other words, they’re loan sharks in microfinance clothing. Given the “wild, wild, west” character of the business, it’s no surprise that everyone’s reputation is sullied, even the legitimate players.
In the United States (when the documentary was filmed a couple of years ago), the fifty week (1 year) repayment on a $1,000 loan would be $20/week principle, $2/week interest, and $2/week paid to Grameen that goes into a savings account in the woman’s name. A $1,000 loan therefore creates a 1 year $24/week payment obligation, and the woman ends up with an improved credit score and $100 in a savings account at the end of the year.
The biggest problem with Grameen Bank is that it is not self-supporting and continues to rely on help from individuals and foundations to the tune of millions of dollars. The critics claim that it’s not so much a banking system as it is a wealth redistribution system disguised as a bank. To a certain extent this is no doubt true. But it is a bank in the oldest sense of the word, not a bank by contemporary definition. In order to function it has to have huge cash reserves on hand. Grameen does not use fractional reserve banking to create money out of thin air like American banks do.
The magic of fractional reserve banking is that an American bank (a country where this sort of sleight of hand is actually legal!) can loan out millions of dollars that they don’t even have (money, that prior to the loans, didn’t even exist), thus collecting profits on interest for non-existent money. Confused? Fractional reserve banking is as complicated as it is shady. For our purposes it is enough to say that Grameen Bank does not participate in this sort of high risk banking. It actually has money on hand before it loans it out. It therefore requires huge capitalization to operate. The millions of dollars that pour into Grameen are invested, paid back, and reinvested, with Grameen’s user base constantly expanding. So these millions of dollars that come into Grameen are not just poured into a welfare hole, but create an ever-expanding base of money that continually recirculates within the poor communities where Grameen Bank works.
But American critics rarely if ever think to question the Ponzi scheme called fractional reserve banking (the norm in America), so Grameen’s system, with its necessarily large capital layouts, seems at the very least inefficient. From my research I have not found truth to the wealth redistribution charge. It only appears that way to people who accept the American system of funny money via fractional reserve banking as normative.
Interest rates aren’t the only problem. Evidently (and here reports differ, depending on whose side the reporter is on) Grameen Bank in Bangladesh is now partially controlled by the Bangladeshi government. Critics claim that Grameen has just become another government program disguised as a non-profit in order to get their hands into the pockets of naïve people who want to do good.
The Bangladeshi government is indeed involved in Grameen Bank, but according to Yunus, it is a coercive move on the part of the government because the government fears it is losing its power over the people. Yunus is not happy with the situation, but when a government shows up at your door and says it’s here to help, what can you do? (I suppose it’s not dissimilar to American health care where our government, which is only here to help, has managed to criminalize non-traditional and non-mainstream activities.)
Grameen Bank is now large enough that The Triumvirate of Big Business, Big Banking, and Big Bureaucracy has had to take notice. Each side is pushing the other. Each side is trying to position themselves in relation to the world’s poor population. The Triumvirate sees Grameen Bank specifically and microfinance generally as a threat and are trying to take control of it. Grameen Bank is fighting back. The result is a pretty ugly picture. If you believe Big Banking and Big Government is the good guy, you will no doubt see Grameen Bank in a very bad light. But if you think The Triumvirate is a dangerous development you will most likely consider Grameen a step in the right direction.
I am afraid of The Triumvirate and therefore tend to be quite charitable toward Grameen and microfinance. In the next essay, I want to consider the critics of Grameen Bank and the documentary To Catch A Dollar from this light.