Microfinance

A Talk by Mohammad Yunus: A Man Misunderstood

Today I heard a speech by Mohammad Yunus at FICCI (Federation of Indian Chambers of Commerce and Industry) in New Delhi. He spoke for 35 minutes to a packed, standing crowd, interrupted only by the laughter of his jokes and the occasional rude cellphone.

I am compelled to write this (long) post, because I must recommend to everyone that ever has a chance, to listen to him. Listen to him not because his work is en vogue, nor because of his Nobel Prize, nor because he is an excellent speaker mixing humor with the dirty reality of his work. Listen to him simply because he is a man whose idea – microfinance – has been completely misunderstood.

A Brief History of Microfinance

In telling the story of Grameen Bank, they say the first loan every given was $27. What they do not say is that that loan was given to a collective of 42 people. The tiny scale of that amount, and how its usefulness contradicts everything we believe to hold true, sets the stage for Yunus’s life. To hear the story from a man who cannot hide the excitement in the excitement of his clients, is to hear it come alive.

Prof. Yunus started with a simple proposition. In his words, he saw a terrible problem – the grip of moneylenders on a community – to which there was a very easy solution – to lend the money himself. The response he got from the poor – of being almost deified – “hooked him” to what he was doing.

Yet, because he did something nobody else did, or was prepared to do, his work was all about challenging the status quo. Even his insistence on lending to women, was a reaction to banks that did not. Surprisingly women, when initially offered a loan refused saying they did not know what to do with it. Yunus had a simple explanation for that, saying to his colleagues, “it is not her saying no. It is her history saying no.”

Microfinance and Grameen Bank’s Business Model

In 2006 there were about 100 million clients worldwide. Of these, 85% were in Asia with 50 million in India (34mn) and Bangladesh (16mn). 10% of the clients were in Africa with a further 5% in Latin America.

Yet, two thirds of the people in the world do not have access to the financial system, a state of affairs Prof. Yunus believes to be inherently unjust, suggesting that credit should be a human right. In Bangladesh, Grameen Bank (GB) covers 80% of poor households, and soon hopes to reach the rest. But to make financial services a ubiquity requires a policy framework that legalizes microbanking (a process underway in India). GB, I was surprised to learn for instance, has special legal status that allows it to operate as a bank.

There are, however, more fundamental differences between GB and other MFIs. In particular, when GB creates a new branch, its manager is set two targets:

1. That each branch raise its own money. No money is provided to a branch, which implies that branches must raise deposits from the community and use that to disburse loans.
2. That each branch must breakeven within 12 months. At present, GB has achieved that target in 80% of the cases.

The first point is worth repeating because it is very different from what happens in conventional banks. Microfinance today is really microcredit. Banks do not collect deposits from the very poor, and when they do that money is channeled to metropolitan areas. While both strategies may be good for the business they have a negative impact on the community.

The contrast with commercial banks became even more stark when Prof. Yunus was asked what he thought of farmers committing suicide in Vidharbha (a region of India) from chronic indebtedness. That, in his opinion, was a failure of the institution that lent the money – because by making money more important than the client’s life, the institution had failed in its orientation.

Grameen Bank takes a different approach to default. If one person in a group fails to make a payment, the Bank asks other members not to pressure the borrower but to help her repay. For instance, if the default happens because a woman’s husband ran away with money, other group members should bring pressure to bear on the husband, not the woman herself. If everything fails the loan is converted into a very long-term loan. Similarly, bank loans often have insurance built in, so that if a woman is unable to pay or she or her husband dies, the loan can be written off.

The Non-Quantifiable Impact of Microfinance

There were times when I thought Yunus sounded just like any other proponent of microfinance – and I have heard many. When he said, for instance, that he hoped to reach 100% of the people in Bangladesh, I could not help but ask – “then what?”

My problem is that nobody really asks anymore if microfinance actually helps people get out of poverty. It has become an end in itself rather than being a means to an end.

The roots of my skepticism lie in studies that show little income growth among microfinance borrowers. Yet, my insistence on numbers stems from my training in western thinking. To know what percentage of people microfinance helps is necessary, but not sufficient. Because if it helps even one person, that is one more than the alternative. Yunus describes a program that lends to women beggars, encouraging them to become roaming saleswomen. From its 85,000 clients, if even 5,000 were to give up begging that would in Yunus’s opinion be worthwhile (so far 8,000 have done so).

One cannot count the value of social impact simply with those that escape poverty. One must also remember the many who do not but feel otherwise empowered. To dismiss them as irrelevant to the ‘impact’ of microfinance, is to reduce them – and our measure of happiness – to an incomplete number.

And finally, there are knock on effects. Yunus was asked what he thought of the rise of Islamic fundamentalism in Bangladesh, which excludes women from the mainstream? In response, he saw microfinance as a tool against that rise. “The more women are empowered, the more fundamentalism is weakened,” he said.

Social Business, Incentives, and Competitive Advantage

Grameen Bank, by putting its clients before profits, is what Yunus calls a “Social Business”. This orientation challenges the very core of economics and what we are taught in business school of the profit-maximization theory. “Yet,” he says, “I find it humiliating that I have to fit into a theory, rather than the other way around.”

In Yunus’ words, classical economics and the theory of profit maximization have done lasting damage by focusing only on one part of human nature. Because while humans are excited by money and the ability to make it, that is not all they are. Doing otherwise, we reduce ourselves to less than what we really are (a point made very forcefully by Amartya Sen in critiquing the dismissal of ethics in economics).

The success of a “social business enterprise” is measured not by profits, but by the number of people served. For instance, a joint venture between GB and Danone that provides fortified milk products to poor children measures its success by the number of children it feeds. Similarly, GB itself can be distinguished from other MFIs that have climbed the bandwagon but offer higher interest rates to maximize profits, rather than cover costs.

The idea is not new. David Green had the same motive in creating Aurolab. But Prof. Yunus is clear that the two motives cannot co-exist in the same business. For if that happens eventually profit-maximization will win over other incentives. There is, as he says “only one bottom line.”

Interestingly, it struck me that among the poor being a social business can also be a competitive advantage. For instance, by being “non-loss, non-dividend”, GB can offer lower interest rates than its competitors. It is an interesting paradox – that by not being profit-maximizing, one has an evolutionary edge over companies that are.

Social Market Exchange

Taking the argument further, if social businesses can exist, they can also benefit from a stock exchange of their own. This would be an exchange on which companies are traded, but each listed company is a social business measured not on its profit but on how many people it helps.

It is an interesting idea. Because people are not only profit-oriented (as demonstrated by philanthropy), each of us exhibits a range of motives for what we do. Our relative share of ‘investment’ in profit-maximizing and social businesses may vary, but there will be many people that will put their money where their belief is.

Parting Impressions: An Ironic Achievement

That really is what Yunus is all about. He is about challenging the mainstream thought process and offering a more complete perspective to what is important, beyond profits.

Yet Yunus’s attempt to prove that social business is viable has been only selectively recognized, and the very businesses he set out to challenge have subsumed his message. Microfinance has gone mainstream, but lost its proposition of being focused on the poor.

It is sobering to ask if social businesses can indeed coexist in society obsessed with western economic theory. Would any social business face the same tradeoff? Would it have to compromise on its values in order to attract global attention?

I retain my criticisms of microfinance as a development tool. In particular the blind belief that it helps alleviate poverty – a belief that prevents objective analysis and the development of alternatives. I share Yunus’s belief that business need not only be profit-maximizing. Yet, the rise of microfinance shows that the gap between how things work today and how we would like to see them work is vast. Microfinance today is not what Yunus set out to do, and he is being applauded for the wrong things. That is the irony of his achievement.