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Fighting loan sharks who prey on peasants
June 24, 2009, Wednesday
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EDITOR'S note: What began with a loan of US$27 to 42 women in a small village 33 years ago has grown into a global microcredit movement that has changed the lives of millions of poor
people around the world. Muhammad Yunus, founder and managing director of Bangladesh's Grameen Bank, was the guest speaker at Wharton's MBA commencement on May 17. The following is the first of three articles based on his interview with Knowledge@Wharton.
Q: Can you briefly describe your (business) model?
Yunus: We are not trying to create a non-profit.
Initially, I offered myself as a guarantor, and then took the money from the bank and gave it to people. So it was an extension of the bank's activities.
When we saw that it was working well and the banks were not as enthusiastic as we were, we thought maybe we should have a separate bank created for this purpose.
Finally we did that in 1983 - called Grameen Bank or the "Village Bnk." People sometimes refer to us as an NGO. We have to explain that we are not an NGO.
We are a bank and it is owned by the poor people. The owners of the bank are the borrowers of the bank.
Q: Your success with Grameen has led to a lot of other people entering the microcredit area. How has that changed the microcredit model?
Yunus: The word "microcredit" has become very popular.
We define microcredit, microfinance, in a certain way. This is a credit and financial service to the poorest people without collateral, without guarantee and without any lawyers in the system. And this has focused more on women - the poorest women.
Most of the agricultural banks around the world require collateral.
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."
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 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.
Q: So how do you tackle that? Is there some regulation required?
Yunus: In Bangladesh, we have been talking about regulation. The Bangladesh government has created a microcredit authority, (based on) our suggestions.
So they will be looking into the interest rate issue, the transparency issue. A lot of people quote their interest rate in many, many ways, hiding the actual fact of how much they are charging.
We say it has to be very transparent. All interest rates should be expressed in a standardized form so that you can compare A and B.
Who charges more or less? This is something that they have to clarify right away, and they also have to keep the interest rate as low as possible.
I have been promoting the idea that a true microcredit interest rate should be within a particular range - as a cost of funds at the market price plus 10 percent. This is the green zone of microcredit interest rates. You are legitimate. You are doing excellent work.
If it is cost of funds at the market price plus 10 percent to 15 percent, we say your interest rate is in the yellow zone. You're on the high side, but still we will consider you a genuine microcredit program.
If cost of funds is at the market price plus 15 percent and above, we say you are in the red zone, meaning that you are too high and you are on the wrong side of microcredit. You are moving into the loan shark zone.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)
people around the world. Muhammad Yunus, founder and managing director of Bangladesh's Grameen Bank, was the guest speaker at Wharton's MBA commencement on May 17. The following is the first of three articles based on his interview with Knowledge@Wharton.
Q: Can you briefly describe your (business) model?
Yunus: We are not trying to create a non-profit.
Initially, I offered myself as a guarantor, and then took the money from the bank and gave it to people. So it was an extension of the bank's activities.
When we saw that it was working well and the banks were not as enthusiastic as we were, we thought maybe we should have a separate bank created for this purpose.
Finally we did that in 1983 - called Grameen Bank or the "Village Bnk." People sometimes refer to us as an NGO. We have to explain that we are not an NGO.
We are a bank and it is owned by the poor people. The owners of the bank are the borrowers of the bank.
Q: Your success with Grameen has led to a lot of other people entering the microcredit area. How has that changed the microcredit model?
Yunus: The word "microcredit" has become very popular.
We define microcredit, microfinance, in a certain way. This is a credit and financial service to the poorest people without collateral, without guarantee and without any lawyers in the system. And this has focused more on women - the poorest women.
Most of the agricultural banks around the world require collateral.
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."
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 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.
Q: So how do you tackle that? Is there some regulation required?
Yunus: In Bangladesh, we have been talking about regulation. The Bangladesh government has created a microcredit authority, (based on) our suggestions.
So they will be looking into the interest rate issue, the transparency issue. A lot of people quote their interest rate in many, many ways, hiding the actual fact of how much they are charging.
We say it has to be very transparent. All interest rates should be expressed in a standardized form so that you can compare A and B.
Who charges more or less? This is something that they have to clarify right away, and they also have to keep the interest rate as low as possible.
I have been promoting the idea that a true microcredit interest rate should be within a particular range - as a cost of funds at the market price plus 10 percent. This is the green zone of microcredit interest rates. You are legitimate. You are doing excellent work.
If it is cost of funds at the market price plus 10 percent to 15 percent, we say your interest rate is in the yellow zone. You're on the high side, but still we will consider you a genuine microcredit program.
If cost of funds is at the market price plus 15 percent and above, we say you are in the red zone, meaning that you are too high and you are on the wrong side of microcredit. You are moving into the loan shark zone.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)
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