Unit 4 Macro: Muhammad Yunus
Suyash Raj Bhandari profiles the Founder of the Grameen Bank, Mohammad Yunus
Muhammad Yunus is an economist and Nobel Peace Prize winner who has further developed the concepts of microcredit and micro-finance. In 2006 Muhammad Yunus and Grameen Bank received the Nobel Peace Prize for their work in microcredit and their efforts to create economic and social development.
How it works
The concept of micro-credit loans is centered on the idea that the poor have not been able to fully utilize their skills and thus with right incentive can earn more money. When providing loans, Grameen bank uses a group-based credit approach in order to make sure that social pressure within rural communities ensures that borrowers uphold their end of the contract (making repayments on time and achieving a good credit standing).
Grameen bank’s credit policy focuses on providing the under-served populations with support and as a result 94% of its borrowers are women. In most developing nations like Bangladesh, gender inequality is still a major issue. Grameen Bank helps empower women by mainly providing them with the micro-credit loans, which in turn offers them the opportunity of self-employment and access to money. In addition, reports have proven that the overall impact on development is greater when loans are given to women as opposed to men since women are more likely to use their earnings to improve their living situations and to educate their children. The value of loans starts at $35 and average $200 but mainly depend on the needs of the borrower and her level of credit (based on their previous borrowing and repayment record).
Since the bank’s primary focus is on alleviating poverty rather than generating high returns, interest rates are kept relatively low and as close as possible to commercial rates.
Given its success, Grameen bank has diversified its services among different applications of microcredit. The Village Phone program allows female entrepreneurs to start businesses that provide wireless payphone services in rural areas. The Program has improved the livelihoods of many villagers, farmers and other people who previously did not have access to critical market information and lifeline communications in over 28,000 villages in Bangladesh. Today, more than 55,000 phones are being utilised, with over 80 million people benefiting from access to market information.
In 2003, Grameen Bank launched it struggling members program, exclusively targeted to the beggars in Bangladesh rather than its famous traditional group-based lending scheme. This program distributes small loans to beggars. The loans are interest-free, the repayment period can be arbitrarily long, and the borrower is covered under life insurance free of cost. For example, a beggar taking a small loan of around 100 taka (about US $1.50) may pay back only 2.00 taka (about 3.4 US cents) per week.
Lessons from Grameen Bank’s success
Providing the poor with micro-credit loans can help spur economic growth. Companies such as M-PESA have also implemented the idea of micro-finance in Africa as well. Although they do not function like Grameen Bank, both companies rely on the idea that financial inclusion and helping the poor fulfill their potential is necessary for development. Efforts are being made all over the world to embrace this idea (e.g. Nepal) as it can ultimately help lift the poorest out of poverty.
Financial Times Video (June 2014)
Muhammad Yunus, the Bangladeshi founder of Grameen Bank, claims that entrepreneurship can offset the flaws of capitalism