By: Malvika Sriniwasan
The Grameen Bank: the supplier of economic oxygen in a treeless economy facing those bound by poverty
In a world plagued with poverty, in a society of unequally distributed income, in a jungle of ruthless capitalism – how do the poorest of the lot survive? Developing countries with emerging economies like Bangladesh, India, Sri Lanka, Vietnam etc. encounter the problem of population overgrowth and growing poverty, resulting in low productivity, unemployment, and drop in real GDP per capita. With this, the issue of lack of access to credit or any formal banking for several poor households arises. Households are stuck in the ‘poverty cycle’ or ‘debt trap’, where low income leads to low savings, in turn low investment in capital, and low productivity. They drown deeper in this trap by forcefully being subject to unfair money lenders, or ‘loan sharks’, with high interest rates, where they aren’t able to provide the required collateral, and are taken advantage of. Collateral is a property or asset borrowers offer as ‘security’ for the loan they take. Microfinance has risen and proved to be the guiding tool towards fighting poverty and aiding the impoverished. Microfinance, or microcredit, is the provision of financial and banking services to unemployed or low-income earning individuals in the form of loans, insurance, and savings who otherwise lack business with, or ties to financial institutions. Simply put, it is the provision of opportunity and resources to those living in absolute poverty by giving them access to credit. Microfinance usually deals with providing loans in small amounts, ~ $100, to help start up small local businesses, and has low consumer-friendly interest rates. Its concept rests on the foundation of mutual trust and agreement, collective responsibility, and peer pressure.
While the concept of microfinance seems perfect, it comes with its set of controversies – are giant banks taking advantage of uninformed poor workers? Is microfinance deepening the debt trap poor families are already stuck in? Are big financial institutions killing two birds with one stone by earning profit and engaging in their ‘corporate social responsibility’ while poor low-income families bear the brunt? While economists have debated upon these questions for decades, Muhammad Yunus – Nobel Laureate, social entrepreneur, economist, and professor – thought through these issues and founded the Grameen Bank in 1983, a microfinance institution providing small loans, or ‘grameencredit’ (Grameen refers to rural, or village), to extremely poor workers and families in Bangladesh, without requiring them to provide collateral. By freeing borrowers from the burden of collateral, and lending at low, consumer-friendly interest rates, the Grameen Bank has successfully empowered households, (especially women), and small and medium-sized enterprises (SMEs) to run successful small businesses and earn sufficient income to sustain a respectable lifestyle.
The Grameen Bank has steered developmental economics in a new direction. It has shed light on the importance of self-sustainability as a driver of economic growth and development, rather than financial or economic dependency or assistance. This means that by delivering credit to impoverished yet ambitious workers and small entrepreneurs, we can achieve economic growth – seen simply and clearly through a rise in GDP and the Happiness Index; this is a result of efficient and increased productivity, self confidence in entrepreneurship, and a drive to attain a certain standard of living. Starting its loans at a meagre $27, GB has risen to enables millions with small loans of an average of around $100. In December 2017, the Grameen Bank recorded 8.93 million borrowers, 97% of whom are women, and boasts a > 95% repayment rate. It covers 81,400 villages in Bangladesh, i.e., more than 97% of the total number of villages. In 2006, the Grameen Bank and Muhammad Yunus equally received the Nobel Peace Prize for ‘their efforts to create economic and social development from below’.
The Grameen Bank focuses on women, accelerating the women in business movement in rural Bangladesh. It emphasizes on women empowerment, underscoring that women in Bangladesh are neglected, and need to be exposed to the business world of opportunities, and understand their right to work to break the existing glass ceiling in the workforce. Studies show that providing loans to women to start businesses proves to be a more viable business option since they are more likely to use their income to improve their household’s living standards, invest in human capital by educating their children, and are more likely to repay loans. Women run several local businesses – embroidery, weaving, knitting, rice husking, pottery – to name a few, and have generated countless success stories of them becoming independent microentrepreneurs, understanding the once-patriarchal business world, and feeling empowered as the bread earner of the household. These stories play an important role in the understanding of developmental and behavioral economics – economic growth is achieved through increased productivity, but economic development has also proven to have improved, since borrowers of GB have shown a greater sustained increase in standards of living, as compared to non-borrowers. Earning income through self-employment rather than labor wage is an important angle to be viewed in the lens of behavioral economics – studies show that this gives microentrepreneurs the confidence to continue improving and investing in their business, improve technologies, and drive productivity; economic decision making is also more clear since they understand basic business decisions and make informed choices with regards to saving, investments, and purchases. Basing their foundation solely on the principle of mutual trust and accountability, and self-sustainability, the Grameen Bank successfully earns profits without receiving any money from donors.
The Grameen Bank, while empowering borrowers and industries, is a stepping stone toward ending the poverty cycle. It views credit as a human right.
Above is a diagram representing the ever-dreaded poverty cycle. The Grameen Bank steps in by breaking this cycle at the beginning – increasing income of the unemployed and low-income earners. By empowering them to be microentrepreneurs making informed business decisions, saving and investment in capital will be monitored and maintained at a sustainable level, leading to faster generation of factors of production such as land and labor (drivers of their local businesses), resulting in greater income growth.
“One struggle that I had all of my life is the banking system doesn’t reach out to [the poor]. I kept saying that financing is a kind of economic oxygen for people. If you don’t give this oxygen to people, people get sick, people get weak, people get non-functional. The moment you connect them with the economic oxygen, the financial facility, then suddenly they wake up, suddenly they start working, suddenly they become enterprising. That is the whole thing missing. Almost half of the population of the entire world is not connected with the financing system”, says Yunus, reiterating the very basis of the Grameen Bank – trust in the ambition, drive, and behavior of newly empowered low-income earners, especially women. Through their microfinancing strategies, the Grameen Bank has reversed traditional banking operations; it has successfully integrated the humane aspect of economic productivity, pressing on the covert motivational drive generated by collective pressure and responsibility. Many other microfinancing companies and projects in emerging economies have adapted the concept of the Grameen Bank, and have understood the importance of involving women in the workforce, and the multiplier effect they have on savings, investment, and personal financing of households.
- Panagariya, A. (2010, November 24). Getting it right on microfinance. The Economic Times. Retrieved from https://economictimes.indiatimes.com/opinion/et-commentary/getting-it-right-on-microfinance/articleshow/6979476.cms
- The World Bank. (2017). GDP per capita (Current USD) [Data file]. Retrieved from https://data.worldbank.org/indicator/NY.GDP.PCAP.CD
- Grameen Bank. (January 2018). Introduction to the Grameen Bank. Retrieved from http://www.grameen.com/introduction/
- Grameen Bank. (January 2018). FAQ: Grameen Bank. Retrieved from http://www.grameen-info.org/faq/
- Grameen Bank. (March 2013). Role of Microcredit. Retrieved from http://www.grameen-info.org/role-of-microcredit/
- Knowledge @ Wharton High School: University of Pennsylvania. (October 2018). 5 Truths about Microfinance. Retrieved from http://kwhs.wharton.upenn.edu/2018/10/5-truths-microfinance/