Microcredit, the innovation of the century
René Mendoza Vidaurre *
There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.
(Niccolo Machiavelli, 1532, The Prince)
Grameen Bank (“village bank”) emerged nearly four decades ago in Bangladesh. In 2006 its founder, Muhammad Yunus, received the Nobel Peace Prize “for his efforts in creating economic and social development from below”, achieving world recognition for microcredit. Apart from the criticisms that microcredit pacifies poor families so that they do not fight for their rights, and that the US$130 average amount is not enough to buy a cow, and much less a hectar of land, its achievements are impressive: 3,000 branches, 7 million borrowers (95% are women), and 3% arrears rate; nearly 100% of Grameen children that start their studies finish them; education, health, retirement and pension programs, and services of access to new technology – cell phones in more than 2,000 villages (Grameen Telecom), solar panels (Grameen Skakti) and internet in the villages (Grameen Communications). What made posslbe this change of the century in finances in favor of the poorest of the poor?
Distancing themselves from conventional finance
After years of war, Bangladesh achieved its independence in 1971, a year later Yunus returned to his country as a university professor, and in 1974 the country experienced a great famine. Yunus, his colleagues and students wanted to help, and went to live – and study – in the village of Jobra. There they found usury with interest rates of up to 10%/day, and their dependence on those loans made them live as semi-slaves. In Jobra they counted 42 people under these usurious conditions, and the total loan amount was only US$27. He lent them those US$27 at 0% interest, and to his surprise they paid him back; then he discovered that they were paying interest rates higher than 60%/year to the commercial banks. So he observed something contradictory in the banking system, they were there to give loans, and acted under the principle of “the more you have, the more you get”, but they were exclusive: “when you exclude people for no fault of their own, it is apartheid.” Without the first dollar they could not get the second one, this was the situation of the poor. From there emerged his vision: end poverty.
He requested a loan from the bank to provide “small loans for the poorest.” The banks rejected the request: the poor do not receive loans because they cannot repay them, they do not know how to fill out the forms, and they do not have material collateral. After six months, and after Yunus himself offered collateral, one bank lent him US$300. Yunus and his team organized the credit and recovered up to the very last cent. The manager of the bank attributed this to luck, and when that credit experience was replicated in five, ten and fifty villages, that manager did not change, “because people can make mistakes, but the banking system does not.”
The more he lent, the more they saw the need to found an organization: Grameen Bank (1983) (GB), in order to place the first dollar in the hands of the poorest. What was the motivation for the people to pay and improve their lives?
Microcredit in groups and the social movement
GB followed a path opposed to the logic of the banks and what economics teaches. The bank waits for the client in their offices, requires material collateral, and provides individual loans, high loan amounts, and to people with more resources; it is a system built on the basis of prejudices; “Those who have more resources pay.” GB started microcredit (small amounts), without material collateral, with groups of five people as the basis to build a culture of credit, members with different businesses that mutually support one another, if one member does not pay the rest do not get a loan; the groups meet weekly to pay, save and renew their commitments to 16 norms (have a small family, build latrines, send their children to school, stop the practice of dowries, drink water from healthy sources or boil their water, grow vegetables, vote in elections…); they were mostly women because they were the poorest and those most affected by the purdah norms (conceal women from men who are not direct relatives), because they made better use of the loans and they paid on time. The GB officials stay out in the villages, explaining the microloans and accompanying those that have been disbursed, and because of the role of the groups, the credit and the savings in good measure are administered by the people themselves; the transactions are done in front of everyone. The basis is trust; without lawyers, nor taking people to court for lack of payment.
The novelty is in the learning capacity of GB and in its social movement nature. Yunus and his team immersed themselves from the beginning in order to understand the reality; so they understood the bottleneck of usury, discerned their vision and maintained it. Then they experimented, it if did not work out, they would study the banks to do “just the reverse”; trial and error forming groups with women. These circles remind us of the microfinance institution known as Bora founded by Munro and 50 beggars in Kiberia (Kenya) (“small loans, big changes”), Toyota (“if one worker makes a mistake another worker corrects him”), and Wikipedia (“one writes and others anonymously correct, improve and edit the text”). The key: combining decentralization (circles) and centralization (GB), economics (credit) and social-cultural movement (freeing women from the conservatism of Islam), and personal and social change.
Erosion of microcredit and the imperative to recover its novelty
Thousands of NGOs and microfinance institutions got involved in microcredit since 1980, they even adopted the circles called “solidarity group lending” (SGL). Most of them fell by the wayside, or turned into conventional banks, brandishing the prejudices that GB fought against: “the poor do not pay”, “credit only with material collateral”, “arrears are recovered by lawyers”, “credit is done by people who have studied it”, and “SGL only for recovering the loans.” In spite of the path shown by GB, those who followed, took it and added the microcredit discourse and SGL in the old form of making credit exclusive, and have been “scaling up” to social groups with more resources. Albert Einstein said it well that “it is easier to split an atom than it is to break a prejudice.”
How can this innovation of the century be recovered? Following the path of Yunus and his colleagues, doing immersion and creating conditions for experimenting. Recognizing that in our countries upward of 70% of the population continues to be excluded from credit, and that they constitute an enormous sector to innovate (e.g. with larger amounts for family agriculture). Rethink SGL as “pressure among themselves to pay”, to believe in themselves, improve their businesses, take on norms like erradicating domestic violence and having sustainable practices. Understanding credit (from the Latin credititus, “having trust”) as the “door” for a strategic alliance between SGL with the poorest organized into associative forms, groups with more resources and better organized, and financial institutions, around financing and social change, and scaling up in that alliance, combining technical assistance and commerce.
Even though the government of Bangladesh has been working to take over GB since 2013, and there are growing criticisms that GB is being dragged along by the market, GB has shown that is can change the world with $27 dollars, and do it bringing the people from the base of the pyramid to a financial system open to learning and to alliances with the poorest of the poor. This can be an initiative that begins “a new order of things”.
* I thank F. Huybrechs and J. Bastiaensen for their comments on the draft of this article.
René Mendoza has a PhD in development studies, is a collaborator of the Wind of Peace Foundation (http://peacewinds.org/research/), an associate researcher for IOB-University of Antwerp (Belgium) and for the Nitlapan-UCA Research and Development Institute (Nicaragua). firstname.lastname@example.org