Ana Arias Terry

Microlending Yields Life Changing Results

Is it possible to help the poorest people in developing countries break out of the Catch-22 cycle of their unfortunate condition? It is, according to the founder of the Grameen Bank in Bangladesh. With the equivalent of a $27 loan out of his own pocket, Muhammad Yunus pioneered what became the microlending movement as a viable way to help many of the very poor break the vicious cycle.

Around the globe today, estimates of microfinance programs and organizations range from between 3,000 a few years ago to 7,000 today, with as many as 16 million poor individuals being helped in developing nations. According to The Aspen Institute's FIELD (the microenterprise Fund for Innovation, Effectiveness, Learning and Dissemination) program in Washington, D.C., in the U.S. approximately 341 microenterprise programs exist.

Microcredit as pioneered by The Grameen Bank and pursued by other microlending programs is changing lives.

What Is It?

Definitions of microcredit, microlending, and microenterprise abound. The Microcredit Summit offers a particularly useful and concise explanation. This entity launched a worldwide campaign "to ensure that 100 million of the world's poorest families, especially the women of those families, are receiving credit for self-employment and other financial and business services by the year 2005." It explains that microcredit is about programs that "extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families."

The Virtual Library on Microcredit (VLM), a vast and important repository of data on microcredit aimed at researchers, practitioners, and community organizations internationally, offers an important extension to the definition. Hari Srinivas, VLM's coordinator and a member of the Department of Social Engineering at the Tokyo Institute of Technology in Japan, writes, "Microcredit is as much about money as it is about information." In this broader framework, "The key implications of microcredit [are] in its name itself: 'micro.' The small size of the loans made, small size of savings made, the smaller frequency of loans, shorter repayment periods and amounts, the micro/local level of activities, the community-based immediacy of microcredit." Microcredit is not one single solution, then, but "a menu of options and enablements that has to be put together, à la carte, based on local conditions and needs."

The Grameen Bank

After his studies at Chittagong University, Yunus studied economics at Vanderbilt University as a doctorate Fulbright scholar. He returned to Bangladesh in 1972, after a seven-year absence from home. Settling a scant twenty miles from the place of his youth, he became head of the Economics Department at Chittagong U. He was frustrated by the poverty and famine he saw all around him. The independence of Bangladesh in 1971 had taken a heavy toll and left the economy in shambles.

Yunus spent the next four years talking to villagers and trying to figure out how best to help. He experimented with a number of approaches until 1976, when the idea came together. That was the year he met Sufiya Begum, a thin twenty-one-year-old bamboo stool maker and mother of three. Begum exemplified the plight of the bamboo stool makers in the small village of Jobra. To buy the bamboo, they had to borrow money from local moneylenders. But at the end of each day, they had to sell their stools to the middleman, at a price pretty much determined by the middleman, as loan repayment. Their leftover "profit" was a pittance -- around two cents a day and woefully inadequate to support the stool makers, let alone their families.

With the help of a student, Yunus found out that there were forty-two villagers who depended on the trader for money loans that amounted to almost $27. Angered that so few dollars made the difference for the hardworking villagers, Yunus lent them $27 so they could sell their stools to whomever they wanted at a fair price. Soon after, Yunus realized that his action was inadequate to help all the people who shared a similar plight. What was needed was an institution that would lend money to people who had nothing.

Going against most recognized economic principles and skeptical, traditional banks, Yunus developed what would become The Grameen (meaning "rural" or "of the village") Bank system with the able and motivated but highly inexperienced assistance of student volunteers. He did this for three years before he tested it in a new location. It would be five more years before Grameen expanded seriously. From the beginning of his explorations into helping the poor until he expanded his program twelve years passed.

The loans made by the Grameen Bank are literally based upon trust, accountability, peer participation, and creativity. The institution makes small, uninsured loans. No collateral is needed. Yet loan repayment is nearly 100 percent. Grameen has so far managed to provide more than $2.5 billion in microloans in Bangladesh alone. This has helped an excess of 2.5 million families. Close to 95 percent of the bank's clients are women.

In 1998, two years after author David Bornstein wrote The Price of a Dream: The Story of the Grameen Bank (1996, University of Chicago Press), he offered this insight. "The Grameen Bank has brought an entrepreneurial edge to development -- creating new systems and continuously innovating in the effort to alleviate poverty more quickly and more effectively. It has recently introduced into Bangladesh a cellular phone system operated by women villagers. Grameen has developed systems to help hand weavers, fishermen, small-scale farmers, and is currently one of Bangladesh's largest Internet service providers. All its ventures are aimed at building systems to reduce poverty and create new opportunities for poor people."

Microlending Initiatives and Their Impact

Grameen-type operations and others have lately emerged around the globe. One of the earliest U.S. initiatives to follow the Grameen model in the mid-1980s was the Good Faith Fund in Pine Bluff, Arkansas, spurred in part by then-Arkansas Governor Bill Clinton and his wife Hillary. Thanks to the efforts of South Shore Bank of Chicago bankers Ron Grzywinski and Mary Houghton, and of Julia Vindasius, who was originally put in charge of this program, many rural residents were able to start to combat poverty through small businesses. The Women's Self-Employed Project in Chicago is another established South Shore Bank replication program.

Other pioneering organizations have included the Lakota Fund, a significant microlending enterprise, which assists Native Americans in the Oglala Lakota Nation in southwestern South Dakota. ACCION International, likely the largest microlending organization in the U.S. today, has been around for twenty-five years and, with its affiliate members, works to lower unemployment and poverty across the Americas through the provision of individual microloans and business training. ACCION U.S.A. (in twenty-one U.S. cities) and ACCION Latin America Network (in fourteen Latin American and Caribbean nations) helped over 450,000 clients in 1999. About 65 percent of the recipients are women. At ACCION Chicago, 704 loans have been disbursed providing more than $3.5 million to entrepreneurs. Its loan repayment rate is 98 percent.

Another champion in the microloan cause has been Working Capital. Based in Cambridge, Massachusetts, this organization was founded in 1990 by former Peace Corps volunteer Jeffrey Ashe. Still one of the largest microcredit programs in the U.S. (and the largest in the peer group lending category), Working Capital focuses on providing group-level assistance, credit, training, and technical aid to low-income entrepreneurs. Working Capital has assisted about 5,000 individuals since its inception. Its loans range from about $500 to $20,000, and it has extended more than $3.1 million in loans. Their repayment rate is better than 90 percent.

In 1997, there were at least sixty-five nations with programs similar to Grameen. In Oklahoma, microcredit initiatives are helping to reduce alcoholism, thanks to Cherokee Nation's Chief Wilma Mankiller. In Chicago, programs are helping unwed moms go off welfare. In Uganda, microentrepreneurs are better able to tend to the food, housing, education, and medical needs of AIDS orphans. In South Africa, microcredit has enabled many to set up their own small businesses selling wares and is perceived there as a powerful tool to combat the high rate of unemployment.

The Microlending Movement Today

Most microcredit programs have been instrumental in improving entrenched societal ills associated with poverty.

While the human factor list of "success" stories abound from many corners of the world, the balance sheet isn't yet showing any U.S. microlending organizations that are breaking even.

In his book, Bornstein notes that some bankers "shunned" comparisons with the Grameen model because they saw little in common between a U.S.-based and a Bangladesh microenterprise. Many others thought it was too early to get into financial measurements and that attention to profits developed false expectations of donors and put unnecessary burdens on loan administrators and clients. "Instead, microbankers defended their program costs by 1) framing the issue in terms of social justice, and 2) posing the question: What is the cost of not providing these services?"

Today, four years after The Price of a Dream was published, Bornstein sees the picture differently. "My views on the importance of financial sustainability have changed," he says. "I think it's more important now for an idea to be politically sustainable. Many necessary programs will never make profits. But we have to think about spreading the concepts so more people understand their importance -- not just trying to make everything fit into the strict economic model."

Refreshing? I think so. Well, then, I asked, "what's your assessment of the climate in the more traditional financial community about microlending? Is there greater acceptance or are the skeptics still rampant?"

"Microlending has become a very well established feature of development efforts. There's no debate about that," says Bornstein. "What there is debate about is how much microlending has to be supported by other interventions, such as training, market supports, regulatory support, advocacy, infrastructure development, and so forth. And also to what extent it can be focused on the very poor vs. the moderate poor. People argue about things like appropriate interest rates and how many subsidies it requires. But financial institutions from the World Bank to local banks now see this as a good anti-poverty approach -- they're not looking to make profits in it. But there's still no approach that has demonstrated the ability to create employment for so many people so quickly, especially in the developing world."

The approach to the policies and strategies used by microlending programs vary, but one that's key in Bornstein's view is geography. He says that the urban/rural difference is enormous.

In his book Bornstein points out many other variables, with geography still a factor, that are debated in banking circles about the suitability of replicating or transferring Grameen-type operations to the U.S. There are issues of varying government regulations in the context of taxes, competition, supplier access, and responses to dynamic markets that make the barriers tougher here.

"If Yunus had an American counterpart who spent four years walking around a poor urban neighborhood in the United States (presumably close to where he or she grew up), asking people what they needed to solve their problems, what would have emerged?," writes Bornstein. "Would people have talked about credit? Or vocational services? Or improved public schools? Or locally based policemen? Or better political representation? The answer remains open to speculation. But one thing is certain: It cannot be ascertained from a distance."

Richard Taub is the Paul Klapper Professor in the Social Sciences at the University of Chicago and a professor in the Department of Sociology and Human Development. "The idea that one might be able to transfer such a program to the United States has distinctive appeal," he writes in his 1998 paper "Making the Adaptation Across Cultures and Societies: A Report on an Attempt to Clone the Grameen Bank in Southern Arkansas."

The problems, he adds, is that while the principles of Grameen are appealing and easy to replicate, the specific practices are significantly more difficult, if not impossible, to transfer. In his assessment "wholesale transplantation" of the Grameen model to the States, particularly the practices, will not work. Taub explains that the reasons have to do with differences in "the meaning and practice of group activities; population density and establishing a microloan program; poverty conditions and the amount of capital, and the skills, necessary to alleviate those conditions; and the safety net." Thus, Taub says, today's Good Faith Fund bears little resemblance to the Grameen model after which it was modeled.

Ashe says, "It's a different setting than what it was ten years ago. It was quite a heady period. Now there's a plethora of programs, competing. Where there was growth in the scale of operations, now things are stable. In the mid-1980s unemployment was edging 20 percent in Massachusetts; now it's closer to 4 percent." Ironically, the level of prosperity that we've been experiencing in this country has made it more difficult for microlending enterprises to find market share.

Ashe also says that there has been a decline in peer group lending, a move toward individual lending, and the window of opportunity has shrunk. The trend is for better, more extensive training, improved assessment of businesses, and generally less community development.

And the Future?

Can microlending become a sustainable "socially conscious capitalist enterprise" -- as Yunus called it -- in the U.S?

According to Ashe, "When it's all said and done, it's a very worthwhile undertaking. The links between businesses and the thousands of people reached help build social capital in really poor and lower income areas. But it's a long, slow, costly road. Ultimately, it can work. But it's going to take more money, more patience, and greater understanding of a process that's more complicated than what we had envisioned when we started with developing country models. We need funders to hang in there for the future to bear fruit."

To prepare for this future, Working Capital has trimmed down, is focusing more on urban areas, looking at larger loans, and finding more creative ways to streamline costs. Ashe himself is starting a new chapter in his life as we go to press. He's stepping out of Working Capital and into Brandeis University, where he'll be teaching students about international microlending programs and design. Each lesson he shares, he says, will reflect on every granted wish and on every scar that he has accumulated.

Bornstein offers a different twist to the question. He doesn't see profits for these programs in the near future. But he does think that sustainable microcredit programs can exist in this country. "They must be politically or socially sustainable, which is better in the long run," he says. "Look," he continues, "the United Nations is not financially sustainable, nor is the Catholic Church, except that both these groups are able, through persuasion, to get funding from governments and private citizens. Similarly, microcredit has established itself as a respectable, popular, politically feasible, economically sound proposition that does a good job at balancing investment type thinking and social change needs."

Even though microlending programs are not stacking up the plus signs toward profit on the balance sheet, it would be difficult not to interpret the good that such programs bring to individuals as "successes."

Srinivas sums it up beautifully when he writes, "The true value of a microfinance program lies in the change it can effect on the lives of ordinary people. It is the stories of ordinary people being able to overcome extraordinary odds that inspire other people to initiate change at the community level."

Yunus knows something of that inspiration. Referring to the future in Banker to the Poor (1999, Public Affairs, New York), he writes, "Before we actually translate something into reality, we must be able to dream about it. Any socioeconomic dream is nothing but the first step in the process of mapping the course to our destination. So the real question is not so much where we will be in the year 2050, but where we would like the world to be in 2050.... By that time, I want to see a world free from poverty.... Poverty does not belong in civilized human society. Its proper place is in a museum."

If I had a lighter right now, I'd flick the flame and hold it high.