How $162 Loans Made This Bank a Success
In The Business of Good, serial and social entrepreneur Jason Haber intertwines case studies and anecdotes that show how social entrepreneurship is creating jobs, growing the economy, and ultimately changing the world. In this edited excerpt, Haber reveals how one economics professor launched a profitable bank for the poorest of the poor in developing nations.
It was the perfect storm for mass suffering. After achieving independence in 1971, Bangladesh quickly entered a crisis. In January 1972, Time magazine reported, “In the aftermath of the Pakistani army’s rampage last March, a special team of inspectors from the World Bank observed that some cities looked ‘like the morning after a nuclear attack.’ ” An estimated 6 million homes were destroyed, and almost 1.5 million people were left without sufficient equipment to harvest food and crops.
But it was about to get worse. In 1974, famine struck. Heavy flooding by the Brahmaputra River wiped out much of the local food supply. The government was caught unprepared for this calamity. It had only been a few years since they won their independence, and those in power had no experience containing such a crisis. The United States had more than 2 million tons of food aid that it refused to deploy until Bangladesh stopped supplying Cuba with jute. By the time the Bangladesh acquiesced, it was already too late. Deaths from starvation, disease, and the aftermath of the famine reached 2 million people.
Observing the calamity, Muhammad Yunus, then a young professor of economics at the University of Chittagong, went into the field to study why so many people were suffering from the famine. He traveled east to Jobra, a small rural village. There he met a 21-year-old woman named Sufia Begum who was in desperate need of funds to support herself. She had taken out a loan with a local moneylender. The loan amount was 25 cents. The interest rate was 10 percent per day. The loan also required her to sell her wares back to the moneylender at below market price, leaving her with a tiny return of about 2 cents.
Sufia wasn’t alone. Yunus was soon introduced to other women who were in the same predicament. The economist in him identified a poverty trap. The humanitarian in him discovered a way to defeat it. To make their bamboo stools, the women needed $27. That’s all. Yunus engaged in an experiment. He lent them the money with an interest rate of about 62 cents per borrower. The women were also allowed to sell their product at the fair market price. To his pleasant surprise, 100 percent of this initial loan was repaid. Yunus was on to something.
Excited, he went to the bank on campus at the University of Chittagong to encourage them to lend to the poor of Jorba. “Absolutely no way,” he was told by a bank official. “The bank cannot lend money to the poor people.”
If the banks weren’t going to lend to the poor, Yunus would launch a new bank that would turn the tables on every established lending rule. Banks want collateral. Yunus’s bank would not have any of it. Banks lend to men. He would lend to women. And he wouldn’t require attorneys or the notarization of documentation. This bank would focus on the poor.
Today, more than 7 million borrowers rely on Grameen Bank. Of those, 97 percent are women. The average loan balance per borrower is approximately $162. The gross loan portfolio of the bank is in excess of $1.1 billion.
The bank makes loans to artisans and to others looking to rise out of poverty. It has financed thousands of college, graduate, and medical students. Grameen has enriched and changed lives, while moving people out of poverty.
And what of the default rate? Do the poor really pay back loans like borrowers do in the developed world? The answer is no.
In the developed world, default rates vary depending on the type of loan. Student loan default rates hover around 11 percent, mortgage default rates are at 6.5 percent, and credit card defaults are slightly under 3 percent.
At Grameen Bank, in a typical year, the default rate is 2 percent. Grameen borrowers outperform the payback rate of almost any other bank in the world. Yunus has proved that being poor is not an impediment to being a good investment. It also demonstrates the financial rewards that can be made by turning people at the Bottom of the Pyramid (the poorest people in the world) into your customers. Grameen Bank has more than $176 million in annual revenue through its microfinance programs.
We tend to think of the poor in the developing world as an economic group without clout. How could they have clout if they earn less than $1,500 a year? It is true, on an individual level, they lack leverage. But as a collective, they are enormous. How big? There are more than 4 billion potential consumers waiting to be tapped. The question for social ventures is how?
Until recently, most ventures stayed clear of the developing world. It just didn’t seem like a good business pursuit. “The dominant assumption is that the poor have no purchasing power and, therefore, do not represent a viable market,” wrote business professor C. K. Prahalad. By dispelling the mythology about the poor, Prahalad led a counterintuitive argument that ventures should find ways to engage the poor as consumers.
This is a far more appealing option for those living in poverty than charity. When you are given something for free, you are to be grateful, even if what you’ve been given is not what you need. But once you move from being a recipient of charity to a consumer of record you have clout. If the product or service isn’t what you want, you don’t pay for it. If you don’t like it, you can voice your complaint. It’s an entirely different paradigm. This paradigm shift works not just at the micro level but at the macro level as well.