Publication: One-to-One, Spring 2007
Could poverty disappear in our lifetime? Muhammad Yunus, founder of the microcredit movement and recent winner of the Nobel Peace Prize answers “Yes” to this question. Receiving his Ph.D. in economics as a Fulbright Scholar in 1969 at Vanderbilt University in Tennessee, Yunus moved back to his home of Bangladesh, where he taught economics and later founded the Grameen Bank.
He is called “the banker to the poor.” His microcredit lending strategy began in the 1970s and led to his bank’s incorporation in 1983. Today, he is invited to speak at universities and economic conferences worldwide and has risen to near celebrity status as evidenced by appearing as a guest on “Oprah”.
Microcredit is very simply giving very small loans to people who would not be deemed credit-worthy at conventional banks. To better understand the application of microcredit, try and work out the following word problem:
A single mother in rural Bolivia sells cheese that she makes from the milk of her eight goats. Demand for her cheese is strong from the passers-by on the dirt road in front of her house. Profits on cheese sales cover her immediate family needs and upkeep for her goats. She believes with two more goats she would net more profits and a better life. One day, she decides to hitch a ride to a bank in the city. She walks barefoot into the bank and attempts to fill out a loan application for the cost of two more goats ($200). How long does she have before security escorts her out?
Through Grameen bank, which now employs more than 20,000 people, there are 7 million borrowers (97% women) who have obtained such small loans, the average amount being about $200. The World Bank (which is “Working for a world free of poverty” according to its motto) reported that 5% of Grameen Bank borrowers move out of poverty each year.
Perhaps the most ingenious element of the Yunus’ loan process is this: loan recipients are put in groups of five. Once two members of the group have borrowed money, the other three must wait for the funds to be repaid before they get a loan. These loan recipients therefore face tremendous responsibility and accountability within their group to make payments on time.
In fact, Grameen does not use any type of binding contract with borrowers, nor does it employ punitive methods to ensure repayment. New loans become available to the borrower when the previous loan is paid. Grameen Bank keeps the interest rate close to the prevailing rate in the commercial banking sector. Default rates on these loans run approximately 4%, which is less than half the rate on sub-prime loans made by U.S. lenders.
Make no mistake, Yunus doesn’t consider this a form of charity: “(The) social welfare system creates a human zoo. The animals in the zoo are given their meals on time and a doctor comes by when they’re sick, but they are living in captivity. They still have a vague instinct that tells them they should hunt, but they aren’t challenged to go hungry for days on end and hunt prey. The animals aren’t as sharp and inventive as they would be in nature….They have become a poor imitation of themselves. By the same token, people who are swallowed up in the western social welfare system are also no longer themselves. They aren’t stimulated to discover their possibilities, talents, and creativity. They are robbed of every challenge. They are curbed in their development.”
The World Bank estimates there are now more than 7,000 microfinance institutions. Since Yunus opened the door, small loans have become big business around the world in places such as India, Latin America, and Africa.
In Africa, less than 10% of the adult population has access to a bank account. In Mexico, where it is estimated that only 20% of the population have access to a bank account, Citigroup has become a large microcredit player through its Mexican subsidiary, Banamex. Compartamos is another large Mexican lending organization. With more than 300,000 clients, its portfolio grew by 58% last year, and by 2008, their goal is to have 1 million clients. “The first phase is to show the world that there was a way to make the poor credit-worthy; the second phase is to show that micro-finance institutions are themselves credit worthy”, say the principles of Compartamos.
Vinod Khosla one of the world’s largest venture capitalists and founding CEO of Sun Microsystems, finds them worthy. Khosla, calls microcredit “one of the most important economic phenomena since the advent of capitalism and Adam Smith.” He is now funding microcredit institutions and giving grants throughout his homeland of India.
Similarly eBay founder Pierre Omidyar has also invested in microcredit by giving $100 million of eBay stock to Tufts University to invest in international microfinance. Microfinance is also gaining a foothold in developed nations such as Australia, where the numbers of such lending institutions are expanding at rates of 25% to 30% per year.
What are groups such as American Baptists, Evangelical Lutherans, Presbyterian Church, Operation Blessing, United Methodist Church, World Vision, Unitarian Universalist Association, Save the Children, Episcopal Church, Christian Children’s Fund, CrossRoads, Habitat for Humanity, and the Mennonite Central Committee (plus people such as Rick Warren, Pat Roberson, Bono, Sam Brownback, and many others) coming together for? They have all become partners in The One campaign.
In its own words, “The ONE Campaign derives its name from the belief that allocating an additional one percent of the U.S. budget toward providing basic needs like health, education, clean water, and food would transform the futures and hopes of an entire generation in the world’s poorest countries. We also call for debt cancellation, trade reform and anti-corruption measures in a comprehensive package to help Africa and the poorest nations beat AIDS and extreme poverty.”
It is a well thought-out strategy with momentum that is not easily dismissed. You may have noticed their trademark wrist bands, t-shirts, and other paraphernalia which they sell to fund greater awareness about the cause. By partnering with those who have put boots on the ground, The One Campaign may be well positioned to steer funds out of the hands of greedy dictators and endless black holes.
The One Campaign points out that on a percentage basis, The United States government does not give as much to causes such as health, education, AIDS relief, and other issues compared with other developed countries. It should be noted however that in terms of actual “hard dollars,” the U.S. out-gives every other country, and as for personal individual giving to such causes, the U.S. generosity dwarfs that of any other nation. Moreover, U.S. aid and debt relief to Africa, in particular, has skyrocketed under the current Bush administration.
It is important to understand that initiatives such as microcredit and The One Campaign, while helpful, and possibly necessary, do not get to the root causes of poverty.
As Charles Simpson and CSM have taught in the past, it is the theology of a people that weighs heaviest on its culture and economy. As an example, stewardship may be taught in two cultures but defined very differently in each. If poverty is a virtue in your culture or religion, you may not see the need to fix it.
Take a look at microcredit in Haiti, where the national theology, is a mix of Voodoo and Catholicism. Instead of lifting Haitians out of poverty, microcredit is losing steam. All too often microcredit there becomes an added debt burden to individuals where the testimony of true “voodoo economics” resides on display.
So, back to the lady who wants two more goats for her cheese business: If she lives underneath an oppressive and wrong theology, and believes that the goats she buys are spirit entities or possibly her reincarnated aunt and uncle, she may end up with a herd of nonproductive goats for which she feels obligated to care, but which produce no real income.
Why do microcredit lending institutions target women? The sad truth, as you may have guessed, is that the men are often deadbeats when it comes to repaying loans. How much more economically better off would the family and entire region be if the fathers were more responsible? Again, this goes back to theology.
Wading through the issues of the One Campaign and microcredit, some may be resigned to the fact that poverty will never be truly eliminated. The Bible says that the poor will always be with us. There is evidence, however, that the scope of poverty as it is known today can be greatly reduced, and that these vehicles are effective to that end.
Perhaps the most compelling reason to be supportive of measures like these is the understanding that “what happens over there effects you here.” No longer can “civilization” remain immune from all of the problems in the poor or developing nations. The choices are to deal with them now, while there may be light at the end of the tunnel, or later when they are more severe. It’s probably cheaper to do it now and simultaneously build good will among nations whose poor populations are easy prey for terror groups.
JONATHAN SIMPSON is a frequent contributing writer to CSM’s Marketplace Exchange.