Banker to the Poor: Micro-lending and the Battle Against World Poverty

by Muhammad Yunus

When you hold the world in your palm and inspect it only from a bird’s eye view, you tend to become arrogant—you do not realize that things get blurred when seen from an enormous distance.

The one who shone brightly through this whole sad period was my father. He adapted himself to the situation with grace and fortitude, caring for Mother in every possible way and in all circumstances for the thirty-three years that her disease lasted. He tried to behave as if nothing had changed and she was the same Sofia Khatun he had married in 1930, when he was only twenty-two. He was loyal and good to her all the fifty-two years of their marriage until her death in 1982.

Television had appeared in Dhaka only in 1964, and before arriving in the United States I was quite unfamiliar with it. At Boulder, I soon became addicted. My favorite show was 60 Minutes, but I also watched every silly sitcom there was: I Love Lucy, Gilligan’s Island, Hogan’s Heroes. I found I could talk and think more clearly when the TV was on. That is still true today.

He also taught me that things are never as complicated as they seem. It is only our arrogance that prompts us to find unnecessarily complicated answers to simple problems.

did not agree. “We have all the details we need,” I said. “Bangladesh has declared its independence. Now we have to decide whether we consider ourselves citizens of this new country or not. Everybody has the right to choose. I declare my choice. My choice is Bangladesh. I declare my allegiance to Bangladesh. If there is any one else who would like to join me in this, he is free to do so. Those who do not join Bangladesh, I will consider Pakistani and an enemy of my country.” There was silence. Everyone was taken aback by the way I posed the question of allegiance. I suggested that we form the Bangladesh Citizens’ Committee and immediately issue a press release for the Nashville print and electronic media.

Analyses of the causes of poverty focus largely on why some countries are poor rather than on why certain segments of the population live below the poverty line.

By now I had almost completely abandoned classical book learning in favor of hands-on, person-to-person experience.

For the deep tubewell to operate efficiently, it needed an efficient water distribution system. In other words, it required a large number of small farmers to implement uniform crop decisions on their fragmented holdings.

These farmers also needed instruction on fertilizer use, plant protection, and the repair and maintenance of the pumps. Unfortunately, although the government generously invested in modern irrigation technology, it did not provide the time, the resources, or the effort to resolve the people-centered problems such technology brought with it.

I proposed an experiment, in which we would all join a new type of agricultural cooperative called the Nabajug (“New Era”) Three Share Farm. The landowners would contribute the use of their land during the dry season; the sharecroppers would contribute their labor; and I would contribute the cost of fuel to run the deep tubewell, the seeds for high-yield crops, the fertilizer, the insecticide, and the technical know-how. In exchange, each of the three parties (farmers, sharecroppers, and myself) would share one-third of the harvest.

At first the villagers were suspicious of my proposal. So much ill will and distrust had built up between the well operators and the farmers that they were not ready to listen to my plan. Some argued that paying me one-third of the harvest would be too much. Even with my offer to bear all losses, my proposal failed to interest them.

At a second meeting, one week later, I was able to convince them that they had nothing to lose. They would receive irrigation water, fertilizer, seeds, and insecticides without any up-front payment. They only had to agree to give me one-third of their harvest. The poor sharecroppers greeted my proposal with enthusiasm. The relatively well-off farmers reluctantly agreed to give it a try. This was a difficult period for me. I would often lie awake at night, anxious lest anything go wrong. Every Tuesday evening I visited the farmers and held a formal meeting with the four student “block leaders” I had appointed as well as my thirteen-man advisory team. We discussed and reviewed the problems of fertilizer, irrigation, technology, storage, transport, and marketing. The first year’s effor...

I realized how important it was to differentiate between the really poor and the marginal farmers. International development programs in rural areas always focus on farmers and landowners. In Bangladesh, half of the total population is worse off than the marginal farmer.

In my work, I found it useful to use three broad definitions of poor to describe the situation in Bangladesh2: P1—the bottom 20 percent of the population (“hard-core poor”/absolute poor) P2—bottom 35 percent of the population P3—bottom 50 percent of the population

In the world of development, if one mixes the poor and the nonpoor in a program, the nonpoor will always drive out the poor, and the less poor will drive out the more poor, unless protective measures are instituted right at the beginning. In such cases, the nonpoor reap the benefits of all that is done in the name of the poor.

When I visited the Buddhist section, I would often take one of my students, Dipal Chandra Barua, a native of the Buddhist section, along with me. Otherwise, a colleague, Professor H. I. Latifee, would usually accompany me. He knew most of the families and had a natural talent for making villagers feel at ease.

Her life was a form of bonded labor, or slavery. The trader made certain that he paid Sufiya a price that barely covered the cost of the materials and was just enough to keep her alive. She could not break free of her exploitative relationship with him. To survive, she needed to keep working through the trader.

In rural Bangladesh, one maund (approximately 37 kilograms) of husked rice borrowed at the beginning of the planting season has to be repaid with two maunds at harvest time.

When land is used as security, it is placed at the disposal of the creditor, who enjoys ownership rights over it until the total amount is repaid. In many cases, a formal document such as a bawnanama establishes the right of the creditor. According to the bawnanama, the creditor usually refuses to accept any partial payment of the loan. After the expiration of a certain period, it also allows the creditor to “buy” the land at a predetermined “price.”

Another form of security is the dadan system, in which traders advance loans against standing crops for purchase of the crops at predetermine...

one thing, the small amounts you say these villagers need to borrow will not even cover the cost of all the loan documents they would have to fill out. The bank is not going to waste its time on such a pittance.”

“They don’t have any collateral,”

“Yes, we want our money back,” explained the manager. “But at the same time we need collateral. That is our guarantee.” “To me, it doesn’t make sense. The poorest of the poor work twelve hours a day. They need to sell and earn income to eat. They have every reason to pay you back, just to take another loan and live another day! That is the best security you can have—their life.”

Howladar did bring up the idea of a guarantor, a well-to-do person in the village who would be willing to act on behalf of the borrower. With the backing of a guarantor, the bank might consider granting a loan without collateral. I considered the idea. It had obvious merit, but the drawbacks seemed insurmountable. “I can’t do that,” I explained to Howladar. “What would prevent the guarantor from taking advantage of the person whose loan he was guaranteeing? He could end up a tyrant. He could end up treating that borrower as a slave.”

I was the guarantor and as far as the bank officials were concerned I was the only one that counted. They did not want to deal with the poor who used their capital. And I made sure that the real borrowers, the ones I call the “banking untouchables,” never had to suffer the indignity and demeaning harassment of actually going to a bank.

To my great surprise, the repayment of loans by people who borrow without collateral has proven to be much better than those whose borrowings are secured by assets. Indeed, more than 98 percent of our loans are repaid. The poor know that this credit is their only opportunity to break out of poverty. They do not have any cushion whatsoever to fall back on. If they fall afoul of this one loan, they will have lost their one and only chance to get out of the rut.

Conventional banks and credit cooperatives usually demand lump sum payments. Parting with a large amount of cash at the end of a loan period is often psychologically trying for borrowers. They try to delay the repayment as long as they can and in the process they make the loan grow bigger and bigger. In the end, they decide not to pay back the loan at all. Such long-term lump sum payments also prompt both borrowers and lenders to ignore difficulties that come up early on; rather than tackle problems as they appear, they hope that the problems will go away by the time the loan is due. In structuring our credit program, I decided to do exactly the opposite of traditional banks. To overcome the psychological barrier of parting with large sums, I decided to institute a daily payment program. I made the loan payments so small that borrowers would barely miss the money. And for ease in accounting, I decided to ask that the loans be paid back fully in one year. Thus, a 365 taka loan could be paid at the rate of 1 taka a day over the course of one year.

when we discovered that support groups were crucial to the success of our operations, we required that each applicant join a group of like-minded people living in similar economic and social conditions. Convinced that solidarity would be stronger if the groups came into being by themselves, we refrained from managing them, but we did create incentives that encouraged the borrowers to help one another succeed in their businesses. Group membership not only creates support and protection but also smoothes out the erratic behavior patterns of individual members, making each borrower more reliable in the process. Subtle and at times not-so-subtle peer pressure keeps each group member in line with the broader objectives of the credit program. A sense of intergroup and intragroup competition also encourages each member to be an achiever. Shifting the task of initial supervision to the group not only reduces the work of the bank but also increases the self-reliance of the individual borrowers. Because the group approves the loan request of each member, the group assumes moral responsibility for the loan. If any member of the group gets into trouble, the group usually comes forward to help.

In Jobra, we discovered that it is not always easy for borrowers to organize themselves into groups. A prospective borrower first has to take the initiative and explain how the bank works to a second person. This can be particularly difficult for a village woman. She often has a difficult time convincing her friends—who are likely to be terrified, skeptical, or forbidden by their husbands to deal with money—but eventually a second person, impressed by what Grameen has done for another household, will take the leap of joining the group. Then the two will go out and seek out a third member, then a fourth, and a fifth. Once the group of five is formed, we extend loans to two members of the group. If these two repay regularly for the next six weeks, two more members may request loans. The chairperson of the group is normally the last borrower of the five. But often, just when the group is ready, one of the five members changes her mind, saying, “No, my husband won’t agree. He doesn’t want me to join the bank.” So the group falls back to four, or three, or sometimes back to one. And that one has to start all over again.

It can take anywhere from a few days to several months for a group to be recognized or certified by Grameen Bank. To gain recognition, all the members of a group of five prospective borrowers have to present themselves to the bank, undergo at least seven days of training on our policies, and demonstrate their understanding of those policies in an oral examin...

The pressure provided by the group and the exam helps ensure that only those who are truly needy and serious about joining Grameen will actually become members. Those who are better off usually do not find it worthwhile. And even if they do, they will fail our means test and be forced to leave the group anyway.

To help inexperienced borrowers like Mufia, we have always tried to simplify our lending operations. Today we have distilled our repayment mechanism to the following formula: • Loans last one year. • Installments are paid weekly. • Repayment starts one week after the loan. • The interest rate is 20 percent. • Repayment amounts to 2 percent of the loan amount per week for fifty weeks. • Interest payments amount to 2 taka per week for every 1,000 taka of the loan amount.

If Grameen was to work, we knew we had to trust our clients. From day one, we knew that there would be no room for policing in our system. We never used courts to settle our repayments. We did not involve lawyers or any outsiders. Today, commercial banks assume that every borrower is going to run away with their money, so they tie their clients up in legal knots. Lawyers pore over their precious documents, making certain that no borrower will escape the reach of the bank. In contrast, Grameen assumes that every borrower is honest. There are no legal instruments between the lenders and the borrowers. We were convinced that the bank should be built on human trust, not on meaningless paper contracts. Grameen would succeed or fail depending on the strength of our personal relationships. We may be accused of being naive, but our experience with bad debt is less than 1 percent. And even when borrowers do default on a loan, we do not assume that they are malevolent. Instead, we assume that personal circumstances have prevented them from repaying the money. Bad loans present a constant reminder of the need to do more to help our clients succeed.

The more money we lent to poor women, the more I realized that credit given to a woman brings about change faster than when given to a man. In Bangladesh, hunger and poverty are more women’s issues than men’s. Women experience hunger and poverty more intensely than men. If one of the family members has to starve, it is an unwritten law that it will be the mother. The mother will also suffer the traumatic experience of not being able to breast-feed her infant during the times of famine and scarcity. Poor women in Bangladesh have the most insecure social standing.

Despite these adversities, it is evident that destitute women adapt quicker and better to the self-help process than men. Though they cannot read or write and have rarely been allowed to step out of their homes alone, poor women see further and are willing to work harder to lift themselves and their families out of poverty. They pay more attention, prepare their children to live better lives, and are more consistent in their performance than men. When a destitute mother starts earning an income, her dreams of success invariably center around her children. A woman’s second priority is the household. She wants to buy utensils, build a stronger roof, or find a bed for herself and her family. A man has an entirely different set of priorities. When a destitute father earns extra income, he focuses more attention on himself. Thus money entering a household through a woman brings more benefits to the family as a whole.

If the goals of economic development include improving the general standard of living, reducing poverty, creating dignified employment opportunities, and reducing inequality, then it is natural to work through women. Not only do women constitute the majority of the poor, the underemployed, and the economically and socially disadvantaged, but they more readily and successfully improve the welfare of both children and men. Studies comparing how male borrowers use their loans versus female borrowers, consistently show this to be the case.

“Give the loan to my husband. He handles the money. I’ve never touched any and I don’t want to,” said a third. “I wouldn’t know what to do with money,” said a woman who sat closest to me but averted her eyes. “No, no, not me. We have no use for money,” said an elderly woman. “We have all had enough trouble with dowry payments and we don’t want another fight with our husbands. Professor, we just don’t want to get into more trouble.”

Very early on in the process of trying to convince women to become Grameen Bank borrowers, we realized that having female bank workers made the job a great deal easier.

Even today, twenty-five years later, when 94 percent of our borrowers are women, our female employees still face hostility and discrimination on a regular basis in the villages where they work. When a female bank worker visits a village for the first time, it is not uncommon for crowds to gather and observe her. She often faces criticism from the villagers who were not used to seeing women anywhere but in the home.

She had to learn to view her clients as total human beings in need of help and change. She had to establish an easy and fear-free interaction with the poor and find out everything there was to know about her borrowers’ lives and difficulties.

In October 1977, on a trip to the capital city of Dhaka, I had a chance meeting that radically changed our efforts to bring credit to the poor villagers of Jobra. For personal reasons that had nothing to do with Grameen, I was in the offices of one of our largest national banks, the Bangladesh Krishi (“Agriculture”) Bank (BKB), where I bumped into an acquaintance of mine, the managing director. As soon as he saw me, Mr. A. M. Anisuzzaman,

“The urban poor are another problem,” Anisuzzaman said with a loud sigh. “If we alleviate suffering in the countryside, that will reduce the pressure on the poor to rush to Dhaka and clog the streets,” I said.

“I would pay farmers a negative interest rate,” I explained. “I would lend them one hundred taka (about five dollars), and if a farmer returned ninety to me, then I would forgive him the repayment of the ten taka. You see, the real problem with lending to farmers is getting the principal back, not the interest.”

The deputy governor of the Central Bank, Mr. Asit Kumar Gangopadhaya, was in the audience listening to this whole discussion. After the meeting, he called me into his office and asked me if I was serious about wanting to extend my experiment.

The ex-Gonobahini turned out to be excellent workers. These underground fighters were young (usually between eighteen and twenty years old), hard working, and dedicated. They had wanted to liberate the country with guns and revolution, and now they were walking around those same villages extending micro-loans to the destitute. They just needed a cause to fight for. We channeled their energies toward something more constructive than terrorism. Provided they gave up their guns, we were happy to hire them as bank workers.

For example, we wasted two hours on Decision Number 37, arguing back and forth about whether to give flashlights to bank workers so they could walk between villages at night. One managing director felt that village life in Bangladesh ought not to be “ruined” by the importation of flashlights. He wanted our bank workers to use old-fashioned lanterns and kerosene lamps. Like the social anthropologists who continually accuse Grameen of fundamentally altering rural society in Bangladesh, this banker was not willing to allow the introduction of anything that sounded nontraditional. With wealth comes change. But why is this a drawback? I am all for change. And if that managing director lived in the poorest villages of Tangail and Chittagong, he would be all for it too.

From those early days, we learned the importance of picking fresh young people to run our branches. Surprisingly, people without previous work experience of any kind are often best suited for this. Previous work experience distracts new workers from the ideals and unique procedures of Grameen. Many young managers embraced Grameen as a great opportunity.

Responsible for setting up the local Grameen branch, the manager chooses the general location of the future office and draws a map of the area. He writes reports on the village’s history, culture, economy, and poverty situation. To give Grameen maximum exposure, the manager then invites all the people in nearby villages, including village leaders, religious leaders, teachers, and government officials, to a “projection meeting” at which a high-ranking Grameen official explains the bank’s procedures in detail, giving the villagers the option to either accept Grameen with all its rules and regulations or to reject it, in which case the bank promises to leave the area. So far, no one has ever asked us to leave, but we like to make it clear from the start that the choice to have us is theirs.

In Grameen, we offer our borrowers little if any formal training. Instead, we train our staff, turning them into an elite brigade of poverty fighters.

Anyone younger than twenty-eight with a master’s degree and at leastaBaverage in all final examinations is eligible to apply for a job as one of our bank managers. We advertise in the national newspapers and receive a large number of applications. Half of these applicants would make first-class bank managers for Grameen. But since our training facilities are limited, we screen the candidates through interviews to pick only a limited number. Those we select are asked to report to our training institute. Here they receive a two-day briefing, and then we send them off to various branches, where they remain in training for most of the following six months. Before they go, the institute staff tells them, “Observe everything carefully. When your training is over, your task will be to create a Grameen branch of your own that will be better in every respect than the one in which you spent your first six months.”