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

by Muhammad Yunus

Unlike other commercial bank workers, our staff members grow to consider themselves teachers. They are teachers in the sense that they help their borrowers to explore their full potential, to discover their strengths, to extend their capabilities further than ever before.

Here is a typical Grameen bank worker, a composite of the 12,000 workers we now employ, and a typical day’s work: 1. Name: Akhtar Hossain 2. Age: 27 3. Monthly salary (1995): 2,200 taka ($66), including housing allowance, medical subsidy, and commuting allowance 4. Bonus: One month’s salary paid during each of the two Eid holidays • 6 A.M. Akhtar wakes up, washes, prays, eats breakfast. • 7 A.M. Akhtar fetches his bicycle, documents, and carrying bag from the branch and pedals to a center. • 7:30 A.M. Forty bank borrowers await Akhtar at the center. They are seated in eight rows, organized according to group. Each group chairperson holds the passbooks of the five group members. Akhtar collects the loan repayments and deposits from each group. • 9:30 A.M. Akhtar bicycles to another center for his second meeting. During the course of the week, he attends to ten different centers, meeting with all 400 borrowers he is responsible for and collecting repayments for general loans, seasonal loans, and housing loans, as well as savings deposits. • 11 A.M. Akhtar visits borrowers at home and offers advice. This is an important way to keep track of his borrowers’ needs and problems. • Noon. Back at the branch office, Akhtar fills out all the reporting forms and enters all the records in his ledger. The branch manager signs off. • 1:30—2:00 P.M. Akhtar takes a lunch break with his fellow workers. • 2 P.M. Funds collected in the morning are disbursed as new loans in the afternoon. All ...

In one particular village in Tangail, for example, our Grameen manager was physically threatened by a religious leader. When the manager saw there was no way to reason with the mullah, he quietly closed the branch and left the village. He told potential members that his life had been threatened and that they would have to go through orientation meetings in the neighboring village. Some women made the daily trek to the neighboring village to form groups and join Grameen. But others, inspired by the way Grameen had bettered the lives of their neighbors in other villages, visited the religious leader and argued with him.

the Grameen borrower is also an owner of the bank.

We tried a variety of techniques, and after a few years we learned that our staff members should quietly go about their business in one tiny corner of the village. If just a handful of desperate women make a leap of faith and join Grameen, everything changes. They get their money, start to earn additional income, and nothing terrible happens to them. Others begin to show interest. We find that borrowing groups form quickly after the initial period of resistance.

During 1982 alone, our disbursements increased by an additional $10.5 million.

Fortunately for us, the secretary of the Finance Ministry, Mr. Syeduzzaman, was another friend of Grameen. Muhith enlisted his support and took my proposal directly to the president. As a military dictator, the president had no political legitimacy and perhaps he saw in Grameen a chance to score some political points. Whatever his thinking, it worked in our favor.

We also popularized the Sixteen Decisions, resolutions adopted at a national workshop of borrowers (see Chapter 8), integrated housing loans into our program, expanded our social development efforts, and experimented with irrigation loans and other seasonal loan programs.

Unfortunately for us, Finance Minister Muhith resigned in 1985 before he had a chance to keep his word about altering Grameen’s corporate structure. But luckily, the permanent secretary of the Finance Ministry, Syeduzzaman, was a close friend of Muhith’s and shared his enthusiasm for Grameen.

I did not give up. I explained my case to the secretary in charge of the presidential Secretariat. This senior bureaucrat happened to have been a student in my math class while I was teaching at the University of Colorado in Boulder. When I asked for his help, he promised to do everything possible.

We experienced some problems in our oldest branches in Chittagong and Tangail, where our borrowers had been subjected to many changes in policies as we went through our process of trial-and-error, but branches started during or after 1983 performed extremely well.

first began to see societal problems being solved, one Grameen family at a time, during annual workshops we held for center leaders at each branch. These workshops gathered together center leaders to review their problems and achievements, to identify areas of concern, and to look for solutions to social and economic challenges.

Today, at every Grameen branch, our members take enormous pride in reciting the Sixteen Decisions. They are as follows: 1. We shall follow and advance the four principles of the Grameen Bank—discipline, unity, courage, and hard work—in all walks of our lives. 2. Prosperity we shall bring to our families. 3. We shall not live in a dilapidated house. We shall repair our houses and work toward constructing new houses at the earliest opportunity. 4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus. 5. During the plantation seasons, we shall plant as many seedlings as possible. 6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health. 7. We shall educate our children and ensure that they can earn to pay for their education. 8. We shall always keep our children and the environment clean. 9. We shall build and use pit latrines. 10. We shall drink water from tube wells. If they are not available, we shall boil water or use alum to purify it. 11. We shall not take any dowry at our sons’ weddings; neither shall we give any dowry at our daughter’s wedding. We shall keep the center free from the curse of dowry. We shall not practice child marriage. 12. We shall not commit any injustice, and we will oppose anyone who tries to do so. 13. We shall collectively undertake larger investments for higher incomes. 14. We shall always be ready to help each other. If anyone is in difficulty, we sh...

These decisions are a demonstration that the poor, once economically empowered, are the most determined fighters in the battle to solve the population problem, end illiteracy, and live healthier, better lives. When policy makers finally realize that the poor are their partners, rather than bystanders or enemies, we will progress much faster than we do today.

But no matter what cataclysm, weather disaster, or personal tragedy befalls a borrower, our philosophy is always to get that person to pay back his or her loan, even if it is only at the rate of a half penny a week. This discipline is meant to boost the borrower’s sense of self-reliance, pride, and confidence. To forgive a loan can undo years of difficult work in getting that borrower to believe in his or her own ability.

We never wipe out old loans, but convert them into very long term loans and try to get the borrower to pay them off more slowly and in smaller installments. In the extreme case where a borrower dies, we disburse funds from the Central Emergency Fund (a life insurance fund for borrowers) to the deceased’s family as soon as possible. We then ask the group or center to adopt a new member from that same family to bring the group number back up to five.

There were also localized disasters, such as the tornado that hit the Manikganj District in 1989. Grameen’s operational procedures in such situations are always the same. First, we suspend all rules and regulations of the bank. The local bank manager and all bank personnel are directed to immediately scour the region to save as many lives as possible and to provide shelter, medicine, food, and protection. Second, the bank workers visit the houses of our members and try to reestablish the victims’ confidence by letting them know that the bank and their fellow members are ready to support them. We then find out what the survivors need and make provisions to provide it. We provide emergency food as well as water and saline solution to prevent dehydration and diarrhea. Emergency seeds for planting and cash for buying new cattle and new capital assets are also distributed. Disaster loans are provided. We want to give our members time to mourn their loved ones, but we do not want them to sink into apathy and lethargy from despair. We want them to start right up again thinking of survival schemes. Because national and international relief is usually late and inadequate, the only way that victims can get through the pain, suffering, and devastation is by rebuilding what they had. During periods of disaster, old loans are rescheduled and a grace period is accorded for repayment. In a special meeting, the local center is given the authority to decide how long this grace period shoul...

In Jobra, we simply did not see any need for formal training, and our experience in the 1980s gave us more confidence that we had taken the right approach. Why give credit first? I firmly believe that all human beings have an innate skill. I call it the survival skill. The fact that the poor are alive is clear proof of their ability. They do not need us to teach them how to survive; they already know how to do this. So rather than waste our time teaching them new skills, we try to make maximum use of their existing skills. Giving the poor access to credit allows them to immediately put into practice the skills they already know—to weave, husk rice paddy, raise cows, peddle a rickshaw. And the cash they earn is then a tool, a key that unlocks a host of other abilities and allows them to explore their own potential. Often borrowers teach each other new techniques that allow them to better use their survival skills. They teach far better than we ever could.

But if you go out into the real world, you cannot miss seeing that the poor are poor not because they are untrained or illiterate but because they cannot retain the returns of their labor. They have no control over capital, and it is the ability to control capital that gives people the power to rise out of poverty. Profit is unashamedly biased toward capital. In their powerless state, the poor work for the benefit of someone who controls the productive assets. Why can they not control any capital? Because they do not inherit any capital or credit and nobody gives them access to it because they are not considered creditworthy.

Formal learning is a threatening experience for our borrowers. It can even destroy their natural capacity or make them feel small, stupid, and useless. Also, poor people are often offered incentives to participate in training programs—sometimes they receive immediate financial benefits in the form of a training allowance or training is made a prerequisite to obtaining other important benefits in cash or in kind. This attracts the poor, even though they may not be interested in the training itself.

But training should not be forced on people. It should be offered only when they actively seek it out and are willing to pay in kind or cash to obtain it. Grameen borrowers, for example, do look for training. They might want to read the numbers in their passbooks, for example, or figure out what amounts have been paid and how much remains to be paid back. Often Grameen borrowers want to be able to read the Sixteen Decisions, keep accounts, or follow business news. Or they may want to learn about poultry raising; cattle raising; or new ways of planting, storing, and processing crops. Grameen is also bringing new technology to them: cellular telephones, solar energy, the Internet. Soon borrowers will need to calculate the cost of telephone calls or read the words on a computer screen.

In other words, after nearly five years of specialists reviewing the problem and wasting precious resources, the poor islanders were unable to receive a single micro-credit loan with support from this agency. I cannot help but remark that had the Negros project received an amount equal to the cost of a single UN mission, it could have assisted several hundred poor families. The growth of the consultancy business has seriously misled international donor agencies. The assumption is that the recipient countries need to be guided at every stage of the process—during identification, preparation, and implementation of projects. Donors and consultants tend to become overbearing in their attitude toward the countries they help. Furthermore, these consultants often have a paralyzing effect on the initiatives of the recipient countries. Officials and academics in these countries quickly adopt the figures mentioned in the donors’ documents even if they personally know that those figures are incorrect.

One observation that became increasingly apparent is that multilateral aid institutions have a lot of money to disburse. Officials determine target amounts for each country. The more money officials manage to give out, the better grade they receive as lending officers. Therefore young, ambitious officers of a donor agency will choose the projects with the biggest price tag. By moving a lot of money, their name moves up the promotion ladder.

One research institution in Bangladesh estimates that of the more than $30 billion in foreign donor assistance received in the past twenty-six years, 75 percent was not spent in Bangladesh. It was spent on equipment, commodities, and consultants from the donor country itself. Most rich nations use their foreign aid budget mainly to employ their own people and to sell their own goods, with poverty reduction as an afterthought. The 25 percent that is spent in Bangladesh usually goes straight to a tiny elite of local suppliers, contractors, consultants, and experts. Much of this money is used by these elites to buy foreign-made consumer goods, which is of no help to our country’s economy or workforce. And there is a general belief that a good chunk of donor money ends up as kickbacks to officials and politicians who have helped make purchase decisions and sign contracts.

Most foreign aid goes to building roads, bridges, and so forth, which are supposed to help the poor “in the long run.” The only people really benefiting from most of this aid, however, are those who are already wealthy. Foreign aid becomes a kind of charity for the powerful while the poor get poorer. If aid is to have some impact on the lives of the destitute, it must be rerouted so that it reaches poor households more directly.

Development should be viewed as a human rights issue, not as a question of simply increasing the gross national product (GNP). When the national economy picks up, the situation of the poor is not necessarily improved. Therefore development should be redefined. It should refer only to a positive measurable change in per capita income of the bottom 50 percent of the population.

A new report released by the United Nations in 1998 repeated many of the old arguments about why micro-lending programs can work only in places with certain unique characteristics. The report argues that “many people, especially the poorest of the poor, are usually notin a position to undertake an economic activity, partly because they lack business skills and even the motivation for business. Furthermore, it is not clear if the extent to which micro-credit has spread, or can potentially spread, can make a major dent in global poverty.”5

Started in 1988, FCF offered low-income women access to investment capital of $300 to $5,000 if they agreed to join a group of five peers and were able to present a sound business proposal. The credit rating or access to collateral of the prospective borrowers was not taken into account during their loan approval process.

To encourage prospective borrowers to form groups, the FCF organized regular “parties” to help people get acquainted.

One of those members, a frightened-looking woman in her early forties, spoke only Spanish. I told her, “These are beautiful quilts and embroidered designs you make. When did you think of starting a business with this?” Through an interpreter she explained her life to me in great detail: “When Jenny [a staff member of the WSEP] came and talked to me, I was scared. I thought she is going to try to sell me something. I avoided her. She came back another time with another woman, a Hispanic woman from the neighborhood. They tried to talk to me, but I was still too afraid to listen. They were talking about business. I had no understanding of business. My husband has a hard life. He works in a factory. He gets very angry if I ever try talking to outsiders. He does not like me to leave the apartment by myself. I didn’t know anybody in Chicago. I had been living here with my husband for the past fifteen years since I came from Mexico. “Jenny kept coming back. She told me about the Grameen Bank in Bangladesh—a faraway country. She told me how women in that country changed their lives. I liked the stories she told me, and I wished I could be like the women in that country. But here things were so rough. I did not dare do anything by myself. My husband would kill me if I created trouble for him. “I started talking to Jenny. She introduced me to other women in the neighborhood. I listened to them. They told me about their hard lives, about their children, about their husbands, about th...

Murshida was born into a poor family of eight children. Neither her father nor grandfather owned any farmland. At fifteen she was married to a man from a nearby village who worked as an unskilled laborer in a factory. The first few years of the marriage went relatively well, but things turned sour when Murshida began having children. Just as their family expenses went up, her husband started bringing home less and less money. Finally it became clear that he was a compulsive gambler. During the 1974 famine, he was given a company bonus of 1,800 taka. He lost it all gambling. When Murshida complained, her husband beat her. To earn some extra money, Murshida took up spinning raw cotton into yarn. She worked on contract for other people and was paid very little, sometimes no more than a handful of broken rice. Still, the work prevented her from starving. She considered other options—working as a domestic servant for a rich family or begging. But what would happen to her children? One day Murshida’s husband came home after a week’s absence and complained that there was not enough food for him. Murshida had cooked up something modest and had not eaten the entire day. Angry, her husband beat her and then left, saying he would return later in the morning. That day there was a thunderstorm, and as her husband had sold the roof of their house to pay gambling debts, Murshida and her three children were soaked. At that moment Murshida decided that something had to change. When her hus...

How did we define “poverty-free”? After interviewing many borrowers about what a poverty-free life meant to them, we developed a set of ten indicators that our staff and outside evaluators could use to measure whether a family in rural Bangladesh lived a poverty-free life. These indicators are: (1) having a house with a tin roof; (2) having beds or cots for all members of the family; (3) having access to safe drinking water; (4) having access to a sanitary latrine; (5) having all school-age children attending school; (6) having sufficient warm clothing for the winter; (7) having mosquito nets; (8) having a home vegetable garden; (9) having no food shortages, even during the most difficult time of a very difficult year; and (10) having sufficient income-earning opportunities for all adult members of the family.

Grameen is a private-sector self-help bank, and as its members gain personal wealth they acquire water-pumps, latrines, housing, education, access to health care, and so on. Another way to achieve this is to let a business earn profit that is then taxed by the government, and the tax can be used to provide services to the poor. But in practice it never works that way. In real life, taxes only pay for a government bureaucracy that collects the tax and provides little or nothing to the poor. And since most government bureaucracies are not profit motivated, they have little incentive to increase their efficiency. In fact, they have a disincentive: governments often cannot cut social services without a public outcry, so the behemoth continues, blind and inefficient, year after year.

In Grameen we always try to make a profit so that we can cover all our costs, protect ourselves from future shocks, and continue to expand.

not one single Grameen borrower requires any special training. They either have already received this training as part of their household chores or have acquired the necessary skills in their field of work. All they need is financial capital.

I propose that we replace the narrow profit-maximization principle with a generalized principle—an entrepreneur maximizes a bundle consisting of two components: (a) profit and (b) social returns, subject to the condition that profit cannot be negative.

To be even more rigorous, I would define development by focusing on the quality of life of the lower 25 percent of the population.

Micro-credit pushes the entire train forward by helping each passenger in the rear (or third-class) carriages.

Of course, investing in roads, dams, power plants, and airports increases the efficiency of the engines in the first-class carriages. Those are the fanciest and richest ones, and it enhances the train’s engine capacity many-fold. But whether these investments can help ignite or enhance the capacity of the engines in the subsequent carriages, in all other layers and strata of society, remains uncertain.

One reason we are so acutely aware of health problems is that they can destroy even our brightest successes. Morley Safer’s Sixty Minutes program of 1989 featured one borrower near Chittagong who, thanks to Grameen loans, had risen from being a street beggar to owning seven cows, a large plot of land, a new house, a modern latrine, and a three-wheeled baby taxi for her husband and ensuring a school education for all her children. Morley Safer called her “the picture of contentment and human success,” yet when I met her and her husband again in 1996, I could barely recognize them. He had contracted a stomach illness that was never properly diagnosed. To pay for his medical treatment, the couple had sold off their taxi, their land, and their cattle. She was so frail and tired, she did not trust herself to take a new loan. All they had left were four chickens.

Grameen Bank provides three types of loans: income-generating loans (with an interest rate of 20 percent), housing loans (with an interest rate of 8 percent), and higher education loans for the children of Grameen families (with an interest rate of 5 percent). All interests are simple interest, calculated on a declining balance method. This means that if a borrower takes a loan of 1,000 takas and pays back the entire amount within a year through weekly installments, she’ll pay a total amount of 1,100 takas (i.e., 1,000 takas in principal plus 100 takas as interest for the year).

The central assumption underlying GGS remains the same as it was behind the Grameen Classic System—the firm belief that poor people always pay back their loans. On some occasions they may take longer to pay than originally stipulated, but repay they will. A credit institution dedicated to serving the poor should not get worried the minute a borrower fails to adhere to a strict schedule. Circumstances can befall a poor person over which they have no control. Since the borrower is paying additional interest for the period that she is delayed in repayment, there should be no problem on the institution’s part.

In other words, on the Grameen highway, a borrower can routinely upgrade her loan size at each cycle of the loan. This is done on the basis of predetermined rules. She knows ahead of time how much of an enhancement in loan size is coming and can plan her activities accordingly. But if a borrower faces engine trouble (a business slowdown or failure, sickness, family problems, accidents, thefts, natural disaster, etc.) and cannot keep up with the highway speed, she has to quit the highway and take an exit. This detour is called a “flexible loan” or “flexi-loan.” It allows her to move at a slower speed more appropriate to her situation. She can reduce the installment size that she can afford to pay by extending the loan period.

Under the new system, the flexibility is something that the borrower is entitled to, and rescheduling a loan is not seen as an offense or something to be disapproved of. This gives the borrower a dignified way to deal with any problem she may face in repaying her loan.

One big disincentive for a borrower to take the flexi-loan detour is that the moment she exits from the basic loan highway, her loan ceiling (i.e., the maximum amount that she can take out as a loan, built up on the basis of her performance over the years) gets wiped out. When she reenters the highway after completing her detour, her loan ceiling will have to be reconstructed. This will be somewhere between her entry-level loan ceiling and the loan ceiling she enjoyed immediately before taking the detour.

GGS allows loans of any duration, such as three, six, or nine months or any number of months and years.

GGS requires all borrowers with loans above 8,000 takas ($138) to contribute a minimum of 50 takas ($0.86) each month to a pension savings account. After ten years a borrower will receive a guaranteed amount, which is almost double the amount she has put in during those 120 months. This has become an amazingly attractive feature of GGS for the borrowers.

Bangladeshi borrowers always worry what will happen to their debt if they die. Will their family members pay it? They believe that if their debt remains unpaid after their death, their soul cannot rest in peace. Inclusion of a loan insurance program in GGS has made them very happy. The insurance program is extremely simple. On the last day of every year, the borrower is required to put a small amount of money in a loan insurance savings account. It is calculated on the basis of the outstanding loan and interest of the borrower on that day. She deposits 2.5 percent of the outstanding amount. If a borrower dies any time during the next year, her entire outstanding amount is covered by the insurance fund. This money is provided by the interest income of the loan insurance savings account. In addition, her family receives back the amount she saved in the loan insurance savings account. Borrowers find it unbelievably generous. Everybody loves it.

Creating Five Star branches really caught their imagination. Grameen Bank provides color-coded stars to branches for 100 percent achievement of a specific task. Five stars indicate a branch has reached the highest level of performance. At the end of 2002, branches showed the followed results: • 696 branches, out of the total of 1,178 branches, received green stars for maintaining a 100 percent repayment record. • 437 branches received blue stars for earning a profit. (Grameen Bank as a whole earns a profit because of the revenue it generates from the interest payments made by the branches on the funds borrowed from the head office.) • 213 branches earned violet stars by generating a surplus of deposits over the loans outstanding in those branches. These branches not only carry out their business with their own funds, but also contribute their surpluses to meet the fund requirement of deficit branches. • 61 branches have applied for brown stars for ensuring an education for 100 percent of the children of their Grameen families. After the completion of the verification process, their stars will be confirmed. • 21 branches applied for red stars, indicating that they have succeeded in taking 100 percent of their borrowers’ families over the poverty line. The star will be confirmed only after the verification procedure is completed. • 772 branches (i.e., two-thirds of all branches) received a total of 1,346 stars, an average of 1.74 stars per branch. Each month branches are com...

I have always believed that the elimination of poverty from the world is a matter of will. Even today we don’t pay serious attention to the issue of poverty, because the powerful remain relatively untouched by it. Most people distance themselves from the issue by saying that if the poor worked harder, they wouldn’t be poor. When we want to help the poor, we usually offer them charity. Most often we use charity to avoid recognizing the problem and finding a solution for it. Charity becomes a way to shrug off our responsibility. But charity is no solution to poverty. Charity only perpetuates poverty by taking the initiative away from the poor. Charity allows us to go ahead with our own lives without worrying about the lives of the poor. Charity appeases our consciences.