Altruism or Exploitation? Big Finance Muscles In on Microlending

Microloans were invented to help the poorest of the poor help themselves. Now major banks and pension funds are getting into the business, as they discover that the interest paid by the poor can produce high returns. Is it aid or exploitation?

By Uwe Buse

Muhammad Yunus is one of the good ones, on a par with Nelson Mandela, Martin Luther King and Mother Teresa. Like them, he won the Nobel Peace Prize and, like them, Yunus believes in man's inherent ability to be reformed.

Yunus is a good speaker, whether he is speaking one-on-one, as he is now in his office, or in front of an audience, as he did less than two years ago when he was awarded the Nobel Prize at the city hall in Oslo. Yunus has a relaxed and easygoing way about him. Public appearances are part of his daily life, and he is used to winning awards. He already holds the World Food Prize, the Planetary Consciousness Prize and the Sydney Peace Prize.

Yunus has an opinion on almost everything, and he is quick to express it. But when it comes to Shafiqual Haque Choudhury, Yunus suddenly becomes a man of few words, barely able to choke out "we'll see."

Like Yunus, Shafiqual Haque Choudhury is also involved in the business of eliminating poverty. Choudhury, too, is eloquent, and clearly loves speaking to large audiences, but when he is asked about Yunus, he says, tersely: "He has his achievements."

Yunus and Choudhury both live in Dhaka, the capital of Bangladesh, a densely packed metropolis that expands farther into the surrounding countryside everyday. Both Yunus and Choudhury have built skyscrapers among the city's run-down shacks. And there is another similarity: Both manage banks. Yunus is permitted to use the word bank to refer to his organization, Grameen Bank. But for legal reasons Choudhury's organization, ASA, cannot call itself a bank. It is formally a non-governmental organization (NGO).

The two men ought to be able to work together rather effectively, and yet they avoid each other. They are competitors in many respects, and if Choudhury's latest project is successful, they will likely become adversaries. Their dispute revolves around a single, but fundamental question: Should one be able to make money at the expense of the poor, if that means liberating them from poverty at the same time?

Choudhury says yes.

Yunus says no.

Yunus is the banker of the poor, the godfather of the microloans. He secured his spot on the Mt. Olympus of humanitarians with an experiment: He took a risk and transformed a bank, the most important tool of capitalists, into an instrument to fight poverty. And he turned the loan, for centuries a privilege of the affluent to increase their wealth, into a human right.

Yunus' Most Famous Client

Yunus changed the lives of millions of people, people like Laily Begum. In fact, he has been so successful that his idea is now in jeopardy and could soon become irrelevant.

The visit to Begum takes us to the outskirts of Dhaka, to a narrow, dim path that eventually expands into a courtyard. The first people to appear in this scene are children, playing naked in the sand. Laundry is hanging out to dry, chickens are scratching, a rooster is strutting and a calf, tied to a wooden post, is dozing in the midday heat, slapping at flies with its tail.

There is a hearth in a corner on the right, under a narrow overhang. Next to it is a door, and in the door stands Laily Begum.

She raises her hand in greeting, and flashes an easy-going and genuine smile. She is used to visitors, both Bangladeshi and foreign, because Begum is Yunus' most famous client here in Bangladesh. Her photograph is on posters, in brochures, in government offices, apartments and markets. Her husband, a Muslim like his wife, and like 90 percent of the population here in Bangladesh, stands next to her. He is also her press spokesman. He says that much has changed in recent years.

In their former life, Atiqullah Begum was a day laborer and Laily was a housewife. They lived in a mud hut, which they shared with their children, their livestock and, occasionally, the nearby lake when it flooded during the monsoon.

They lived on the food they grew in their garden and from their earnings as manual laborers. On many an evening, they had to decide who should be allowed to eat his fill -- the children or the husband.

Today they face different decisions. Should the eldest study abroad after finishing high school? Should they buy a new television set? Are three mobile phones enough for a family of six?

The source of their affluence is a row of five shops on the main road, each of them around half the size of a garage, protected against burglars with metal shutters. The shops belong to Laily Begum. She had them built, then rented them out. Her tenants sell food, motor oil and various services. There is a hair salon in the first shop, a laundry in the second one and a snack bar in the third.

Begum also owns a small apartment building next to the row of shops. There are nine apartments, and she rents them unfurnished. Behind her house is a stable with cows in it. The milk, the calves and the rent for the apartments and shops provide Laily Begum, her husband and their three children with a daily income of about €15 ($23), or €450 ($698) a month. This puts the Begums squarely in the ranks of the affluent middle class in Bangladesh.

The Begum family has Yunus to thank for its success. More than 30 years ago, he recognized that an important cause of poverty was the fact that the poor are excluded from the services the financial sector offers. Banks don't lend money to poor people, because they can provide no collateral. In the average banker's opinion, lending them money is tantamount to "gradual suicide."

Yunus, a professor of economics at the University of Chittagong at the time, disagreed. He issued his first loan to 42 female basket weavers. The total loan amounted to €33 ($51). All of the women repaid their shares of the loan in full.

'Women Handle Money More Responsibly'

That was the beginning of Grameen Bank. To this day, it issues small loans to the poor, and to this day its repayment rates remain phenomenal: above 98 percent, according to the bank. This is possible because Yunus cleverly combines individual liability with collective pressure. The loans are issued to individual borrowers, who are also liable to the bank. But in addition to the loan agreement, the community of borrowers also exerts pressure on individual borrowers. The borrowers are organized into groups, with membership in one of these groups being mandatory for each borrower. The members ensure that loans are repaid on time. This method has been profitable for Grameen Bank, which has reported average annual earnings of €4.7 million ($7.3 million) in the last 10 years. The money is distributed to the owners of Grameen Bank. The owners are the bank's borrowers.

Bangladeshi Nobel Peace Prize winner Muhammad Yunus opposes profiting from loans to the poor.

Bangladeshi Nobel Peace Prize winner Muhammad Yunus opposes profiting from loans to the poor.

Grameen Bank charges interest rates of up to 20 percent. "That's extortion," say Yunus' critics. His response is that they understand nothing about his business. His employees travel out into the villages on bicycles or mopeds and collect the loan payments during the borrower groups' weekly meetings. This personal form of collection costs money.

Laily Begum felt that the terms were acceptable, and she received her first loan in 1997. It was for about €20 ($31), and was repayable in one year. She used the money to buy a mobile phone, a black Nokia 1610. It sits in a cabinet today. Her husband fetches it. A few keys are missing, and the phone has become a toy for the children.

It was no accident that it was Laily Begum who received the loan, not her husband. Grameen Bank issues loans almost exclusively to women. "They handle money more responsibly than men," says Yunus. In Bangladesh, the emancipation of women is a byproduct of the emancipation of the poor.

Begum used the telephone to transform her hut into a call shop. Anyone who wanted to call friends or relatives paid 7 Taka a minute, or about €0.14 ($0.22). Begum kept 4.4 Taka, and the rest went to the telephone company. It was a good business -- and a brilliant idea. With the telephone, Laily earned an average of €800 ($1,240) a month.

Both Begum and the villagers benefited from her new business. Farmers could call the owners of market stands to negotiate prices before setting out for the market. The sick could call to find out if their doctor was available before spending hours on a bus. Day laborers could call companies to find out if there was any work available.

Begum bought her Nokia mobile phone from Grameenphone, which developed the first nationwide mobile phone network in Bangladesh. The company is a joint venture between Grameen Telecom, another firm founded by Yunus, and Telenor, a Norwegian telecommunications group. For Grameenphone, Laily Begum was advertising. She was the first so-called village phone lady at the time, more than 10 years ago now. Her present-day wealth and fame are based on this circumstance.

Grameen Bank currently has microloans issued to more than 7.5 million women in Bangladesh. This is an astonished success, but not all women are capable handling their new power and opportunities. Some entered the village phone business too late in the game, others unwittingly bought sick or old cows and yet others had to look on as their husbands drank away the money. According to estimates, roughly one in two borrowers has been able to pull her family out of poverty with the help of microloans.


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