Nobel Thoughts on Microcredit

As I watched, I could see the smashing of ancient rules, the shattering of traditional canon. I could see subversion. Here is what was being subverted:

• The belief that poor people are helpless people;
• The belief that women are most helpless of all;
• The belief that poor landless people are terrible credit risks;
• The belief that poor people cannot co-operate, cannot plan ahead, cannot decide for themselves, cannot manage or service a loan;
• The belief that the best form of economic development is aid for massive, centralized projects undertaken by the state

If old beliefs were made of pottery, the floor of the Grameen Bank would be littered with broken shards.

Peter Goldmark
President of Rockefeller Foundation

The peace prize for the year has gone to Muhammad Yunus [and Grameen Bank] who was instrumental in subverting the banking system over the last few decades. Yunus has been unconventional, broke the banking rules, but at the same time created his own rules. This has not been without controversies, without a fair share critics and also without a few eyebrows raised as to whether this was indeed such a revolution that deserved the coveted prize. There have been some political commentators who have tried to link both Pamuk and Yunus together as being moderates and therefore this price being seen as a subtle message to the Islamic fundamentalists. Firstly fundamentalists do not take subtle messages. Secondly taking that line of argument is at best an insult for both the works of Pamuk and Yunus, because what they have created merit such a recognition irrespective of which part of the world they come from and what their religion is.

I have been personally delighted at the news, because this was the first person with whom I have had a direct correspondence to win the prize! There are issues with the design of Grameen and as an academic I keep raising those both inside the class room and outside in my writings. However, when it comes to the whole body of work by Yunus I only ask one question. Is the world in general better off because of Grameen. My answer to that is a thumping yes. That is reason enough to celebrate.

There has been enough written about Yunus, his experiment in Jobra village where he started with $27 as the first set of microloans and how his methodology impacts the way poor are dealt with as customers. He treated the poor as “exclusive” customers [partly because they were excluded from the banking system, and partly because of his faith in the essential capability of the poor to grab opportunities when they were made accessible to them]. However, what we need to remember is that the so called Grameen Methodology that appears simple, can be replicated the world over and can be scaled up fast took a long time to stabilize.

There are some great similarities between Kurien and Yunus which strike us at the first sight. For instance, when Kurien was asked to replicate the Anand model of milk co-operatives one of the conditions he laid down to Prime Minister Shastri was that he would like the headquarters of National Dairy Development Board to be in Anand and not in Delhi. This was one way of insulating the activity from petty politicians and bureaucrats. Yunus echoed similar sentiments when an American reporter asked him what he would do if he took over as the president of the World Bank. Yunus apparently said: “I would move the headquarters of the World Bank to Dhaka”. The reasons given to elaborate this were:

• If the bank is interested in combating poverty, it has to be in a location where poverty is rampant

• If the headquarters are moved to Dhaka, many of the five thousand employees would refuse to come.. this will allow me to ease out those who are not completele dedicated to to fighting poverty and it would reduce costs. Dhaka is less expensive than Washington…”

Yunus has dealt with the donors the way Kurien has dealt with them, on terms that were always beneficial to the recipient than to the donor. On conditions that were dictated by the recipient than the donor. Both have made fund raising into an art where the giver is actually at the receiving end. That could happen only because both were men of conviction, knew exactly what they wanted to do and knew that if the design is right and honesty of purpose is there, resources would flow. Yunus went one step further, by making the operations so simple and replicable that any moron could have imbibed his methodology of having monetary transactions with the poor.

However, we have to remember that the journey to this simple methodology was not without a long learning curve that the Professor had in his passion to make a difference. While he was in US as a student he got active in politics – supporting the Bangladesh liberation movement and generating public opinion in favour of the liberation. On return to Bangladesh he did not start off with microcredit, instead like any young educated person thought that the difference could be made by dissemination of knowledge to the poor.

His first idea was a Three-Share-Farm where he tried to get production from the fallow lands in lean season. The Three-Share-Farm basically would have land contributed by landowners, Yunus himself putting in capital for running a deep tubewell, seeds and other inputs and the share-croppers lending their labour, for an equal share of the produce at the end. While the experiment itself was successful and earned the President’s award, it did not satisfy him, because he believed that it was not really helping the poor, because he found that poverty at the extreme could not help women even to be share croppers. While Yunus continued to teach economics in the Chittagong University, it was apparent that he was deeply dissatisfied with what he was teaching. He has time and again questioned conventional theories which in his view were not working. Possibly the operating principle of cetirus paribus [all other things being equal] commonly applied in Economics was troubling him, as all other things were never equal. So life had to move beyond the classroom Economics, and beyond the three-share farm experiment.

In the meantime Yunus had experimented with his credit programme with some women, and saw a potential for intervention. His idea was that if only one can provide enough push through capital the intrinsic entrepreneurial ability of the poor would help them to stand on their own feet. However, he also realized that his personal experiment would only make a small impact and it needed an institutional framework to achieve impacts on scale. There began his long journey with the banking system – constantly collaborating with the systems and trying to fight from within, and at the same time trying to find alternatives outside the banking system. The first roadblock Yunus hit was that of a collateral. Obviously the assetless could offer nothing as a collateral. The banks were asking Yunus to stand as guarantor, and Yunus was willing to do that because he had faith in the essential enterprise of people. Goodness yes, but also enterprise, because people would return the loans only when they had a reasonable assurance that they would get a further loan in case they needed [and often they did]. Unlike any other trading activity which is a terminating transaction, credit was a series of transactions built on faith and constant interactions. Therefore credit was a relation building exercise – the essence of which Yunus recognized early on. So all that he possibly needed to do was to replace his own guarantee [or reputation] with that of a fellow poor person – for whom it might not be a reputation at a larger level but it was indeed a question of pride. Yunus introduced what is today called as Social Collateral into the lexicon of banking.

Two highlights that dictated the social collateral were the following aspects:

• Individually, a poor person feels exposed to all kinds of hazards. Group membership gives a feeling of protection.
• Subtle, at times, not so subtle, peer pressure keeps the group members in line with the broader objectives of the credit programme

Therefore it was imperative that the lending methodology followed by Yunus had to have some group formation. This is what ultimately dictates the methodology of operations of Grameen.

Now the methodology of Grameen has been so well perfected that it is replicable almost anywhere, the basic pre-conditions being that there has to be a regularity of cash flows and there has to be enough numbers to form a commune of borrowers. Is this as simple? Are there no issues of default? Are there no issues of harrasement, exclusion from Grameen or are there no downsides to the Grameen model. Obviously there are and I will come to that a little later.

Before that, it is important to see what Grameen and microcredit have done to the poor, how they have fundamentally changed their lives. Whenever there is a high profile programme like Grameen talked about, the expectations are that this is a magic wand that will eradicate poverty, educate people, empower women and make the world a happy place. Yunus himself has been responsible for propagating this view as the single most powerful instrument in eradicating poverty, so much so he has said that a century later we must be seeing poverty only in museums. However, we need to recognize that what microcredit achieves has limitations, but at the same time very effective within those parameters.

It is not without reason that microcredit has been women focused. Micro-credit after all deals with small amounts of money which leads to small enterprises. When we look carefully the amount of credit that is available will lead to a supplemental income. That is because the Grameen methodology expects repayment from the week after the loan has been disbursed. Thus if one has to repay the loan, the money has to come in from the existing cash flows or has to be put in a business that produces a good cash flow from day one. Either way the borrower is a winner, because it increases the cash throughput in their hands and reduces their vulnerability. At the crunch situation a person with a few rupees in the pocket is better off than a person with a credit card because cash is universally accepted as a medium of exchange. [Ever tried taking a rickshaw ride on a credit card?] Therefore one is actually talking of enterprises that are incremental in nature that use the slack in a household. Women are the most enterprising lot to use the slack. Just remember how much our mothers would do in bargaining on a purchase, saving on the expenses by learning sewing and taking on a whole lot of work that men would typically outsource.

Men also suffer from bloated egos that will not allow them to do things incrementally, but would want a big-bang effect. If we take rural India, for instance, microcredit is not designed for meeting the needs of agriculture which has multiple lumpy cash outflows and a singly lumpy inflow. Women love groups. Attending a group meeting gets them out, unshackles them from the bounds of a house. It is liberating because this is an organized and respectable way to interact with other like minded women. Men of course hang out with other men on non-productive purposes in the evenings in places where women seldom frequent. Thus attending a microcredit group meeting is both liberating and [with cash in hand] empowering the women at the same time. This is the limited purpose that microcredit serves at a base level. I am sure there could be several counter arguments as to how life could go much beyond this, but at the large scale these are the guaranteed fall outs of microcredit programmes. This has not been achieved by the moneylender, by the formal institutions or the other semi-formal structures. This is the most significant contribution of Yunus to the society.

I think the other subtle contribution was in the discipline of repayment. As weekly repayments were non-negotiable in Grameen, it forced women to look for activities that gave the year long income. This possibly helped in livelihood diversification and getting small amounts of money on a regular basis. This also helped reduce vulnerability to a great extent. The other larger impacts of microcredit possibly are context specific and in some cases just frills.

But is the contribution of Yunus and Grameen all that hunky dory? What are the downsides of microcredit? It is not that microcredit, and the Grameen model in particular have not been subject to some scathing criticism, both from the development Jholawalas as well as the Wall Street. I will take on the wall street first and later the criticism from the developmentwallahs. Wall Street Journal correspondent Daniel Pearl wrote a front page scathing piece [November 27, 2001] on Grameen indicating that they were not transparent, they were hiding data and there were repayment pressures. Grameen responded saying that most of the data that Pearl was using was dated, they did indeed have repayment problems following a nation wide flood and they had overcome most of it. What went on between Daniel Pearl [Yes, if the name rings a bell, it is rightly so, because he was the correspondent who was brutally killed by Taliban, a victim of Islamic fundamentalism] and Yunus [said to be another opponent of Islamic fundamentalism] was not as important as to what we learn about Grameen methodology.

Till this happened, Grameen was known as a single product Bank [though they had housing and other loans, all of them followed similar repayment rules] and also as a bank that brooked no nonsense in repayment. In Grameen discipline was above all else. It was seen in not only how repayments were effected but also in the overall organization of the activities. This encompassed the timeliness of group meetings, the orderliness of seating and the code of conduct for the staff and in the 16 decisions that all Grameen members had to recite. One major part of the criticism about Grameen was that if god forbid a member’s enterprise failed, she would be worse off than when she started because there was not compromise on default due to inability to pay. A nation-wide calamity shook them up on the genuine triggers that could lead to a default. Yunus talking about the Daniel Pearl article says:

“Gradually we started noticing that our rules were not appropriate for the borrowers in this situation. We took a long preparation to develop a new flexible system and field-tested it over months. We finally introduced the new system in September of 2000”. This essentially meant that Grameen had made some significant design changes before the article. Unfortunately it was not widely known, but came into sharp focus after Pearl’s article.

Yunus has time and again said that building Grameen was not easy. Reaching out to a large number of poor was time consuming and has warned against rapid growth. Grameen tried out various mechanisms and burnt their hand several times in arriving at the current model. Even now, Grameen is possibly constantly learning. What Grameen did to the business model was that by putting discipline on the top of the agenda, made microfinance fairly risk free. Given the success of Grameen, we find several replicators across the world trying to get the model off the ground.

The other set of criticisms of Grameen come from the fact that their orientation towards enterprise loans excludes people who do not want to do enterprise. There have been some stories where people got into Grameen and with a failed enterprise had to borrow at usurious rates from moneylenders in order to stick to the Grameen regimen. There are researchers who have said that some people do not even join Grameen for the fear of failure. Evidence of this is available in a book edited by Yunus way back in 1982, if only we do a subtle reading. The book Jorimon and Others has several real life biopics of grameen borrowers. While the story is of their triumph the intermediary period of joining Grameen could not have been smooth. I give two quotes from the book:

From Sakhina’s new identity:

…Even this [assurance from others] did not give here too much courage. She went to Shinguria to get the opinion of her relatives. Her mother and sister were terrified at the idea and strongly opposed it. They said “If you take the money and cannot repay it……

…..Granted she took the loan, how would she use the money …?

….Sakhina worried so much before joining the group that she did not sleep for 2 or 3 nights. …her resolution to join a loan group did not solve all her problems. Sakhina’s joining was not an easy task and presented all sorts of doubts in the minds of other members….

…On the day she received the cash she was wild with happiness… but at the same time it created a fear and doubt that made her heart tremble and her throat go dry….. Sakhina silently placed the money in Rahima’s hands and after a few minutes said “I am scared”… Sakhina was so frightened that she kept the fact of her receiving the money a secret…

From the life of Fuljan:

“Fuljan was not a permanent resident of the locality, and on top of that, her relatives opposed her getting a loan. All this created obstacles for Fuljan which caused the long delay in her receiving the money.

At the same time Fuljan was also afraid – “Suppose I cannot pay my weekly instalments? Suppose the loan money is used up in some other way?”

These are criticisms that Grameen has taken in its stride over a period of time.

The only downside of the success of Grameen is that it created several clones, not only in Bangladesh but also elsewhere in the world including India. The replicators [as all replicators do] picked up the outer shell and possibly not the soul. So we have an ASA in Bangladesh which operates the microcredit programme in an absolutely codified and standardized manner, like one would run a poultry farm. Grameen for instance is 96% owned by the borrowers with the Government of Bangladesh having the other 4%. Most of the replicators do not have such an ownership structure. Though Grameen Bank does not distribute dividend and the money is used in further development and growth, theoretically the wealth so created belongs to the poor owners. Most of the replicators in India are privately owned and eventhough they claim that the money is reinvested like Grameen. But there is a potential for skimming away the wealth so generated. This has created immense damage to the image of the original Grameen.

There has been a criticism that microcredit has led to excessive consumerism. It might be true in some cases that replicate the Grameen model, particularly in some places like Guntur in India. But the original Grameen design was that, while it was a credit machine, it was clearly monitored, recorded and used for productive-enterprise purposes. The question several people ask is what is then the difference between moneylending and microcredit. While there are basic and philosophical differences, even discounting all those my own stand is that any day moneylending in the organized space is much better than money lending through faceless entities. If there is an issue, the formal organizations can be regulated, can be called to table and can be engaged with. So anything that happens in the formal space with elements of transparency is much better than the informal sector.

My own appreciation of Grameen is through secondary sources and I have never had the opportunity to visit Bangladesh. However, I have followed the literature on Grameen and have had the opportunity to clarify several issues with Professor Yunus himself. I sent him the first email when the Daniel Pearl story broke out with a set of questions. He responded indicating somebody from the office would respond in a couple of days, but even before his office could respond, I got a second personal mail from him with all the answers. Another instance was when he delivered the commonwealth lecture I had a couple of issues and Yunus was kind enough to personally respond and interact with me on mail. For an extremely busy person, this was quite remarkable. Not only did he respond, but also cared to remember that three of my colleagues from IIMA had visited Grameen a decade and a half ago, when most of the world had not heard of his microfinance model. That was indeed some remarkable memory.

For somebody who was getting to be skeptical about how the clones of Grameen were going about their business in the country and getting to be a little questioning about the original model, it has been good news. Because after the Nobel, I took time to revisit the basics, read up his autobiography and also looked at some of his writings. As I look back, possibly I was drifting in my assessment and the Nobel brought back some really Noble thoughts in me. This certainly is a moment of happiness and a cause for celebration.