There are many reasons to celebrate
the award of the Nobel Peace Prize for 2006 jointly to Muhammad Yunus,
the recognised creator of the "microcredit" model of finance
for the poor that has swept across the developing world, and to the Grameen
Bank in Bangladesh that he founded three decades ago. These reasons go
well beyond appreciation of the valuable human qualities of the man himself,
such as his creativity, persistence, charisma and passionate advocacy
in promoting this model widely and extending it in various ways. The reasons
for celebration also go beyond regional pride – as South Asians, or even
as citizens of the developing world in general.
One important reason, of course, is that awards such as this rescue the
Nobel Peace Prize both from the controversial dogfights that have accompanied
some of the political choices of the past, and from being mired in a very
restrictive notion of the concept of peace. This award, along with the
earlier award to the African environmentalist Wangari Maathai, shows the
Nobel Committee's recognition that peace is not really possible without
more equitable development.
The citation says as much, claiming that this prize is being given to
Yunus and the Grameen Bank "for their efforts to create economic
and social development from below. Lasting peace can not be achieved unless
large population groups find ways in which to break out of poverty."
But while this is clearly a much-deserved prize, it also exposes other
weaknesses about Nobel Prizes in general. It is in some ways a safe, even
predictable, choice. Rumours about this award have been in wide circulation
for some time, given the now almost universal espousal of microcredit
by the World Bank and international development agencies in general, as
well as by many developing country governments. The UN declared 2005 to
be "the international year of microcredit", and there has been
enthusiastic promotion in international circles by Bill Clinton and others.
Tit is worth noting is that the economist Dr. Muhammad Yunus received
this prize for promoting peace, rather than the Nobel Prize for Economics.
Yet his contribution has really been in the field of economics, since
his model stood conventional economic theory on its head and effectively
created a new paradigm, which has since spawned an international industry
of theoretical models to explain its success. This tells us something
about how relatively limited in vision the awards of the Economics Nobel
Prize have been. They have focussed much more on narrow academic peer
recognition than on addressing real world development issues or processes
that actually transform economies.
What exactly was this innovation called microcredit? To understand its
significance, it is important to begin with understanding how formal financial
institutions operate. Since giving credit is always associated with some
risk of default – that is, the borrower not returning the loan amount
or paying interest – bankers of all types usually require some form of
surety (collateral) against which they can lend. Formal banking institutions
therefore require the borrower to have some assets like land or a house,
or a secure job, or a certified credit history, or some such assurance
against which they will proffer funds.
This obviously eliminates the poor, who are by definition without significant
assets and usually also lack secure streams of income through regular
employment. So the poor get automatically excluded from formal financial
institutions, and are forced to go to private moneylenders who charge
very high rates of interest. These traditional moneylenders are able to
function in such circumstances because they can somehow ensure that the
loan and interest are repaid through extra-economic means, or can extract
other forms of payment such a labour services.
It was therefore accepted that the poor were not "bankable"
for formal financial institutions, or able to access other financial services
such as insurance. Economic theory had also devised many complicated models
to explain the necessary persistence of traditional money lending and
high interest rates among the poor.
The significance of the Grameen Bank and other microcredit experiments
was that they countered this axiomatic belief by showing that even formal
financial institutions could provide loans exclusively to the poor and
still be assured of repayment. This is because they are based on the principle
of "group lending" whereby loans are made to a group (of between
5 and 20 people) and therefore peer pressure acts as an effective mode
of ensuring repayment.
Muhammad Yunus may not be the pioneer of microcredit – there were cases
of similar experiments in the early 1970s in Colombia and Brazil, for
example. But he was the first to make this a viable model capable of being
copied and scaled up, and he also became a tireless propagator of the
cause of microcredit worldwide.
It all began in 1974, during a famine in Bangladesh, when Yunus was teaching
economics at Chittagong University after receiving a doctorate in the
US. In his efforts to do something to help the famine-ravaged people in
the district, he was visiting nearby villages when he was persuaded to
make his first loan in the village of Jobra.
He offered around 7000 Bangladeshi taka from his own funds to a group
of 42 bamboo craftspeople in desperate need. They had no collateral to
offer, and no contract was signed. Nevertheless, the loan was repaid in
full, after the borrowers used the money to buy bamboo, sell their crafts
and repay both Yunus and the traditional moneylenders to whom they were
indebted.
Yunus drew from this the lesson that the poor can indeed be viable and
creditworthy borrowers. But his efforts to persuade banks to lend to them
independently were fruitless, as the banks all continued to insist on
his personal surety for any loans taken by those without collateral. In
any case, traditional banks were simply not interested in making tiny
loans at high transaction cost to those with no credit history.
The Grameen Bank was founded in 1976 by Muhammad Yunus as a result of
such experience. It was dedicated to serving the poorest of the poor,
based on Yunus' vision that even such very poor people were viable credit
risks and could make productive use of small loans to enhance their earning
capacity.
The Grameen bank model that emerged had some important features, apart
from its concentration on the poor as clients. It involved lending in
groups (originally of five members) who were jointly responsible for the
loan. It required repayment in small periodic instalments, over a relatively
short period. It lent not only to farmers but also to rural labourers,
petty traders, and most importantly to women. While at first male borrowers
outnumbered their female counterparts, this was consciously altered so
that by the mid 1980s women accounted for more than 96 per cent of the
loans.
This aspect of lending to women has emerged as one of the more transformatory
features of the Grameen model. Women turned out to be much more reliable
borrowers, whose loans were used for the well-being of the family. But
this also became an important instrument of social change in the conservative
patriarchal context of Bangladeshi society. Not only did the access to
microfinance improve women's bargaining power within their households,
but the fact of meeting together and being part of groups led to other
ways of thinking in a collective mode that proved to be quite empowering.
These features have been emulated not only by BRAC (Bangladesh Rural Action
Committee) and Proshikha, the two other large microcredit NGOs in Bangladesh,
but across the world, as the focus on microcredit has been an important
part of the agenda of multilateral development banks and even of governments.
And the focus on women borrowers has proved to be one of the more successful
results of the model wherever it has been transplanted.
The spread of this essentially simple idea has been quite remarkable in
the past two decades. According to the 2005 "State of the Microcredit
Summit Campaign Report", at the end of 2004 there were 3,200 microcredit
institutions that reported reaching more than 92 million clients across
the world.
In India too, governments at central and state levels have been actively
promoting microcredit, particularly to women, through the institution
of Self Help Groups which engage in both savings and loan activities.
In some states such as Karnataka and Andhra Pradesh, such organisations
has been present for some time now, through the efforts of NGOs such as
Mahila Samakhya and Co-operative Development Foundation.
A further innovation has been to form them into federations and link them
with formal lending institutions. NABARD (the National Bank for Agriculture
and Rural Development) has a scheme whereby it finances more than 500
nationalised banks for lending on to Self Help Groups that have shown
they can manage their funds well. The amounts involved are relatively
small and the interest rates are also quite high (usually around 12 per
cent). Bu the scheme involves very large numbers – around 1.4 millions
SHGs comprising nearly 20 million women, making this Indian scheme therefore
the largest bank-microcredit linkage in the world.
Despite this spread, and some clear areas of success, it is a mistake
to view microcredit as the universal development panacea which it seems
to have become for the international development industry. It can at best
be a part of a wider process that also includes working towards reducing
asset inequalities, better and more egalitarian access to health and education
services, more productive employment opportunities.
The undoubted successes of the microcredit model should not blind us to
some of the problems and concerns that have been expressed. It still remains
difficult to make microcredit a commercially viable proposition for finance
institutions. Even in Bangladesh, Grameen Bank and BRAC still depend substantially
on subsidies to run their operations despite the high repayment rates,
because of high costs of transaction and monitoring. Supporters argue
that it is better to spend public money on such subsidies rather than
on other forms of public expenditure, since it is cost-effective and responsive
to local felt needs.
Yet it is also true that the amounts of money distributed through microcredit
are so small and the periods for repayment are so short, that they cannot
really lead to effective asset building. Some argue that microcredit at
best acts as a consumption stabiliser, reducing the adverse effects of
shocks such as natural calamities or seasonal fluctuations, and provides
means for taking advantage of very small business opportunities. In the
absence of other measures or more dynamic growth processes, this can amount
to no more than a redistribution of incomes among the relatively poor,
rather than an overall increase in incomes of the poor. It can also be
associated with microcredit dependency, involving continued reliance on
loans for consumption rather than put to productive use.
Similarly, the group lending that delivers high repayment rates can also
become an instrument of stratification, especially when there are linkages
with banks providing some additional institutional finance to the groups.
There have been cases of women from the most destitute or socially deprived
groups being excluded from membership of groups containing better off
members, because of fears that their inability to repay will damage the
prospects of other members. In some states of India, peer pressure has
forced women borrowers to take on expensive loans from moneylenders to
repay the loans from the Self Help Group.
A more damaging argument suggests that microcredit programmes can have
adverse effects if they imply a transfer of public resources from other
public spending, leading to cuts in public health, sanitation and education
expenditure. This need not happen, but if it does, then it is akin to
a privatisation of public welfare programmes, with unclear effects on
overall development. Further, a focus on microcredit should not reduce
public attention to ensure adequate institutional finance to rural areas
in general, such as agricultural loans and loans to small businesses.
All these criticisms do not detract from the importance of the microcredit
model, but they do emphasise that this in itself cannot be seen as the
magic bullet to end rural poverty. To their credit, both Muhammad Yunus
and the Grameen Bank themselves appear to be aware of this rather obvious
truth, since their interventions over the past decades have been characterised
by continuous innovation and experimentation. In addition to other forms
of microfinance such as insurance, Grameen has experimented with housing
loans, loans for fisheries and other small enterprises, venture capital,
solar energy projects, a commercial telecom project with a Norwegian partner
to deliver cheap rural phones, and now even health care services.
It is this approach, of constantly listening to the actual needs of the
poor, of being flexible in terms of continuously looking for new solutions
and enlarging possibilities from below, which is the most engaging aspect
of Muhammad Yunus' contribution. Even more than microcredit alone, it
may turn out to be his most positive influence.