Banker to World’s Poor Sees Opportunity in Crisis
Speaking with a smile and in a thick but tempered accent, Dr. Yunus, an economist by training, stated, “Something is missing in the theory of capitalism…those who created economic theory misinterpreted human beings.” Dr. Yunus went on to say that, “Business is a part of [human] activities but there are other sources of happiness missing from economic theory…I am creating a door that does not exist in the theory.”
A door, if not a fundamental shift, is exactly what Dr. Yunus, the Nobel Peace Prize Laureate, has created. In the thirty three years since its first group loan of $27, Grameen Bank has grown to become the largest bank in Bangladesh, now lending an average of $100 million per month at an average loan size of just $200. Operating as a for-profit institution, but with the expressed objective of improving the socio-economic conditions of the poor, Grameen has a staggering 2,539 branches and operates in 83,566 villages around Bangladesh. Though its nearly 8 million borrowers are not required to post collateral for loans, the bank has a current repayment rate of more than 98%, current deposits of nearly $1 billion, and posted a profit of more than $1.5 million in its most recent fiscal year.
As a clear indicator of the success of Dr. Yunus’ “door” in economic theory, he has successfully founded and operates twenty five companies. The companies range from investment management to IT consulting and electronics manufacturing. Grameen Phone, founded in 1996, is now the single largest company – yes, company – in Bangladesh, providing income opportunities to nearly 300,000 women. Grameen Energy, also founded in 1996, sells and installs nearly 8,000 solar power home systems a month, with parts manufactured and maintained by nearly 3,000 Grameen trained “engineers.” Though disparate in their market sectors, the “Grameen family of companies” are united in their aim to improve life for the poor of Bangladesh.
Dr. Yunus’ model of “social business” and microfinance has created a profound opportunity for the poor. Little more than 10 years ago, a modest 8 million people had access to microcredit. Today, that number has grown to 100 million of the world’s poorest. Still, this success comes at a point of deep economic retrenchment. With both for-profit and non-profit institutions across the globe fighting for survival by scaling back staff, programs, and investments, there is great uncertainty over the future of microfinance. Emerging economies are expected to be particularly hard hit by the downturn, due primarily to the drop in demand for their exports, and to decreased capital inflows from developed countries. The Institute for International Finance predicts that net private sector capital flows to emerging markets will be no more than $165bn this year, less than half of the $466bn inflow in 2008; it is certain that philanthropic flows will be significantly less. Still, despite such uncertainty around the short-term prospects for the microfinance industry, Yunus remains optimistic. Speaking at the launch of the 2009 Microcredit Summit Campaign Report, also held last week at JP Morgan Chase Headquarters in New York, Yunus stated that, “we have the opportunity to change the system … for those left out, this is the best time to redesign that system.”
The 2009 report from Sam Daley-Harris and the team at the Microcredit Summit was inspirational: the organization has achieved its original goal of reaching 100 million of the world’s poorest families with credit for self-employment and other financial and business services. [You can read the full report here].
While the pessimists may take such expression as uninformed idealism, Dr. Yunus’ optimism for the sector seems to be grounded in fact. Though data on the global microfinance industry, with its estimated 3,500 to 10,000 institutions, is weak at best, research and anecdotal evidence suggest that microfinance holds up in periods of recession. A paper by Benjamin Kahn and Tor Jansson of The Inter-American Development Bank points to the resilience of microfinance institutions during the Asian Financial Crisis in the late 1990s. At the heart of the crisis, Indonesia’s economy shrank by 13% in a single year, its currency fell by an amount greater than has been experienced by any other county since World War II, and much of the its middle class was left impoverished. Still, the People’s Credit Banks, which operates 2,200 microcredit institutions serving the country’s poor, held its value throughout the crisis and some of these institutions, such as BPR Karto in Central Java, were able to increase profitability during the time. In a recent Bloomberg interview, Ed Bland, President of the microfinance institution Unitus, stated that while microfinance will inevitably see its available capital decrease as institutions have become more and more connected to the international financial system, at the local level micro borrowers operate in the cash-economy, and are thus less affected by the global recession. Some potential explanations for the relative success of microfinance during periods of recession are the antithesis of the reasons for our current crisis. While the developed world has spent more than it has saved, and the growth of structured debt products have increased the distance between lender and borrowers (and with it risk levels), microfinance banks have remained remarkably close to the communities they serve. Kahn and Jansson argue that microfinance institutions will, “benefit from close ties with their local communities, from knowing their borrowers well, from having an ownership structure that includes shareholders with a strong interest in their well-being…and from making good use of local savings.”
Dr. Yunus’ optimism also springs from the success of his own institutions during the current crisis. Grameen America, launched in January 2008, just months before the collapse of Bear Stearns, provides microcredit to the poor of New York City. During a time when the United States has seen remarkable economic decline, Grameen America has experienced a 99.5% loan repayment rate and is planning to increase its lending and geographic presence in 2009. “Given the world economy’s current credit woes,” said Grameen America’s President Vidar Jorgenson, “it is worth noting that [our] unsecured and virtually undocumented loans to poor immigrant women have performed better than the secured and heavily documented housing loans given to much wealthier individuals, who are defaulting at much higher rates.”
While the next year will undoubtedly be one of great economic pain for the public and private sectors of the economy — microfinance included — one can only hope that our society will emerge strengthened. For the time being, however, Dr. Yunus’ words to the audience at JP Morgan Chase can inspire those of us gripped by fear and uncertainty: “No matter how hard this crisis is, we have to keep trying to make the world a better place than it’s been.”