Is there a word that currently has a worse connotation?
If you were to listen to all the media noise that has been streaming from the web, airwaves, newspapers, and the talking heads who’ve somehow landed their own show, credit (and our “abuse” of it) caused the Second Coming of the Great Depression.
Not only would I argue this is not true, I postulate that credit is also the Great Enabler – a source of hope and future, a leg up out of poverty, and the instrument through which ALL people can prosper. Let me explain myself.
In the 1970’s a man named Muhammed Yanus, a Bengali economics professor had a very simple idea, that small amounts of unsecured credit to the poorest of poor will enable the recipient to dramatically change their life.
The overwhelming majority of the world’s poor* are self employed. Entrepreneurs, if you will. [Note from Allen: During my travels in Tanzania this fall, I identified this same primary occupation. In the absence of big box stores, it is amazing the opportunities for small, retail businesses].
Roadside stands on the highway from Dar to Morongoro
However, they are often tasked with trying to run their businesses without of the two imperatives for entrepreneurial success. I believe there are two main drivers to entrepreneurial success:
1. A great idea (or sometimes just a good one, or a needed one…)
2. Capital to fund it
I assure you, Silicon Valley has no monopoly on great ideas nor does the United States, the West, or Developed countries. In Banker to the Poor (“BTP”) Mr. Yunus states “I believe that all human beings are entrepreneurs, ” and I would argue that nothing inspires creativity and entrepreneurship like desperation. Many of the (primarily) women described in BTP generate their income from running small businesses that spanning trades from weaving and embroidery to farming and telephone services. These stories are both inspiring and motivating for they represent the best of the human entrepreneurial spirit. However, for a single reason many of these entrepreneurs’ businesses are precluded from generating income sufficient to push them above the levels of the very poor.
The story of Sufiya Begum, a 21 year old woman who weaves bamboo stools for resale, describes quite succinctly the reason why many of these businesses never lift their owners out of poverty.
“‘Do you own this bamboo?’ I asked.
‘Yes’
‘How do you get it?’
‘I buy it.’
‘How much does this bamboo cost you?’
‘Five taka.’ At the time, this was about twenty-two cents.
‘Do you have five taka?’
‘No, I borrow it from the paikers.’
‘The middlemen? What is your arrangement with them?’
‘I must sell my bamboo stools back to them at the end of the day as repayment for my loan.’
‘How much do you sell a stool for?’
‘Five taka and fifty poysha.’
‘So you make fifty poysha profit?’
She nodded. That came to a profit of just two cents.
‘And you could borrow cash from the moneylender and buy your own raw material?’
‘Yes, but the moneylender would demand a lot. People who deal with them only get poorer.’
‘How much does the moneylender charge?’
‘It depends. Sometimes he charges 10 percent per week. But I have one neighbor who is paying 10 percent per day.'”
Mr Yunus sums up this predicament as follows:
“I was trying to see Sufiya’s problem from her point of view. She suffered because the cost of the bamboo was five taka. She did not have the cash necessary to buy her raw materials. As a result, she could survive only in a tight cycle – borrowing from the trader and selling back to him. Her life was a form of bonded labor, or slavery. The trader made certain that he paid Sufiya a price that barely covered the cost of materials and was just enough to keep her alive. She could not break free of her exploitative relationship with him. To survive, she needed to keep working through the trader.”
The problem is not the institution of credit. Quite the opposite, the problem is the requirements, the bureaucracy, and yes, sometimes, the greed of banking institutions. The one thing that would break this cycle in Sufiya’s business and, thus, life is the availability of a very small amount of credit. Without the capital to take charge of her own business, she is forever locked into a subsistence only occupation that provides no opportunity to scale her business and escalate her profits.
Mr. Yunus recognized this predicament and decided something had to be done, leading to his formation of Grameen Bank, a bank devoted to providing the poorest with minuscule loans. As an Economics professor in Bangladesh, he had grown increasingly frustrated with the chasm between the economic theories he taught in the classroom and the reality outside its doors in his province.
From initial research within his university’s town, he determined that a small amount of lending (micro credit) could yield enormous gains towards boosting the standard of living of the very poor. He also determined that, somewhat surprisingly, “the repayment of loans by people who borrow without collateral has proven to be much better than those whose borrowings are secured by assets.” In fact, more than 98% of Grameen’s loans are repaid. The reason is simple, borrowers know this is their only opportunity to break out of poverty – if they screw it up they will have lost their one and only chance to get out of the rut.
The results of this work have been staggering. Grameen has provided over $3.8 billion to 2.4 million families in Bangladesh to date and more than 250 institutions in nearly 100 countries operate under the Grameen methodology.
In recent years, micro credit has received additional attention as organizations like Kiva and Opportunity International expand the pool of resources from which to provide micro credit and, allow individual citizens to participate in the process. I received news today that my loan to Abdul Masoli, an entrepreneur in Dar Es Salaam, Tanzania was fully funded and disbursed. I’m excited to watch Mr. Masoli’s business grow!
Please share any experiences you’ve had to micro credit, be they in the field or funding loans through Kiva or Opportunity International. If you haven’t had the chance to fund a loan in this manner, I would strongly encourage you to visit one of these sites, read the stories of these amazing entrepreneurs, and consider supporting credit for them.
* Poor:
P1 – the bottom 20% of the population
P2 – the bottom 35% of the population
P3 – the bottom 50% of the population
Pursuits... 