Monday, February 25, 2008
The irony of Grameen
There’s a delicious irony in the report in the Financial Times of 17 February that the Grameen Bank will soon start lending operations in the United States. The Grameen Bank is based in Bangladesh, one of the world’s poorest countries. How could it be that a Bangladeshi bank has made inroads into the world’s richest country?
The story is interesting on several levels. First, Grameen is a micro-finance operation, started by the unassuming Muhammed Yunus, who in 2006 won the Nobel Prize for his work. The fact that a micro-finance bank can pick up business in the United States speaks more than a volume for the disparities in wealth in the home of capitalism. Second, the concept of micro-finance has come under attack recently, but mostly from people who cannot grasp the non-traditional motivations of the bank. In fact, there is nothing really new about the way micro-finance operates. What is new is that the concept is reappearing at a time when most people thought that the ‘traditional’ sources of credit were all that existed. Third, and for me the most interesting, is the link between micro-finance and ‘social capital’, the topic du jour for economists.
Micro-credit banks operate by advancing very small sums of money to people who either cannot obtain credit from banks, or, if credit is available, at usurious levels. Grameen itself started in 1976 when Mr Yunus loaned $27 to 42 women in Bangladesh. The women used the money to start new enterprises, and earned enough to repay the loans. Everyone benefited, not least Bangladesh.
One of the two interesting elements in micro-credit is the loan guarantee system, and this is what makes micro-credit so interesting from a sociological point of view. New borrowers have (usually) to be introduced by other existing borrowers. If a borrower defaults, the others share the bank’s loss. Naturally this makes everyone ultra-careful, and there is a great deal of social pressure on the borrower to make sure repayments are on time. In a very real sense, the bank has outsourced credit control to the community, but passed on the savings to its customers. The credit control is even better since Grameen stopped lending to men. Yunus found that men often squandered their loans on luxuries or drugs, and that women were the real agents of change in rural Bangladesh.
The other element is the ‘social business’ purpose for micro-credit, exemplified by Grameen. In essence, the bank depicts the emerging paradigm of profit replaced by sustainability. Grameen, and other micro-finance operations, were designed with a specific social purpose in mind, that is lending to borrowers marginalised by mainstream credit operations. The bottom line for micro-credit is therefore more than just profit, although that is necessary just to maintain and expand operations. The bottom line is now “people, profits and planet”.
Criticism of Grameen’s way of doing business is usually the basis of a misunderstanding of the role of micro-credit. The role is not charity, and lending money to the marginalised is not ‘the kindness of strangers’. The role is similar to the idea of giving someone a plough instead of a sack of wheat, and the whole point of the bank’s credit enforcement structure is that the other borrowers are not strangers.
For me, the most interesting part of the Grameen success story is the timing. Grameen is growing at a time when globalisation seems unstoppable, even if it might just possibly be a good thing to somehow ‘stop’ it. It’s entirely possible that Grameen could only grow as a result of the social gaps left by what Schumpeter called ‘the creative chaos’ of modern capitalism. Micro-credit might therefore be a workable indicator reflecting the social capital of a society. How much ‘glue’ there is, sticking the society together, is revealed by how ready the members of the society, or community, are to lend money to each other through micro-credit. Because micro-credit depends on knowing how far you can trust your neighbour, and as an extension, your willingness to bail out your neighbour if times are hard, micro-credit can only exist when social capital is strong. Grameen’s entry into the United States is fascinating not so much for the fact that such a wealthy country needs a small Bangladeshi bank, but from the apparent existence of high social capital groups that can and need to borrow small sums. Grameen’s new American borrowers are groups of immigrant women in New York’s borough of Queen’s. I wish them the very best of luck.