Eliminating Poverty One Loan at a Time

In 1974, Mohammed Yunus, a Bangladeshi economist, met a woman in Jobra, Bangladesh who was trying to earn a living by selling bamboo stools. She made only two pennies of profit a week, far from enough to sustain a family, as buying supplies required her to borrow from a local moneylender at extremely high interest rates. Yunus soon discovered that Jobra was filled with others just like her—women whose tiny ventures barely survived but had the potential to thrive if they could borrow money at reasonable rates.

With typical bank loans not a viable option, Yunus redefined the terms of financing for these women, substituting honor and reputation for credit and collateral. He gave out small loans—just the equivalent of $10 to start—and soon found that the women were not very different from the best customers of the biggest banks in the largest cities in the world. Their greatest assets were their reputation; they valued their pride; they sought opportunity. He grouped his clients into teams and held them commonly responsible for their collective debt each week. Freed from the predatory terms of local moneylenders, these women proved to have lower rates of default than corporate borrowers at the highest end of the financial services spectrum.

With his micro-loans and group-lending strategy, Yunus uncovered a concept with the potential to drive progress and relieve poverty in emerging economies that no amount of philanthropy could achieve on its own. In doing so, he enabled women to propel themselves onto tracks of stability within the confines of their own culture. Last week, for these efforts, Yunus and Grameen Bank, which he founded to institutionalize the method he pioneered in Jobra, were awarded the Nobel Peace Prize.

Yunus’ strategy of mutual benefit sets him apart from the Nobel laureates before him who labored to address poverty. He has been both praised and criticized for finding a method that not only helps the poor but also allows the financial markets to tap into the 86 percent of the globe’s population that has had little or no access to bank loans. Yunus’ prize honors not just his specific strategy, however, but also his impulse to redefine how we look at the problem of global poverty. Microfinance demonstrates that what matters is not the label attached to a solution—be it business or philanthropy or for profit or nonprofit—but its impact.

Indeed, the strategy of mutual success for lender and borrower transcends many limitations of conventional philanthropy. A gift may be of great aid to the recipient at the time it is given, but it does not build credit, savings, or consistent income. The next expense—for a funeral, or for food during a bad winter—may leave her family in a worse position than before. Micro-loans have demonstrated that helping people achieve long-term stability requires not just assets, but a change in ways of thinking.

As their credit and businesses grow, the women begin to see themselves as participants in a productive economy that proves to be the most important key to their successes. “Her husband thought she was stupid,” Yunus explained to New Internationalist magazine. “Her parents thought she was stupid. Her neighbors thought she was stupid. She thought she was stupid. But she has found out she is not as stupid as everyone thinks she is.”

The success of microfinance, however, requires fighting against entrenched orthodoxy. Startup support for a microfinance institution often comes from partnerships with larger banks. These corporations are accustomed to multi-billion dollar deals and must develop confidence in the accumulation of small successes that lie at the heart of microfinance. Additional support requires donors like the Gates Foundation to be convinced that a money-making solution will be effective in alleviating poverty. And the clients must be persuaded to trust a financial services system that has long excluded them.

Yet 20 years of microfinance has provided reassuring success stories—from Yunus’ own in Bangladesh to the 3,200 microcredit institutions that had sprouted up around the world by the end of 2004. It is a strategy that American corporations are slowly catching onto. Many see it as a way for companies to signify their commitment to social responsibility, highlighting a humane effort to change their ruthless reputations. And, it may be successful at helping to do just that.

But part of what defines Yunus’ strategy is its ability to undermine “social welfare” appeals. These women are forming relationships with banks because they have demonstrated their eligibility to participate in the global economy on terms the world already understands. They are slowly proving to big businesses, American included, that they are worthy clients on the same level as more traditional loan recipients.

Yunus and others like him have begun to link the global network of financial services to potential customers who have long been without it and are often both physically and metaphorically a world away. With each micro-loan they narrow this gap, convincing those at both ends of the mutual benefits that they see possible. They are modern explorers of a universe in which the best way to bridge a divide between two worlds is for each to take a step toward the other.

Rebecca A. Kaden ’08, a Crimson editorial editor, is an English and American literature and language concentrator in Kirkland House.