Sunday, October 15, 2006

The Power of an Idea

30 years back, a young professor of economics went for a walk in a village adjoing his university in Chittagong (Bangladesh). While there, he met a poor widow, Sufiya Begum, who tried to make a living by constrcting and selling bamboo stools. She worked hard the whole day, and yet her daily net earning was just $0.02 (2 cents).

Why?... because she had to take a daily loan for buying bamboos from the local moneylender, who charged exhorbitant interest, and whose lending condition was that she sells her produce to him at a price decided by him!!!

She was poor - not because she lacked skills, or because she was lazy - but becasue she did not have access to her own working capital. All she needed was $0.27 (27cents) to get out of this vicious cycle of:

Low income => No working capital => High interest loan => Low income

The professor gave her 27 cents... but then, also went on to find out how many others in the village lived on an income of less than $1/day. To his amazement - and dismay - he found that there were 42 such able-bodied skilled working people, whose cumulative requirement to end their poverty was just $27!

He gave them that sum as loan, which they could use to break out of the cycle of poverty... and they returned the loan in due course.

It was such a simple solution to end the poverty. Poverty, the professor realised, is not caused by people; it is caused by the system. Much later, he described his first insight through an analogy:

"You take the best seed of the tallest tree from the most fertile forest, and plant it in a small flower-pot. The seed does not grow into the tall tree..." not because the seed was bad, but because it got planted in the wrong place.

Academically, this simple insight had a simple solution. Get the banks to give loans to the poors.

But the banks refused: how can you give loans to people who have no collaterals to offer? what if they default? and since they own nothing, you can't take back anything from them, can you?

Failing to convince the regular commercial banks to lend money, the professor decided to become the "guaranteer" for their loans with the bank. If they default, he would pay the banks - but they did not default!

But this experience led to the second insight:

The commercial banking system works on a premise that the more you have (i.e., as collaterals), the more you get; the less you have, the less you get... and of course, if you don't happen to own anything, that you are forever condemned out of the banking/credit system.

...Like the local moneylender, the commercial banking system imposes its own conditionalities in which the rich become richer - and the poor become poorer.

And thus the the third insight: Create a bank for the poors!

This simple idea led to the establishment of Grameen Bank - the "barefoot bank" - in 1983. The professor of economics, you guessed, was Professor Muhammad Yunus, who was awarded the Nobel Peace Prize 2006 this week... The rest, as they say, is history...

Today, the Grameen Bank:

  • has 6.6mn borrowers ("poorest of the poor" - including beggars), of which 97% are women

  • has 2,226 branches operating in more than 71,000 villages of Bangladesh, supported by a staff of around 18,000.

  • is owned 94% by the borrowers (the rest 6% is with the government)

  • offers loan without any collaterals, legal instrument, group-guarantee or joint liability

  • has provided loans of about $5.7bn since its inception

  • provides loans for micro enterprises, housing, education, scholorships, life insurance and pension funds for the borrowers, disaster loan funds, etc.

  • has remained profitable all through its existance, except for 3 years (1983, 1991 and 1992)

  • does not rely on external funding or donations since 1995 (has paid back its loans since then)

  • has helped about 58% of its borrowers to cross the poverty line

  • and has a loan recovery rate of 98.85% (the other 1.15% constitute the defaulters on deadlines of payment - not on payment itself)

    Perhaps more importantly, the contribution of Prof Yunus was The Power of the Idea:

  • that the poor are "credit-worthy" (or the reverse: the commercial banking establishment is not "people worthy")

  • that poverty eradication does happen by handing out "doles" through the top-down subsidies, donations, grants or investments (by govt/IMF/WB, etc.)... In an article in WSJ (Oct 14,'06), he noted:
    " of our most successful tools for rebuilding businesses is not government handouts, but rather, small loans packaged with practical business and social advice.... very little of the cash so generously given ever gets all the way down to the very poor. There are too many "professionals" ahead of them in line, highly skilled at diverting funds into their own pockets. This is particularly regrettable because very poor people need only a little money to set up a business that can make a dramatic difference in the quality of their lives."

    Instead, eradicating poverty requires innovating systems for economic empowerment... By giving the poor that elusive access to the "first dollar that gets you the next dollar."

  • that there is another model of development that is far superior to the "trickle-down" economic model... That perhaps "the rising tide will lift all the boats" is a merely a myth in the minds of the owners of those few boats who have "access rights" to the tide!

    It was this power of idea, that has mobilised a global movement for providing "access to credit" to the poor during last 30 years. There are now:

  • about 3,100 MFIs worldwide

  • who service 92mn clients and

  • about 330mn people from the "poorest of the poor" families

  • across more than 100 nations

    ... and are growing in numbers, and innovating new solutions.

    Cross-posted at:
  • Thursday, October 12, 2006

    The Price of a Cauliflower interesting example of the difference between the "physical" and "economic opportunity" distance.

    - From where I stay, if I drive a couple of Kms towards the local private airport in the evenings, just before the airport, I find people - mostly farmers from nearby areas - sitting on the roadside. They are the small farmers who come from the other side of Swarnarekha river, sit on the roadside and sell vegetables that they have produced. I can buy a cauliflower from them for around Rs.2/- or less (if I negotiate, I can even get 4 for Rs.3/-)

    - Past the airport, I take the right turning, and after about 0.5Km, is the Gudari Bazaar, which in the evenings, becomes a sort of large vegetable mandi. The price of the cauliflower there ranges between Rs.5/- to 7/-.

    - The place from where I buy vegetables is Dhatkidih, which is slightly tangential to the above, but within a range of a couple of Kms. I, and others, buy vegetable from the shops, and pay Rs.12-15/- for a cauliflower.

    The guy sitting on the roadside before the airport does not have 'access' to mandi - or to customers who will pay Rs.5/- (or Rs.12-15/-) for the cauliflowers without a second thought...

    even though
    ...he is within a range of a couple of Km from both the mandi and Dhatkidih shops, and

    ...he is the person, who used his land, time and toil to produce the cauliflower in the first place

    (cross-posted at Alternative Perspective)

    Sunday, October 08, 2006

    Structure of Opportunities

    The other day in my class on Social Entrepeneurship, I had made a reference to the 'Structure of Opportunities' in a society. Opportunities are not equally distributed in a society, i.e., for some of us certain 'opportunities' come easily, while for others they never do - and therefore, the achievements are not always a function of just 'merit' and 'capability'.

    "...e.g., suppose, you go to Chashire Home or School of Hope - or a T-Shirt manufacturer, etc. - and give a bulk-order of their produce, so that you can sell it in the campus (or elsewhere), make some margins and share it back with them. The chances are that, if you ask, they may give you the products on credit, simply because you come from a "background". That is, you can do this venture without 'working capital'. Morevoer, you also have an easy access to the 'market' (batchmates, campus people, etc.) to sell these products.

    Now, imagine that instead of you, it is one of those construction workers who are there on the campus these days, who approaches the same suppliers (Chashire Home, School of Hope, T-Shirt Manufacturer, etc.), with the same "business plan". S/he will need the 'working capital' and even though being in the 'market' (XL Campus),his/her access will not be as smooth...

    This difference would remain irrepective of the "ability" of the person...

    Around the same time, Thanks to Annie's post on HTOHL, I came across this insightful listing by "M." about these 'opportunities' (or as she puts them 'undeserved privileges') on her blog.

    This is a list worth looking at. Social Entrepeneurship essentially involves creating access to these and similar 'opportunities' for those who don't have them...