This page has been migrated from an earlier version of this site. Links and images may be broken.
I submitted this piece as an op-ed to the Kitchener Waterloo Record. I’ll post if they accept it.
Political debate in Canada is stale, swinging between those who look to government for solutions and those who look to the free market. This pendulum has swung back and forth on all the major issues: health care, education, industrial policy, and on and on.
The Nobel Peace Prize awarded to Muhammad Yunus and the Grameen Bank he founded is a timely reminder that many of the most promising ideas for a better world are about neither governments nor business. The source of these ideas is often the periphery of societies rather than the centre, and they work from the bottom up rather than the top down. The prize is also a reminder that new ideas are often difficult to classify: some claim that the ideas behind Grameen are socialist, others that they are capitalist, and others that this is an innovative form of aid to the poor. But most importantly, pretty much everyone agrees that this is an idea that works.
The Grameen Bank was created at a cost of $27 in rural Bangladesh to address a very mundane problem facing poor villagers: lack of credit. Before you can grow crops you need money to buy seeds; before you can sell milk you need money to buy a cow; before you can sell bamboo chairs you need money to buy bamboo. The usual route to get this money is to go to a bank for a loan, but big banks can’t make much money from tiny loans to poor people, and banks also face a set of problems caused by lack of detailed information. The usual way for a borrower to guarantee a loan is to use some of their possessions as collateral to guarantee the loan, but poor people have no collateral – that’s what being poor is all about – so there would be no way for a bank to be confident that its loans would be repaid.
For a big bank to individually identify the good risks and the bad risks among its customers would be a costly enterprise, especially compared to the small amounts of the loans that poor people need. So even if a bank were to set up in rural Bangladesh, they would have to charge high interest rates to cover the bad risks, and these high interest rates make loans unaffordable for the very people who need them. End result, no banks.
Without banks, many villagers went to local moneylenders for loans. These moneylenders live locally and had a virtual monopoly on loans, so interest rates were often extortionate and the borrowers were kept in a state of permanent indebtedness. Women faced an additional barrier because they typically had little control over the way household money was spent. So in addition to not having any money, they couldn’t borrow it and the rural poor were trapped in poverty.
In the 1970’s Muhammad Yunus and the Grameen Bank entered the picture with a conviction that they could help people to break out of the credit trap by providing small loans, typically a few tens of dollars, to help people get on their feet. These small loans came to be called micro-credit. Despite the word “bank” in its name, profit is not the primary goal of the Grameen Bank, but it did seek to be self-sustaining and so it needed some new ideas to make its convictions work where the big banks would not go.
The biggest single innovation, and one that has caught the attention of many around the world, was that the Bank does not lend to individuals, but instead to small groups of borrowers. For each group the members get their loan in turn, rather than all at once, with the member most in need – as identified by the group itself – getting the loan first. If the loan is not repaid, none of the other members in the group get their loan.
This simple but ingenious group-lending model is a way of overcoming the information problems that stymied the banks. The group members have an incentive to identify reliable partners, so that they will not lose their own chance for a loan because of a group member defaulting. The group model also helps to prevent members from undertaking projects that are too risky, because other group members would not go along with harebrained schemes that are likely to fail. The fact that each member’s loan depends on the repayment of the others lends itself to mutual support so that the early loans get repaid. Mutual support is supplemented by peer pressure among the members of the group to ensure that each member is committed to repaying. The group lending model is a framework that encourages people to achieve things together that, separately, they could not.
The model works. The Grameen Bank has made loans to over 6 million poor Bangladeshis. The repayment rate on loans is around 98%, which is a remarkable number for people living so close to the edge. What’s more, almost all the borrowers are women, and the loans give them a chance to break free not only of poverty, but also of many of the social constraints that have prevented them from having control over their own lives. The Bank is now largely owned by its members, and ten of its 13-member board of directors are women.
The Grameen model has been widely imitated, with a recent report saying that over 25,000 microfinance organizations now exist, each serving on average over 25,000 low-income customers. Like any other promising new idea, it has been built on by the industrious, exploited by the unscrupulous, and improved by the imaginative. Some endeavours succeed and some fail. The group lending model of micro-credit is not a panacea, but it is an innovation that has made a real difference to millions of people.
Group lending does not fit easily into the right-wing/left-wing spectrum. Former World Bank president James Wolfehnson claims that the award testifies to “the power of entrepreneurialism”, but the Bank is not profit-motivated – in fact it is aimed at fixing things that the pursuit of profit alone has not been able to fix. The Grameen Bank is not an example of “entrepreneurship” unless you extend the idea to mean “anyone with an idea who works at it”, which is a bit far fetched. At the same time, this is a private initiative that is largely independent of the state and which does foster small businesses, so it does not fall under the usual umbrella of left-wing initiatives.
Being left-wing myself, I’d like to label the Grameen Bank left-wing in the sense used by philosopher Peter Singer: it is explicitly on the side of the weak, not the powerful, but in the end it doesn’t matter. What does matter is that it works.
The success of the Grameen Bank reminds us that many of our most influential ideas start with small groups a long way from the centres of power and influence, finding ways for people to work together to solve immediate, concrete problems. The most influential ideas about how to make cities more livable started with Jane Jacobs looking out of her kitchen window in Greenwich Village, and it was Jacobs who said that “new ideas need old buildings” – that they come from the unfashionable parts of town where rents are cheap.
In the middle of all the debate over health services and social services the feminist movement created sexual assault centres and other crisis services for women, addressing a whole set of needs that were not being met within the established framework. Innovations in open source software production such as Linux, and in open content production such as Wikipedia have started independently of governments or markets. The anti-sweatshop movement has led to the creation of independent workplace-monitoring organizations that are a necessary step in pushing companies to implement good working conditions. The list is long and diverse, and each of these initiatives has gone through times when it is not taken seriously, has been torn apart (or nearly so) by internal dissent, and has faced tough and sometimes unresolved decisions about how to work with existing institutions.
But each idea has made a difference, and each provides far more inspiration than the stale “government versus markets” debates we hear so much.