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There
are many reasons to celebrate the award of the Nobel
Peace Prize for 2006 jointly to Muhammad Yunus, the
recognised creator of the ''microcredit'' model of finance
for the poor that has swept across the developing world,
and to the Grameen Bank in Bangladesh that he founded
three decades ago. These reasons go well beyond appreciation
of the valuable human qualities of the man himself,
such as his creativity, persistence, charisma and passionate
advocacy in promoting this model widely and extending
it in various ways. The reasons for celebration also
go beyond regional pride - as South Asians, or even
as citizens of the developing world in general.
One
important reason, of course, is that awards such as
this rescue the Nobel Peace Prize both from the controversial
dogfights that have accompanied some of the political
choices of the past, and from being mired in a very
restrictive notion of the concept of peace. This award,
along with the earlier award to the African environmentalist
Wangari Maathai, shows the Nobel Committee's recognition
that peace is not really possible without more equitable
development.
The citation says as much, claiming that this prize
is being given to Yunus and the Grameen Bank ''for their
efforts to create economic and social development from
below. Lasting peace can not be achieved unless large
population groups find ways in which to break out of
poverty.''
But while this is clearly a much-deserved prize, it
also exposes other weaknesses about Nobel Prizes in
general. It is in some ways a safe, even predictable,
choice. Rumours about this award have been in wide circulation
for some time, given the now almost universal espousal
of microcredit by the World Bank and international development
agencies in general, as well as by many developing country
governments. The UN declared 2005 to be ''the international
year of microcredit'', and there has been enthusiastic
promotion in international circles by Bill Clinton and
others.
Tit is worth noting is that the economist Dr. Muhammad
Yunus received this prize for promoting peace, rather
than the Nobel Prize for Economics. Yet his contribution
has really been in the field of economics, since his
model stood conventional economic theory on its head
and effectively created a new paradigm, which has since
spawned an international industry of theoretical models
to explain its success. This tells us something about
how relatively limited in vision the awards of the Economics
Nobel Prize have been. They have focussed much more
on narrow academic peer recognition than on addressing
real world development issues or processes that actually
transform economies.
What exactly was this innovation called microcredit?
To understand its significance, it is important to begin
with understanding how formal financial institutions
operate. Since giving credit is always associated with
some risk of default - that is, the borrower not returning
the loan amount or paying interest - bankers of all
types usually require some form of surety (collateral)
against which they can lend. Formal banking institutions
therefore require the borrower to have some assets like
land or a house, or a secure job, or a certified credit
history, or some such assurance against which they will
proffer funds.
This obviously eliminates the poor, who are by definition
without significant assets and usually also lack secure
streams of income through regular employment. So the
poor get automatically excluded from formal financial
institutions, and are forced to go to private moneylenders
who charge very high rates of interest. These traditional
moneylenders are able to function in such circumstances
because they can somehow ensure that the loan and interest
are repaid through extra-economic means, or can extract
other forms of payment such a labour services.
It was therefore accepted that the poor were not ''bankable''
for formal financial institutions, or able to access
other financial services such as insurance. Economic
theory had also devised many complicated models to explain
the necessary persistence of traditional money lending
and high interest rates among the poor.
The significance of the Grameen Bank and other microcredit
experiments was that they countered this axiomatic belief
by showing that even formal financial institutions could
provide loans exclusively to the poor and still be assured
of repayment. This is because they are based on the
principle of ''group lending'' whereby loans are made
to a group (of between 5 and 20 people) and therefore
peer pressure acts as an effective mode of ensuring
repayment.
Muhammad Yunus may not be the pioneer of microcredit
- there were cases of similar experiments in the early
1970s in Colombia and Brazil, for example. But he was
the first to make this a viable model capable of being
copied and scaled up, and he also became a tireless
propagator of the cause of microcredit worldwide.
It all began in 1974, during a famine in Bangladesh,
when Yunus was teaching economics at Chittagong University
after receiving a doctorate in the US. In his efforts
to do something to help the famine-ravaged people in
the district, he was visiting nearby villages when he
was persuaded to make his first loan in the village
of Jobra.
He offered around 7000 Bangladeshi taka from his own
funds to a group of 42 bamboo craftspeople in desperate
need. They had no collateral to offer, and no contract
was signed. Nevertheless, the loan was repaid in full,
after the borrowers used the money to buy bamboo, sell
their crafts and repay both Yunus and the traditional
moneylenders to whom they were indebted.
Yunus drew from this the lesson that the poor can indeed
be viable and creditworthy borrowers. But his efforts
to persuade banks to lend to them independently were
fruitless, as the banks all continued to insist on his
personal surety for any loans taken by those without
collateral. In any case, traditional banks were simply
not interested in making tiny loans at high transaction
cost to those with no credit history.
The Grameen Bank was founded in 1976 by Muhammad Yunus
as a result of such experience. It was dedicated to
serving the poorest of the poor, based on Yunus' vision
that even such very poor people were viable credit risks
and could make productive use of small loans to enhance
their earning capacity.
The Grameen bank model that emerged had some important
features, apart from its concentration on the poor as
clients. It involved lending in groups (originally of
five members) who were jointly responsible for the loan.
It required repayment in small periodic instalments,
over a relatively short period. It lent not only to
farmers but also to rural labourers, petty traders,
and most importantly to women. While at first male borrowers
outnumbered their female counterparts, this was consciously
altered so that by the mid 1980s women accounted for
more than 96 per cent of the loans.
This aspect of lending to women has emerged as one of
the more transformatory features of the Grameen model.
Women turned out to be much more reliable borrowers,
whose loans were used for the well-being of the family.
But this also became an important instrument of social
change in the conservative patriarchal context of Bangladeshi
society. Not only did the access to microfinance improve
women's bargaining power within their households, but
the fact of meeting together and being part of groups
led to other ways of thinking in a collective mode that
proved to be quite empowering.
These features have been emulated not only by BRAC (Bangladesh
Rural Action Committee) and Proshikha, the two other
large microcredit NGOs in Bangladesh, but across the
world, as the focus on microcredit has been an important
part of the agenda of multilateral development banks
and even of governments. And the focus on women borrowers
has proved to be one of the more successful results
of the model wherever it has been transplanted.
The spread of this essentially simple idea has been
quite remarkable in the past two decades. According
to the 2005 ''State of the Microcredit Summit Campaign
Report'', at the end of 2004 there were 3,200 microcredit
institutions that reported reaching more than 92 million
clients across the world.
In India too, governments at central and state levels
have been actively promoting microcredit, particularly
to women, through the institution of Self Help Groups
which engage in both savings and loan activities. In
some states such as Karnataka and Andhra Pradesh, such
organisations has been present for some time now, through
the efforts of NGOs such as Mahila Samakhya and Co-operative
Development Foundation.
A further innovation has been to form them into federations
and link them with formal lending institutions. NABARD
(the National Bank for Agriculture and Rural Development)
has a scheme whereby it finances more than 500 nationalised
banks for lending on to Self Help Groups that have shown
they can manage their funds well. The amounts involved
are relatively small and the interest rates are also
quite high (usually around 12 per cent). Bu the scheme
involves very large numbers - around 1.4 millions SHGs
comprising nearly 20 million women, making this Indian
scheme therefore the largest bank-microcredit linkage
in the world.
Despite this spread, and some clear areas of success,
it is a mistake to view microcredit as the universal
development panacea which it seems to have become for
the international development industry. It can at best
be a part of a wider process that also includes working
towards reducing asset inequalities, better and more
egalitarian access to health and education services,
more productive employment opportunities.
The undoubted successes of the microcredit model should
not blind us to some of the problems and concerns that
have been expressed. It still remains difficult to make
microcredit a commercially viable proposition for finance
institutions. Even in Bangladesh, Grameen Bank and BRAC
still depend substantially on subsidies to run their
operations despite the high repayment rates, because
of high costs of transaction and monitoring. Supporters
argue that it is better to spend public money on such
subsidies rather than on other forms of public expenditure,
since it is cost-effective and responsive to local felt
needs.
Yet it is also true that the amounts of money distributed
through microcredit are so small and the periods for
repayment are so short, that they cannot really lead
to effective asset building. Some argue that microcredit
at best acts as a consumption stabiliser, reducing the
adverse effects of shocks such as natural calamities
or seasonal fluctuations, and provides means for taking
advantage of very small business opportunities. In the
absence of other measures or more dynamic growth processes,
this can amount to no more than a redistribution of
incomes among the relatively poor, rather than an overall
increase in incomes of the poor. It can also be associated
with microcredit dependency, involving continued reliance
on loans for consumption rather than put to productive
use.
Similarly, the group lending that delivers high repayment
rates can also become an instrument of stratification,
especially when there are linkages with banks providing
some additional institutional finance to the groups.
There have been cases of women from the most destitute
or socially deprived groups being excluded from membership
of groups containing better off members, because of
fears that their inability to repay will damage the
prospects of other members. In some states of India,
peer pressure has forced women borrowers to take on
expensive loans from moneylenders to repay the loans
from the Self Help Group.
A more damaging argument suggests that microcredit programmes
can have adverse effects if they imply a transfer of
public resources from other public spending, leading
to cuts in public health, sanitation and education expenditure.
This need not happen, but if it does, then it is akin
to a privatisation of public welfare programmes, with
unclear effects on overall development. Further, a focus
on microcredit should not reduce public attention to
ensure adequate institutional finance to rural areas
in general, such as agricultural loans and loans to
small businesses.
All these criticisms do not detract from the importance
of the microcredit model, but they do emphasise that
this in itself cannot be seen as the magic bullet to
end rural poverty. To their credit, both Muhammad Yunus
and the Grameen Bank themselves appear to be aware of
this rather obvious truth, since their interventions
over the past decades have been characterised by continuous
innovation and experimentation. In addition to other
forms of microfinance such as insurance, Grameen has
experimented with housing loans, loans for fisheries
and other small enterprises, venture capital, solar
energy projects, a commercial telecom project with a
Norwegian partner to deliver cheap rural phones, and
now even health care services.
It is this approach, of constantly listening to the
actual needs of the poor, of being flexible in terms
of continuously looking for new solutions and enlarging
possibilities from below, which is the most engaging
aspect of Muhammad Yunus' contribution. Even more than
microcredit alone, it may turn out to be his most positive
influence.
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