Saturday, October 21, 2006

Microfinance and Muhammad Yusuf

I got a big shock when I came to know for the first time that 300 million Indians earn less than one dollar a day. As a matter of fact what we get to see in urban India is just the ‘top-brass’ of English speaking, educated, knowledge workers. No doubt! The 1991 economic reforms has definitely turned out very good for middle class population in India, but the poor and uneducated population of the country continue to suffer. Access to basic education, healthcare and food is still a huge problem for these poor people. The next question came to my mind was ‘How to solve the problem of poverty?’ After observing Muhammad yusuf’s ‘Microfinance’ revolution in Bangladesh for quiet some time, I am getting confidence that the poverty problem indeed can be addressed to a major extent.

Before getting into details of Muhammad Yusuf, let me classify educated Indians into two categories. The first category is ‘best-and-best’, which consists of intelligent, educated people. These people in turn go to best institutions in developed countries (Especially in US) work with best people and achieve great things. For example one third of Silicon Valley entrepreneurs are from India and China. These entrepreneurs (Most of them are IIT educated who left the country in 1970s) created world class organizations and generated huge amount of wealth. The second category of people ere also equally intelligent and smart but stayed in the country by accepting the limitations of the system. These people strongly believed in ‘bottom-up’ way of revolution and made a huge difference to the country. People like Narayana Murthy, Pranoy Roy, Dr.APJ Abdul Kalaam fall into this category. This great man Dr.Muhammed Yusuf also belongs to the same category.

Yusuf has created a revolution in Bangladesh by empowering poor people (especially ladies) by his knowledge, persistence, commitment and hard-work. His contributions have made so much difference that; he got the ‘Noble peace price’ for the year 2006 and the announcement read:

The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to create economic and social development from below. Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights.

The term Microfinance is a term used to refer to the activity of provision of financial services to clients who are excluded from the traditional financial system on account of their lower economic status. These financial services will most commonly take the form of loans (which is called as microcredit) and micro-savings, though some microfinance institutions will offer other services such as micro-insurance and payment services. Say for example if your home servant (who is about 50 year old) wants a loan of Rs.10000 it is almost impossible to get it from any banks today. What if such small loans can be given to poor people and train them to become entrepreneurs? That’s exactly what Yusuf has done in Bangladesh.

The concept of microfinance originated in Bangladesh, around 1976 through a pioneering experiment by Dr. Yunus who was then a professor of economics. Dr. Yunus and the Grameen Bank (http://www.grameen-info.org/) have successfully implemented microfinance in Bangladesh. The primary differentiator between microfinance and the conventional credit disbursal mechanism lies in the ‘joint liability’ concept. A group of individuals, almost always women, form an association to apply for loans. All members of the assocation undergo a training programme on the basic procedures and system requirements. Loans to individuals within the group are approved by its other members; the group is likewise jointly responsible for its repayment. To minimise the financial burden, there are upper limits on the amounts lended and lower limits on the duration of repayment.

Inspite of its limitations (Loan defaulting problems, venture failure) Yunus was able to tranform people’s lives in three decades. Since most of the beneficiaries were ladies, it indirectly brought other societial improvements in education, healthcare and birth control. Also this loan prevented poor people from local goons who used to exploit them by giving loans at very high interest rates. Following are the statistical evidences which speaks the success of this program:

  1. Breaking all myths 97% of the loans were repayed.
  2. From fewer than 15,000 borrowers in 1980, the membership had grown to nearly 100,000 by mid-1984. By the end of 1998, the number of branches in operation was 1128, with 2.34 million members (2.24 million of them women) in 38,957 villages. There are 66,581 centers of groups, of which 33,126 are women. Group savings have reached approximately USD 162 million, out of which approximately USD 152 million are saved by women.
  3. As of now 90% of the Gremeen Bank is owned by people and the remaining 10% is supported by the government.
  4. The kitty is growing strong and fast. Some more information can be found from:
    http://www.grameen-info.org/bank/GBGlance.htm

In conclusion Yusuf has successfully demonstrated true ‘Leadership’ by transforming million’s of poor people’s lives. This example once again proves my strong belief that promoting Entrepreneurship is the only way to eradicate poverty in countries like India. The technology based Entrepreneurship will result in ‘top-down’ wealth creation by empowering educated, middle class population. At the same time concepts like microfinance will result in ‘bottom-up’ wealth creation enabling uneducated, poor people.

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