Expanding Microcredit to Reach
the Millennium Development Goal

Muhammad Yunus

Grameen Bank, Bangladesh

Halving Absolute Poverty by 2015

The most daring of all Millennium Development Goals, set by world leaders in the year 2000 at a United Nations Summit, was the goal of halving extreme poverty by 2015. This is the most courageous goal mankind ever set for itself.  For nearly three decades I have been talking about creating a world free from poverty, not because it is unjust to have a world with poverty, but because I am totally convinced from my experience of working with poor people that they can get themselves out of poverty if we give them the same or similar opportunities as we give to others.  The poor themselves can create a poverty-free world ? all we have to do is to free them from the chains that we have put around them. 

However, a feeling is getting stronger in me everyday that very few people are really serious about reaching the goal of halving poverty by 2015.  Leaders who made this bold announcement have gone back to their other important commitments, feeling that since the decision has been taken at the highest level, that actions will follow, and a well-coordinated powerful machinery will get activated to get the job done.  Unfortunately, so far it has not happened, and there is a chance that these courageous millennium goals will degenerate into the many lofty goals that were set in the past but never achieved.

It is not that I am a pessimist, I am a compulsive optimist despite the bad signs that I see. I am an optimist because I am convinced that poverty is not as difficult a subject as the experts keep warning us about, because this is about people.  I don't see the possibility of a human being becoming a 'problem' when it comes to his or her own well-being.  All the ingredients for ending poverty of a person always comes neatly packaged with the person himself.  A human being is born in this world fully equipped not only to take care of himself (which all other life-forms can do too), but also to contribute in enlarging the well-being of the world as a whole (that's where special role of a human being lies).  Then why should one billion plus people on the planet suffer through a life-time of misery and indignity and spend every moment of their lives looking for food for physical survival alone ?  We must find some explanations.  This will help us achieve the 2015 goal.

Poverty is not Created by the Poor People

Poverty is not created by the poor people, so we shouldn't give them an accusing look.  Poverty has been created by the economic and social system that we have designed for the world.  It is the institutions that we have built, and feel so proud of, which created poverty.  It is the concepts we developed to understand the reality around us, made us see things wrongly. They took us down a wrong path, and caused misery for people.  It is our policies borne out of our reasonings and theoretical framework, with which we explain interactions among institutions and people, that caused this problem for so many human beings.  It is the failure at the top - rather than lack of capability at the bottom - which is the root cause of poverty.

Grameen Bank

I became involved in the poverty issue not as a policymaker or a researcher, but because poverty was all around me. I could not turn my eyes away from it.  In 1974, I found it difficult to teach elegant theories of economics in the classroom in the backdrop of a terrible famine in Bangladesh.  Suddenly I felt the emptiness of those theories in the face of crushing hunger and poverty.  I wanted to do something immediate to help people around me.  Not knowing what I could do, I decided to find a way to make myself useful to others on a one-on-one basis.  I wanted to find something specific to do to help another human being just to get by another day with a little more ease than the previous day.  That brought me to the issue of poor people's struggle and helplessness in finding microscopic amounts of money in support of their efforts to eke out a living.  I was shocked to discover a woman borrowing US $ 0.25 with the condition that the lender will have the exclusive right to buy all she produces at the price the lender decides !  What a way to recruit slave labour.  I decided to make a list of the victims of this money-lending "business" in the village next door to our campus.  When my list was done it had the names of 42 victims.  Total amount they borrowed was US $ 27 !  What a lesson for an economics professor who was teaching his students the Five Year Development Plan of the country with billions of dollars in investments to help the poor.  I could not think of anything better than offering this US $ 27 from my own pocket to get the victims out of the clutches of the moneylenders.  The excitement that was created by this action got me further involved in it.  The question that arose in my mind was, if you can make so many people so happy with such a tiny amount of money, why shouldn't you do more of it ?

I have been trying to do just that ever since.  First thing I did was to try to connect the poor people with the bank located in the campus.  It did not work.  The bank said that the poor are not creditworthy.  After all my efforts over several months failed I offered to become a guarantor for the loans to the poor.  I was stunned by the result.  The poor paid back their loans every single time !  But I kept confronting  difficulties in expanding the programme through the existing banks.  Several years later I decided to create a separate bank for the poor, to give loans without collateral.  Finally in 1983 I succeeded in doing that.  I named it Grameen Bank or Village bank. 

Today, it gives loans to 4.5  million poor people, 96 per cent women, in 50,936 villages in Bangladesh.  The bank is owned by the borrowers. Generally the repayment rate has been over 98 per cent. Today it is 99%.  It makes profit.  Financially, it is self-reliant ? it has stopped taking donor money since 1995, stopped taking loans from domestic market since 1998. It lends out about half a billion dollars a year, all from its own deposits.  Over 66 per cent of its deposits come from bank's own borrowers.  Deposits amount to 104 per cent of the outstanding loans.  If we combine both deposits and own resources it becomes 132 per cent of loans outstanding.

          It gives income generating loans, housing loans, and student loans to the poor families. To prepare the next generation to stay out of poverty, Grameen Bank encourages the children of Grameen families to enroll in school, stay in school and do well in school.  Grameen Bank offers scholarships to top students of each branch, and gives student loans to all students who are going to universities, medical schools, engineering schools or other professional schools. About 8,000 students at various levels of school education now receive scholarships each year. By March, 2005, 5,651 students received higher education loans, of them 5,181 students are studying at various universities; 82 are studying in medical schools, 143 are studying to become engineers, 245 are studying in other professional institutions.

        More than 600,000 houses have been built with loans from Grameen Bank. 
To date Grameen Bank has provided loans to 109,092 borrowers to buy mobile phones and offer telecommunication services in nearly half of the villages of Bangladesh where this service never existed before.

Grameen Bank has also taken up a special programme, called Struggling Members Programme, to reach out to the beggars.  They receive interest fee loans, conditions of which are decided between the Grameen Bank and the struggling member. Members  are not required to give up begging, but  are  encouraged  to take up an income-generating activity like selling popular consumer items door to door, or at the places of begging. More than 42,000 beggars have already joined the programme. Many have left begging completely.

Microcredit Summit Phase II (2006-2015) Goals

Grameen's ideas have spread around the world. Microcredit Summit of 1997 set the gaol to reach 100 million poorest families with microcredit by 2005. I am sure we'll
reach that number by the end of this year, as planned.

Last month, in the latest Summit that took place in Santiago, Chile, phase II of Microcredit Summit has been declared. Two new goals have been set for phase II to be achieved by 2015, coinciding with the year set to achieve  the Millennium Development Goals.

The two new goals set for the Summit campaign are to work to ensure that 175 million of the world's poorest families, especially the women of those families are receiving credit for self employment and other financial and business services by the end of 2001. With the average of five in a family, this would affect 875 million family members. A second goal of the campaign is to ensure that 100 million of the world's poorest families move from below US$ 1 a day adjusted for purchasing power parity (PPP) to above US$ 1 a day adjusted for PPP, by the end of 2015. With an average of five per family, this would mean that 500 million people would have risen above S$ 1 a day, nearly completing the Millennium Development Goal on halving absolute poverty.
 

What Has Been the Impact on the Poor ?

Independent studies show that microcredit has a host of positive impacts on families that receive it.  A World Bank study in 1998 reported that 5% of Grameen Bank, BRAC, and RD 12 of BRDB borrowers move out of poverty each year.  A recent World Bank study by Shahid Khondkar (2003) show that micro-credit programs operating in Bangladesh over a long period, have produced a greater impact on extreme poverty than on moderate poverty.  "The results of this study strongly support the view that microcredit not only affects the welfare of participants and non-participants but also the aggregate welfare at village level" ¾ Khondkar concluded.

The role of microcredit in disaster situations and post conflict areas has also been well documented, enabling families in those areas to rebuild economic activities and livelihoods when these services are flexible, convenient and easily accessible.  Studies have also shown that microcredit programs improve the coping mechanisms of the poor.  This was demonstrated very clearly during times of disaster such as during the floods in Bangladesh in 1998.  A large number of impact studies have been made on Grameen Bank from different perspectives.  They all came up with findings showing significant impact on its members across wide range of economic and social indicators, including increased income, improved nutrition, better food intake, better consumption on clothing, better housing, lower child mortality, lower birth rate, higher adoption of family-planning practices, better healthcare, better access to education for the children, empowerment of women, participation in social and political activities, etc.

According to Grameen Bank's own internal survey, 55% of its borrower families have crossed the poverty line by 2005, judging this on the basis of ten indicators (size of loan, amount of savings, housing condition, furniture in the house, provision of warm clothing, education of the children, etc.) set by Grameen Bank to track impact of its program on the poor families that it serves. 

In 2001, GB introduced a "Five Star" grading system of branches where a branch can win a star for a particular accomplishment.  Two of these stars are related to impact of the program.  A branch can win a star if the children of all the borrowers are in school or completed at least primary school.  Another star can be obtained if all the families under the branch cross over the poverty line satisfying the stringent conditions laid down by the ten indicators formulated by Grameen Bank. This five star system allows us to track our progress in a systematic and effective way.

How to Expand the Outreach

Although the expansion of microcredit to the poor is encouraging, there is still a number of constraints which prevent microcredit spreading even more quickly.  Bangladesh is still the only country where microcredit outreach is over 75% of the poor families.  In most of the countries it has not even reached 10% of the poor families.  To reach the Summit's phase II goal of 175 million poor families by 2015, and to ensure that 100 million of those who were below US$ 1 rise above it, each country must reach out to 50% of the poor families within that country.  Therefore, there is a lot of catching up to do.

Two major issues are always discussed in connection with the institutionalisation of microcredit in Bangladesh and elsewhere. They are 1) financing of microcredit and 2) legal and regulatory framework for integrating microcredit with the national financial system. Both issues are inextricably connected with each other.  If the issue of appropriate legal and regulatory framework for microcredit institutions is resolved, then the funding issue becomes much easier to address. 

Under the policies adopted in Grameen Bank II, new branches are financed entirely with deposits mobilised within the locality served by the branch. The response is excellent. A new branch can mobilise more deposits than it needs to finance its loan operation, within the first month. The branch becomes profitable within a maximum of six months.  Grameen Bank can mobilise deposits because it is a formal bank.  NGOs cannot take deposits because NGO law does not support it. Microcredit can be funded locally at the village level, provided legal framework is created to allow microcredit programmes (MCP) to accept public deposits. If this legal framework is created, donor funding can be reserved for only start-ups, shoe-horning NGO-MCPs to graduate into microcredit banks, training, research and development, other technical support.  This will give donor money more leverage than it currently gets.

There are many NGO-MCPs with over 100,000 microcredit borrowers in Bangladesh and around the world. It is not easy to run large microcredit programmes when the prime source of money is donor money. The paradox of the situation is that many of these NGOs operate within areas where there is plenty of money all around them.  They can easily get to it if only they are allowed.  Not only are they not allowed to take public deposits, in many countries they are not even allowed to take savings from their own borrowers.  A legal framework to create enabling environment for the NGOs to convert themselves into microcredit banks will change the whole microcredit scenario.

I am strongly advocating that lawmakers pay serious attention to this issue in the context of reaching the Millennium Develop Goal of reducing poverty by half by the year 2015.  This is one enabling step the lawmakers must take.

Creating Microcredit Regulatory Commission

By now all policymakers do recognise that microcredit needs different kind of banking format than conventional banking. Creation of separate legal framework, and a separate Microcredit Regulatory Commission will be the result of that recognition.  Some countries (for example Pakistan, Philippines, Venezuela, Uganda) have already passed laws to create microcredit banks. But they closely followed the law that already exists for the conventional banks. I argue that we need to have sharper departure from the existing banking laws. I am not aware of any separate regulatory commission for microcredit that has been created by any country. It will be an important initial step towards institutionalisation of microcredit.  India has created separate regulatory body for rural finance.  I see no reason why a separate regulatory body cannot be created for microcredit which can develop into a dynamic financial sector in any country with appropriate policy support.  Central bank of the country can play an important role within the microcredit commission.  Selection of the first chairman of the commission will be very critical.  He or she must have deep understanding of microcredit, and patience and skill for creating an entirely new financial sector.

Essential Elements in Legal Framework for a Microcredit Bank

The law for creating a microcredit bank should have two things in mind.  First, it should allow and encourage NGOs to convert one or more units of their microcredit operations into MCBs to test out the formal financial world.  The law and the microcredit commission should make sure that the NGOs like the new experience.  If NGOs convert more and more of their units into MCBs, this will be a testimony to the success of the new law.

Second, the law should encourage creation of start-up MCBs, without going through the process of being born as an NGO-MCP as a first step, and then converting it into an MCB as a second step.

There should be a clear definition of an MCB so that the law is not misused.  The law should state clearly that an MCB is a bank which primarily serves bottom 50 percent (or bottom 25 per cent, as the case may be), or people earning less than a dollar (or less than two dollars) a day.  There should be clear mention that MCBs would give preference to poor women. The law should be flexible enough to allow a part (say, 40 per cent) of the business of MCBs to go outside of strictly microcredit type banking, such as, providing credit for small businesses with or without collateral. The law should allow poor microcredit borrower to grow into borrowing larger loans as her business grows. No microcredit borrower should be forced to leave a MCB because her loan size has grown bigger over time.

Deposit Mobilization

MCBs should be allowed to take deposits from borrowers as well as from the public.  The restriction on the amount that it can mobilize as deposit can be related to the amount of loans outstanding of the MCB.  For example, the deposit mobilization may not exceed a maximum of twice the amount of the loans outstanding.

NGO MCPs and Deposit Mobilization

NGO MCPs that are not registered as MCBs should be allowed to mobilize deposits but only from their members and not from the general public.  They may be allowed to take borrower deposits until the balance of deposits equals 75 per cent of their outstanding loans. 

Deposit Insurance

It is necessary to protect the deposits of the poor against the risk of failure, fraud or mismanagement of MCBs. There should be some arrangement for deposit insurance for deposits mobilized by MCBs to protect the interest of the depositors.

Interest Rate

There should be no restrictive laws limiting the interest rate to be set for MCBs.  MCBs may charge interest rate higher than the interest rate charged by commercial banks for their small loans.  But there should be full disclosure to the borrowers and to the public, of the interest rates being charged and how it is calculated.

The Microcredit Commission should not rush to regulate and overregulate MCBs.  As MCBs innovate and develop, they require a flexible and enabling regulatory environment.  Keeping in mind that these programs are designed to help the poor, governments should not exert too much control which will discourage MCBs from expanding their operation.

Transforming NGO-MCPs into MCBs will be the only way for self-reliance for the MCPs.  Creation of MCBs can strengthen the financial system of a country by filling in a vacuum left by the conventional banks, and give a boost to the emergence of a local level grass-root economy.

Which Microcredit We Are Talking About ?

The word "microcredit" did not exist before the seventies.  Now it has become a buzz-word among the development practitioners.  In the process, the word has been imputed to mean everything to everybody.  No one now gets shocked if somebody uses the term "microcredit" to mean agricultural credit, or rural credit, or cooperative credit, or consumer credit, credit from the savings and loan associations, or from credit unions, or from money lenders.  When someone claims microcredit has a thousand year history, or a hundred year history, nobody finds it as an exciting piece of historical information.

 Grameencredit

 Whenever I use the word "microcredit" I actually have in mind Grameen type microcredit or Grameencredit.  But if the person I am talking to understands it as some other category of microcredit my arguments will not make any sense to him.  Let me list below the distinguishing features of Grameencredit. This is an exhaustive list of such features.  Not every Grameen type programme has all these features present in the programme.  Some programmes are strong in some of the features, while others are strong in some other features.  But on the whole they display a general convergence to some basic features on the basis of which they introduce themselves as Grameen replication programmes or Grameen type programmes. 

General features of Grameencredit are :
(a) It's mission is to help the poor families to help themselves to overcome poverty.  It is targeted to the poor, particularly poor women.  Reaching the poor is its non-negotiable mission.  Reaching sustainability is a directional goal.  It must reach sustainability as soon as possible, so that it can expand its outreach without fund constraints.
(b) It is offered for creating self-employment for income-generating activities and housing for the poor, as opposed to consumption.
(c) Most distinctive feature of Grameencredit is that it is not based on any collateral, or legally enforceable contracts.  It is based on "trust", not on legal procedures and system.
(d) All loans are to be paid back in installments (weekly, or bi-weekly).
(e) In order to obtain loans a borrower must join a group of borrowers.
(f) Loans can be received in a continuous sequence.  New loan becomes available to a borrower if her previous loan is repaid.
(g) Simultaneously more than one loan can be received by a borrower.
(h) It comes with both obligatory and voluntary savings programmes for the borrowers.
(i) Generally these loans are given through non-profit organizations or through institutions owned primarily by the borrowers.  If it is done through for-profit institutions not owned by the borrowers, efforts are made to keep the interest rate at a level which is close to a level commensurate with sustainability of the programme rather than bringing attractive return for the investors.  Grameencredit's thumb-rule is to keep the interest rate as close to the market rate, prevailing in the commercial banking sector, as possible, without sacrificing sustainability.  In fixing the interest rate market interest rate is taken as the reference rate, rather than the moneylenders' rate.
(j) It was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be "not creditworthy".  As a result it rejected the basic methodology of the conventional banking and created its own methodology.
(k) Grameencredit gives high priority on building social capital.  It is promoted through formation of groups and centres, developing leadership quality through annual election of group and centre leaders, electing board members when the institution is owned by the borrowers. To develop a social agenda owned by the borrowers, something similar to the "sixteen decisions", it undertakes a process of intensive discussion among the borrowers, and encourage them to take these decisions seriously and implement them.  It gives special emphasis on the formation of human capital and concern for protecting environment. It monitors children's education, provides scholarships and student loans for higher education.  For formation of human capital it makes efforts to bring technology, like mobile phones, solar power, and promote mechanical power to replace manual power.
(l) It provides service at the door-step of the poor based on the principle that the people should not go to the bank, bank should go to the people.
(m) It promotes credit as a human right.

 Grameencredit is based on the premise that the poor have skills which remain unutilised or under-utilised.  It is definitely not the lack of skills which make poor people poor.  Grameen believes that the poverty is not created by the poor, it is created by the institutions and policies which surround them.  In order to eliminate poverty all we need to do is to make appropriate changes in the institutions and policies, and/or create new ones.  Grameen believes that charity is not an answer to poverty.  It only helps poverty to continue.  It creates dependency and takes away individual's initiative to break through the wall of poverty.  Unleashing of energy and creativity in each human being is the answer to poverty.

Grameen brought credit to the poor, women, the illiterate, the people who pleaded that they did not know how to invest money and earn an income.  Grameen created a methodology and an institution around the financial needs of the poor, and created access to credit on reasonable term enabling the poor to build on their existing skill to earn a better income in each cycle of loans.

If donors can frame categorywise microcredit policies they may overcome  some of their discomforts.  General policy for microcredit in its wider sense, is bound to be devoid of focus and sharpness.

The Role of Social Business Enterprises

A principal reason that microcredit has been effective is because it used the market principles to achieve social goals. It is able to cover its costs, which enables it to expand its reach and be sustainable. If we are to achieve the MDG of halving extreme poverty by 2015, we need to envision other enterprises like microcredit, that are aimed at achieving social goals, but which are also carried out in a business way.

 Many of the problems in the world remain unresolved because we continue to interpret capitalism too narrowly.  In this narrow interpretation we create a one-dimensional human being to play the role of entrepreneur.  We insulate him from other dimensions of life, such as, religious, emotional, political dimensions.  He is dedicated to one mission in his business life ---- to maximize profit.  He is supported by masses of one-dimensional human beings who back him up with their investment money to achieve the same mission.  The game of free market works out beautifully with one-dimensional investors and entrepreneurs.  We have remained so mesmerised by the success of the free market that we never dared to express any doubt about it.  We worked extra hard to transform ourselves, as closely as possible, into the one-dimensional human beings as conceptualised in theory to allow smooth functioning of free market mechanism.

Suppose we postulate a world with two kinds of people, both one-dimensional, but having different objectives.  One type is the existing type, i.e. profit maximizing type.  Second type is a new type, who are not interested in profit-maximization.  They are totally committed to make a difference to the world.  They are  social-objective driven.  They want to give better chance in life to other people.  They want to achieve their objective through creating/supporting sustainable business enterprises.  Their businesses may or may not earn profit, but like any other businesses they must not incur losses.  They create a new class of business which we may describe as "non-loss" business.

Can we find second type of people in the real world ?  Yes, we can. Aren't we familiar with "do-gooders" ?  Do-gooders are the same people who are referred to as "social entrepreneurs" in formal parlance.  Social entrepreneurism is an integral part of human history.  Most people take pleasure in helping others.  All religions  encourage this quality in human beings.  Governments reward them by giving tax breaks.  Special legal facilities are created for them so that they can create legal entities to pursue their objectives.

Some social entrepreneurs (SE) use money to achieve their objectives, some just give away their time, labour, talent, skill or such other contributions which are useful to others.  Those who use money may or may not try to recover part or all of the money they put into their work by charging fee or price.

We may classify the SEs, who use money, into four types :
i) No cost recovery
ii) Some cost recovery
iii) Full cost recovery
iv) More than full cost-recovery
Once a SE operate at 100% or beyond the cost recovery point he has entered the business world  with limitless possibilities.  This is a moment worth celebrating.  He has overcome the gravitational force of financial dependence and now is ready for space flight !  This is the critical moment of significant institutional transformation.  He has moved from the world of philanthropy to the world of business.  To distinguish him from the first two types of SEs listed above, we'll call him "social business entrepreneur" (SBE).

With the introduction of SBEs, the market place becomes more interesting and competitive.  Interesting because two different kinds of objectives are now at play creating two different sets of frameworks for price determination.  Competitive because there are more players now than before.  These new players can be equally aggressive and enterprising in achieving their goals as the other entrepreneurs.

SBEs can become very powerful players in the national and international economy.  Today if we add up the assets of all the SBEs of the world, it would not add up to even an ultra-thin slice of the global economy.  It is not because they basically lack growth potential, but because conceptually we neither recognised their existence, nor made any room for them in the market.  They are considered freaks, and kept outside the mainstream economy.  We do not pay any attention to them, because our eyes are blinded by the theories taught in our schools.

If SBEs exist in the real world, it makes no sense why we should not make room for them in our conceptual framework.  Once we recognise them supportive institutions, policies, regulations, norms, and rules will come into being to help them become mainstream.

With the economy expanding at an unforeseen speed, personal wealth reaching unimaginable heights, technological innovations making this speed faster and faster, globalisation threatening to wipe out the weak economies and the poor people from the economic map, it is time to consider the case of SBEs more seriously than we did ever before.  Not only is it not necessary to leave the market solely to the personal-gain seekers, it is extremely harmful to mankind as a whole to do that.  It is time to move away from the narrow interpretation of capitalism and broaden the concept of market by giving full recognition to SBEs.  Once this is done SBEs can flood the market and make the market work for social goals as efficiently as it does for personal goals.
Let us not expect that a social business enterprise will come up, from its very birth, with all the answers to a social problem.  Most likely, it will proceed in steps.  Each step may lead to the next level of achievement.  Grameen Bank is a good example in this regard.  In creating Grameen Bank I never had a blue-print to follow.  I moved one step at a time, always thinking this step will be my last step.  But it was not.  That one step led me to another step, a step which looked so interesting that it was difficult to walk away from.  I faced this situation at every turn.

If we create the right environment, SBEs can take up significant market share and make the market an exciting place for fighting social battles in ever innovative and effective ways. Lets get serious about social business entreprises.

Conclusion

 Next five years will be very critical in terms of making adequate institutional, financial, and policy preparations for reaching the MDG of 2015.  We have only ten years left for reaching the goal.  If we fail to make appropriate preparations we'll fail to achieve the goal.  Certainly we do not wish to accept the option of failure.

 Microcredit institutions, along with a whole generation of other social business enterprises, can play a vital role in attaining the MDG of halving extreme poverty by 2015.  Issues raised in this paper needs to be seriously considered to get the world ready for successfully completing the most exciting task mankind ever embarked on.  Let us not fail in this endeavour.