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Microcredit Loans Offer a Way Out of Poverty - 2002-05-03

A Bangladeshi professor who pioneered micro-lending in the developing world said micro-loans can also help the poor in industrial countries. Muhammad Yunus has taken his self-help message to Los Angeles.

Professor Yunus came up with the concept of microcredit lending when he learned that 42 Bangladeshi women needed just $27 to start a series of home-based businesses. The economics professor at Chittagong University lent them the money himself, starting a program that has now helped 2.4 million borrowers in Bangladesh.

The institution he started is called the Grameen Bank or "rural" bank, and Professor Yunus said the loans are made to people with no credit history and no collateral. They may buy a cow to sell its milk or purchase weaving materials to make baskets. More than 90 percent of the loans are made to women because, he said, women care for children and a woman's income directly improves a family's standard of living.

A woman applies for a loan through an informal process with some of her neighbors. "If we can get her interested in a bank loan, we will request her to find four other friends of similar conditions to form a group of five. Once that group is formed, we discuss our rules and procedures, and then ask them if they are interested. They have to choose two of the five as the first recipients of the loans," Professor Yunus said.

After the first two receive their money, and they start to repay the loan, the next two members of the group receive their funds, then the last one.

"And the last person takes a loan, so it continues. And when one loan is paid back, they can borrow again," Professor Yunus said.

There are no written contracts. The bank makes "handshake" loans, based on simple verbal agreements. It has now lent more than $2.6 billion to the poor of Bangladesh, in both the countryside and cities.

In some places, microcredit loans are improving the living standard for the whole community by improving the infrastructure. In Bangladeshi villages with no telephone service, women entrepreneurs borrow money to buy a mobile phone, and their neighbors pay to use it. The Grameen Bank has sponsored more than 11,000 so-called telephone ladies through its telecom subsidiary.

In the 26 years since Professor Yunus started the microcredit bank, similar programs have sprung up from South Africa to China. The Grameen Bank founder was in Los Angeles to help start a program here, to be run by an organization called Volunteers of America. There are great differences in the standard of living between Bangladesh and the United States, but the microcredit lender says the poor face similar problems.

"Whether if it is in Bangladesh or in Los Angeles, the same rejection, the same frustration, the same absence of opportunities, the same shelled-in life. So, given an opportunity, they react the same way. They try to take advantage of their own ability, and move out of that situation themselves. Banks in Bangladesh reject the poor women, poor men. So do Los Angeles banks," Professor Yunus said.

He said the poor can be credit-worthy, despite being new to business. The Grameen Bank is owned by its customers, who have a personal stake in the institution's success. Professor Yunus said because of that, 95 percent of borrowers repay their loans. The bank has expanded to accept saving deposits, and it operates an investment program for retirement pensions.

Those who have set up similar systems in other countries say they work best where there are stable close-knit communities and neighbors who encourage their fellow borrowers to make good on their loans. But economist Muhammad Yunus said even in inner cities that are beset with social problems, people exhibit the qualities that are needed to run a business.

"People themselves probably never found out what potential they had, so they need the opportunity to discover themselves, explore themselves. What you see outwardly is not the reflection of what they are. It is only a reflection of what society has made them into. So people that you see sitting idle, drinking or drug addicts, this is not the real picture of those people. We simply push them into that situation. So remove those pushing pressures and release their own capacity, you see they will be as distinguished people as anybody else," he said.

Muhammad Yunus said optimistically that if the poor receive the help they need to start their own businesses, poverty could be a thing of the past in just a few generations. The world has a long way to go, since World Bank figures show that 1.2 billion people live in poverty now. In the United States, the world's richest industrial country, 31 million people live under the poverty line. That is over 10 percent of the population.

But Professor Yunus said his optimism is based on experience. He has seen his bank and programs like it change the lives of millions of borrowers through microcredit loans. When the families of the borrowers are included in the equation, he said microcredit programs have lifted tens of millions of people out of poverty.