There are few people who can be as self-satisfied as Muhammad Yunus. When he goes to bed at night he basks in the glow of his overall goodness, he must look at his family, Nobel peace prize and his billions of dollars and think life is good. His story is the greatest vindication of capitalism which so often is derided for exploiting the poor; he has proved that you can help the poor and make billions. His Grameen Bank started in 1976 in rural Bangladesh with only $27 in capital but now has distributed $6.5 billion in loans.
His business is the template for aspiring micro-credit businesses worldwide including those in Rwanda. In the years following independence, African countries borrowing billions of dollars for huge white elephant projects that were expected to kick-start our economies in the Keynesian model but alas this did not happen. It is only now that we see that the money would have been better spent if it was used for micro-credit. People are better at assessing their priorities or problems and more efficient than government bureaucracies, which due to their size and nature are slower to react to events on the ground.
The top-down model (trickle-down) has been proved not to work so bottom-up models are required, there will still be need for top-down leadership from the government but bottom-up solutions are more democratic, efficient and always have the support of the end-users. Micro-credit exemplifies this ethos, helping people to help themselves and letting them pull themselves out of poverty. Micro-credit is the solution to some of our problems but it has to follow strict rules in order to succeed.
Firstly the company lending has to think local and be in sync with its clients who are often poor. The firm has to abandon all the precepts of large-scale banking such as looking for wealthy clients and charging higher rates. The profit motive must be there otherwise the whole system will crash but the costs must be low and the lender must be sensitized to the problems facing the debtor. Likewise the lender will benefit by knowing the opportunities in the market as well as the pitfalls. Local issues occur independently of global issues; for example a drought in a particular district can lead to economic collapse while the next district is unaffected. Multinationals have the motto “Think global, act local” but in micro-credit it is “Think local, act local.
Secondly the sums lent must be small, in order for the client to be able to repay, for example people sometimes use a goat as collateral because it is the most valuable thing they own. This helps the micro-business to grow organically due to good management and not because of high start-up capital. This also helps limit the risk involved and lower sums mean that you can lend to more people. Micro-credit must help the society in general not single individuals as businesses need to develop alongside their markets. The small sums highlight the fact that micro-credit is needed just to kick-start businesses, sometimes people need as little as $10 to start a business but even that is beyond the means of many people in poverty. This also means that a successful business can be out of debt in a matter of weeks if all goes well unlike firms who borrow larger amounts and can be in debt for years. This also helps turnover money quicker because the quicker they pay the quicker they can lend somebody else.
Thirdly support must be given to the client, it is not enough to just give them money, you have to give them skills, moral support, more time to pay if necessary and help develop symbiotic relationships. It is not the lenders interest for the business to fold and everything must be done to help them. Nobody ever has the whole answer; local knowledge must be added to modern business practices to produce a dynamic system to deal with problems. Education must be very important to the lender and vocational skills must be imparted to borrowers. If the population is better educated then it more likely to succeed, issues like resource management are important because these are often rural areas in delicate eco-systems. The projects must also be sustainable, not only in the environmental sense but economically and socially. Local customs and traditions must also be taken into account.
Lastly, women are the key to the success; in their role as primary care givers they are more likely to spend money wisely. Yunus saw women as the key his success, the same applies to Rwanda where women underpin the rural economy. If a woman is educated then her children are more likely to be educated, and if a woman is economically self-sufficient then her children will be as well. This was seen first hand in rural Rwanda when micro-credit was first introduced, the loans were given to men as they were the head of the family according to tradition but the money often ended up paying for local brew and increased alcoholism. Women however were seen to be more sensible in their handling of money.
In the absence of banking for the poor, or the just generally disadvantaged, micro-credit can fill a void that established banks have left behind. There still needs to be serious regulation of these firms to make sure they are not charging extortionate rates otherwise they can end up just being loan sharks.
The hardest part of banking is scrutinizing the character and determination of the borrower to pay, when someone is borrowing they always promise to pay but circumstances dictate whether they will. Close community ties make it easy to keep track of debtors. Micro-credit develops in conjunction with the needs and aspirations of a community; for now people want money to buy a goat or heifer but eventually they will need money to buy computers or cars. Micro-creditors have to stay in sync with their clients and think like they do no matter how big they get. They can provide micro-solutions for the global problem of poverty, one person as a time.
By Rama Isibo