In the past century the World Bank has poured staggering billions of dollars in loans, grants and other aid into the Third World, with not very much to show for the money except some turgid infrastructure projects. Even these bureaucrats concede that most of the money they have lent out has bypassed the poor.
Who should fill the vacuum? Can the private sector reduce poverty?
It can, and it reveal is the Grameen Bank, the brainchild of Muhammed Yunus, formerly an economics professor at the Chittagong University in Bangladesh. Yunus showed the World Bank how to fight poverty--at a profit.
The Grameen Bank started in 1983 by lending amounts ranging from just $30 to $200 directly to poor people in Bangladesh. Applicants didn't have to be able to read or write; no collateral or credit check was required.
The bank's strategy was to lend money to entrepreneurs (or would-be entrepreneurs) who needed only a few dollars to buy supplies and tools. Borrowers might make bamboo chairs, sell goats' milk or operate rickshaws.
By avoiding the usurious interest rates of local moneylenders--often 20% a month--many of these villagers finally broke out of poverty. Their small businesses grew, and thousands of borrowers now own land, a home (often using a $300 Grameen house loan) and even a cell phone (through Grameen Telecom).
By now, the Grameen Bank has made millions of these tiny loans, totaling $2.5 billion. Note that Grameen is a for-profit, private-sector bank that charges interest of 20% per year. Amazingly, Grameen's loss rate is about 2%, largely because borrowers are bound together in small, local groups. If anyone in the group defaults, no one else may borrow more. That's a powerful incentive.
You could call this social collateral. The strategy has been used by other micro-lenders in the Third World, and in a way it is reminiscent of what went on in small building-and-loan societies generations ago in the U.S., in which borrowers and savers all knew one another.
Total number of borrowers is 7.34 million, 97 per cent of them are women. Grameen Bank does not require any collateral against its micro-loans. Since the bank does not wish to take any borrower to the court of law in case of non-repayment, it does not require the borrowers to sign any legal instrument.
Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. Repayment responsibility solely rests on the individual borrower, while the group and the centre oversee that everyone behaves in a responsible way and none gets into repayment problem. There is no form of joint liability, i.e. group members are not responsible to pay on behalf of a defaulting member.
Successful Grameen borrowers are not starving, and neither are their children. Most of the Grameen Bank's 2,468 branches are profitable, though marginally. According to the company October 2007 report, it works in 80,257 villages. Total staff is 24,703.
Total amount of loan disbursed by Grameen Bank, since inception, is Tk 347.75 billion (US $ 6.55 billion). Out of this, Tk 313.11 billion (US $ 5.87 billion) has been repaid. Current amount of outstanding loans stands at TK 34.64 billion (US $ 504.26 million). During the past 12 months (from Nobember’06 to October'07) Grameen Bank disbursed Tk. 50.27 billion (US $ 733.60 million). Monthly average loan disbursement over the past 12 month was Tk 4.19 billion (US $ 61.13 million).
Projected disbursement for 2007 is Tk 65.00 billion (US $ 930 million), i.e. monthly disbursement of Tk 5.42 billion (US $ 77.50 million). End of the year outstanding loan is projected to be at Tk. 40.00 billion (US $ 572 million). Loan recovery rate is 98.35 per cent.
Yunus' success has inspired hundreds of other micro-lending operations worldwide--including at the World Bank.
The Grameen Bank is powerful proof that the private sector can perform most of the World Bank's functions. There is a renaissance occurring in private charity. Credit innovative organizations like Habitat for Humanity, which can catch the imagination of the public; and credit the huge fortunes that have been created by the current bull market. With the Bill and Melinda Gates Foundation, for example, Bill Gates has finally shoveled some of his money out into the world. Many more bull market moguls will be giving money away. The next 50 years will see tens of trillions of dollars in wealth pass from one generation to the next, and a fair amount of this will go to charities.
The World Bank should not overlook a most important lesson: The World Bank is a puny force in fighting poverty compared with the private sector. It should limit itself to encouraging developing nations to provide the infrastructure (private property rights, sound money policy, limited government) necessary for private markets and independent charities to flourish.
Victor Adedoyin
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