Muhammad Yunus, Grameen Bank Win Nobel Peace Prize
Muhammad Yunus of Grameen Bank, the granddaddy-o of microfinance/microcredit lending, took the Peace Prize today. His group-lending model revolutionized the financial world by making banking for the poor a viable and effective strategy. Millions have been lifted out of poverty because he took a chance and convinced others to take a chance and lend out money to the poorest of the poor, those with zero credit histories or without an ounce of collateral. The radical (at the time) microcredit scheme was implemented first in Bangladesh in the 70s but has since been replicated around the world, throughout Asia, Latin America, and Africa.
The idea is beautiful in its simplicity: give the poor and destitute access to money through microcredit-- small loans (because banks have traditionally shunned them and moneylenders exploit them)-- as a way to fight poverty and get people on the financial track to improving their livelihoods and economic potential. We're talking seemingly insignificant amounts- as small as $25. Most poor people work in the informal sector-- working in homegrown businesses-- small loan lending gets them to start or expand businesses, revitalizes communities, empowers women and improves their status in the household (Yunus's microcredit lending in Bangladesh targeted women).
Dr. Yunus, the first economist to win the Peace Prize (if I'm not mistaken) apparently beat out some hardnosed diplomats who had brokered peace deals and even Bono, U2 lead singer turned development advocate.
To play devil's advocate:
At the same, I've realized that microfinance (the whole bag including microcredit, savings, other financial provisions for the poor) is becoming very much hyped as the darling child in development circles these days. Is it too good to be true?? Not to rain on Dr. Yunus' big moment but some interesting divergent perspectives on microfinance (via The Discomfort Zone):
First, why is ‘formalized’ microcredit better than the informal credit systems that exist in all poor communities? These are not limited to moneylenders that charge high interest rates, but to foreign remmitances and rotating savings associations.
Second, he makes the point that much of the microcredit is targeted to the very poor. As he points out, they have neither the skills nor the market opportunity to create a viable enterprise. In contrast, those that really could benefit from credit are the people already established in some moderately successful venture. Yet, “The microcredit paradox is that the poorest people can do little productive with the credit, and the ones who can do the most with it are those who don’t really need microcredit, but larger amounts with different (often longer) credit terms.“
Most damagingly, does credit really initiate economic growth? Probably not. “The development of the advanced industrial countries did not depend on the average middle class or poor person having access to credit.”
If the large majority of us in the advanced economies are not entrepreneurs, and have had in our past little sophisticated contact with financial services, and if most of us use credit, when we do, for consumption, why do we make the assumption that in the developing countries, the poor are all budding entrepreneurs; that they will use credit wisely for investment in income production, and are ready for all manner of financial services?
Hype makes it difficult to see clearly. I am thankful, therefore, for this article to bring me back to reality. We cannot assume that simply because people are repaying those small loans that they actually benefitted (remember Kenya), or that they are indeed the ones most in need of that credit.
Credit is not an end in itself, but a means to generating economic opportunity and growth. Yet, in all the hype we have forgotten to question the basic premise. Is lack of credit really the problem? Or only one of many problems? If the latter, it must be delivered only after other barriers have been removed.
And the hype prevents that from happening.
More counter-arguments from Organizations and Markets...