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Case 35

Microfinance
The Grameen Project would soon follow—it officially became a bank under the law in 1983. The poor borrowers own 95 percent of the bank, and the rest is owned by the Bangladeshi government. Loans are financed through deposits only, and there are 8.35 million borrowers, of which 97 percent are women. There are over 2,500 branches serving around 81,000 villages in Bangladeshwith a staff of more than 22,000 people. Since its inception, the bank has dispersed more than $10 billion, with a cumulative loan recovery rate of 97.38 percent. The Grameen Bank has been profitable every year since 1976 except three years and pays returns on deposits up to 100 percent to its members.2 In 2006 Dr. Yunus and the Grameen Bank shared the Nobel Peace Prize for the concept andmethodology of microfinance, also known as microcredit or microloans.3

Going Global . . . and Going Public?*
In the world of development, if one mixes the poor and nonpoor in a program, the nonpoor will always drive out the poor, and the less poor will drive out the more poor, unless protective measures are instituted right at the beginning.

–Dr. Muhammad Yunus, founder of the Grameen Bank1 Morethan 2.5 billion people in the world earn less than $2.50 a day. None of the developmental economics theories have helped change this situation. Less than $2.50 a day means that these unfortunate people have been living without clean water, sanitation, or sufficient food to eat, or a proper place to sleep. In Southeast Asia alone, more than 500 million people live under these circumstances. In thepast, almost every effort to help the very poor has been either a complete failure or at best partially successful. As Dr. Yunus argues, in every one of these instances, the poor will push the very poor out! In 1972 Dr. Muhammad Yunus, a young economics professor trained at Vanderbilt, returned home to Bangladesh to take a position at Chittagong University. Upon his arrival, he was struck by thestark contrast between the developmental economics he taught in the classroom and the abject poverty of the villages surrounding the university. Dr. Yunus witnessed more suffering of the poor when, in 1974, inclement weather wiped out food crops and resulted in a widespread and prolonged famine. The theories of developmental economics and the traditional banking institutions, he concluded, werecompletely ineffectual for lessening the hunger and homelessness among the very poor of that region. In 1976 Dr. Yunus and his students were visiting the poorest people in the village of Jobra to see whether they could directly help them in any way. They met a group of craftswomen making simple bamboo stools. After paying for their raw materials and financing, the women were left with a profit ofjust two cents per day. From his own pocket, Dr. Yunus gave $27 to be distributed among 42 craftswomen and rickshaw (human-driven transport) drivers. Little did he know that this simple act of generosity was the beginning of a global revolution in microfinance that would eventually help millions of impoverished and poor begin a transition from destitution to economic selfsufficiency. Dr. Yunus wasconvinced that a nontraditional approach to financing is the only way to help the very poor to help themselves.

What Is Microfinance?
Microfinance involves a small loan (US $20–$750) with a high rate of interest (0 to 200 percent), typically provided to poor or destitute entrepreneurs without collateral.4 A traditional loan has two basic components captured by interest rates: (1) risk of futurepayment, and (2) present value (given the time value of money). Risk of future payments is particularly high when dealing with the poor, who are unlikely to have familiarity with credit. To reduce this uncertainty, many microfinance banks refuse to lend to individuals and only lend to groups. Groups have proven to be an effective source of “social collateral” in the microloan process. In...
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