Grameen Bank and the social business model

On December 10, 2006 Mosammat Taslima Begum, who had borrowed 16 euros from a bank in 1992 to buy a goat, accepted the Nobel Peace Prize in a ceremony held at Oslo City Hall. Begum had taken the loan from a very special kind of bank called Grameen Bank. This loan proved to be a godsend for her, as she became a successful entrepreneur and one of Grameen Bank’s elected board members. It was in this capacity, on behalf of the bank’s investors and borrowers that Begum went to the Norwegian capital to pick up the prize. I mention all this because a few days ago I attended a conference in Madrid given by Professor Muhammad Yunus, an economics professor and the founder of Grameen Bank, the only business corporation to have ever won a Nobel Prize.

First let me give you a few facts about this bank. The word “Grameen”, derived from the word “gram” or “village”, literally means “of the village”. Although its origins go back to 1976 it actually became an independent bank in 1983. It gives loans to the rural poor, especially women who make up around 97% of its clients. These are very small loans known as microcredits.

How do they work? Each borrower must belong to a five-member group. These groups do not provide any guarantee for a loan to one of their members; repayment responsibility solely rests on the individual borrower. However if one member of a group defaults, that group will never receive a loan from Grameen. So it’s a kind of social pressure exerted by the group members. Grameen enjoys very high payback rates—over 98 percent. I’m sure a lot of banks in the advanced world may feel envious.

The Grameen Bank has branched out into over two dozen enterprises represented by the Grameen Family of Enterprises. These organizations include: Grameen Trust, Grameen Fund, Grameen Communications, Grameen Energy, Grameen Telecom…

Yunus is a believer in what are called social businesses. These businesses begin with a goal such as better nutrition or access to education. They obtain start-up capital and attract investors. Where they differ from a rational business is that they do not pay dividends to their investors; all the profits are reinvested. The business is judged not by earnings per share or some other traditional metric but by their efficiency in achieving their social objective. This, for Yunus is a much more effective than traditional charity and provide what Yunus calls “the missing piece of the capitalist system.” 

            But not everything is sweetness and light. Grameen has drawn fire from both the left and right. For Gina Neff of the Left Business Observer the microcredit movement represents a privatisation of public safety-net programs. They say the interest rates are abusive. The neo-liberals call it macrowelfare and think for-profit corporations are a better bet. What do I think? I certainly prefer this kind of solution to the top-down ones favoured by the left. The idea seems a fantastic one to me. Perhaps Grameen is a bit opaque in its accounting. Some claim that their default figures do not reflect reality. I have also found it difficult to interpret the overall impact Grameen has on the Bangladeshi economy. I don’t think Mr. Yunus should be given a free ride but I think he should be applauded for such an exciting innovation. Time will tell how much can be achieved with microcredits and I’m sure they are not a panacea for all the developing world’s problems but I feel they should be given a chance to show that they can produce a beneficial change for the poor around the world.



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