It seems strange that having been living in the land of Mohammed Yunus and Microcredit for eight months, I’ve yet to really discuss either. Well, in recent weeks circumstances contrived forcing me to read up a little more about both.
Yunus, a Nobel laureate for Economics, is the father of microcredit and is referred to as the ‘banker to the poor’. Denied access to credit to purchase basic necessities or to invest in a child’s education by a banking sector which felt them unworthy borrowers, poor people instead are forced to borrow from village level loan sharks who not only demand excessive interest rates but impose numerous other conditions as well. Yunus, an economics professor at the time, felt that the bank’s discrimination was both unfair and unjustified. He set about creating a system which would grant the poor access to credit while ensuring the sustainability of the bank. Providing small loans with low interest rates overwhelmingly to poor women (more reliable than men financially, generally discriminated against and more likely to invest the money in the family) the microcredit model was born. To ensure security, Grameen Bank (Village Bank) overtime built up networks of village depositors. Security was built on trust and honour. Within three years, Grameen could show that 98% of loans were repaid on time.
Microcredit has been around for over 30years now and has spread throughout the world, not least through Bangladeshi entities like Grameen and BRAC.
Needless to say, it’s not all roses.
While micro-credit has been proven to provide poor families with an avenue out of poverty, the idea of providing credit to already impoverished people, to me, is a bit off-putting. Of course there is risk analysis involved and one gets the impression that because the bank is not-for-profit, it will be sure to protect potential customers/beneficiaries. But as microcredit has become more popular, it seems to have moved away from Yunus’ principles. It is now used by thousands of NGOs and corporations in Bangladesh alone, as a tool for poverty reduction but perhaps more commonly, as an income generating source for those entities who then claim to reinvest that income through their development programmes. There are, however; any number of reports of massive personal corruption, charging of extortionate interest rates, fraud and major violence in the microfinance sector.
Many also question the so-called empowerment effect of microcredit. The idea is that by providing loans to women and involving them in village networks, they will gain extra respect within the family, will enjoy more freedom to participate in community activities and therefore inequality between the sexes will decrease. But critics say that while this approach to tackling inequality is certainly welcome it is based on a false premise – that gender discrimination is due to financial inequalities when in fact it is predominantly about prevailing customs, traditions and attitudes towards the role of women and men. It’s not that financial equality would not improve the lot of women but that given the size of the microcredit industry, there is a risk that it could deflect the focus from the major underlying causes.
While Grameen cannot and should not be blamed for all of this, the experience shows that Microcredit, like any financial product, can be exploited to the detriment of those it should best serve. That said, if the product is well regulated and seen as just one tool for defeating gender discrimination and poverty, then Yunus can be proud of what he has created. Indeed, I’m sure that this is exactly what he would say if asked.
Yet for all the good work Microcredit has done, Yunus is off on a new crusade. He has by no means broke up with his ole sweetheart Grameen or indeed Microcredit but rather it seems that relationship is about to reach new heights. They will do this through ‘Social Business’.
What is Social Business?
A social business sells a product or service with the aim of addressing a social problem. It is ‘a non-loss non-dividend company’. In other words it doesn’t actively seek to make profit but rather to balance even and it judges its success in terms of both solvency and its impact on addressing that social problem. Indeed, even when it makes profits (or as Yunus calls them surpluses), they must be reinvested in developing or expanding the business or in the businesses trust which invests them in other development activities or social businesses.
Investors are entitled to full reimbursement in line with their agreement but without any interest or dividend. Shareholders are not entitled to any dividend but instead their dividend either unless of course, the shareholders themselves are suffering from the social ill (e.g. cancer patients, disabled persons, refugees).
Yunus sees this as a powerful alternative to ‘for profit business’. Over the past twenty years, Grameen Bank expanded to create over 10different trusts each focussing on a different social need and each linked to the core network of Grameen Bank shareholders (those who receive credit and are soon offered shares) and other customers. What makes Yunus’ idea different from those of Social Enterprise is the complete focus on social benefit and complete disregard (or even contempt) for profits.
The idea rests on a very simple belief. Though a proud capitalist he feels that economics and capitalism as they stand are incomplete. That their underlying philosophy is that man is motivated by self interest which through the capitalist system expresses itself solely in the form of profit maximization, for Yunus, is simply incorrect. Yes, we are all self-interested and we will do a shitload to earn a few extra quid, he says; but we are not ‘money-making robots’ as evidenced by people regularly carry out any number of selfless things. We have people working and volunteering for charities and not-for profit organizations, we give donations to them function, we help neighbours, we help the people of Darfur and Pakistan, we participate in community activities etc – all actions which are neither focussed on profit maximization nor motivated by self interest. For Yunus, capitalism fails to offer the selfless side of the human being an opportunity to express itself.
And even though, I feel that most so-called selfless acts actually serve the individuals interest at least in some way, what Yunus says seems to me to be pretty sound – everyone has a selfless side to his/her character and it is time that capitalism take this into account.
Does it actually work?
Yunus has big plans for Social Business. Grameen has already partnered up with some of the largest multi-nationals out there – DANONE, Otto GMBH, Adidas, Veolia, Intel, BASF etc. Each of them focus on addressing social problems: highly nutritious yoghurt for poorly nourished kids, better employment in the textile industry, affordable shoes for better health, affordable safe and clean drinking water for arsenic affected areas, reducing child and maternal mortality through accessible and suitable technology, mosquito repellent treated nets respectively. There are also many examples from around the world which have nothing to do with Grameen. I’m not going into the details now, but, yes, though difficult, they can certainly work.
Yunus envisages setting up a global social business infrastructure including University hubs, and even a stock market for buying and selling shares in social businesses. People risk seeing their share value drop and can never takes a dividend or keep the profit from selling their shares at better prices. Instead the only thing they stand to gain is satisfaction from the knowledge that they are reducing poverty or preventing the spread of malaria or helping employ 100 landless indigenous people.
His book, Building a Social Business, is an interesting read and even if at times you might get sick of Yunus’ self-confidence and optimism, it is also pretty inspiring.
As for the idea itself; I kind of like it. It doesn’t intend to replace the ‘for profit model (I would go as far as saying it will be very much dependent on it) but it does give people the freedom to decide what to do with their cash. And, for those who want to address poverty, while at the same time getting the business buzz but without scope for extra profits, it must represent a pretty decent opportunity. For that alone, Yunus should be congratulated.
On the other hand as it supports the privatisation of public goods and services, it remains development theory through the eyes of a businessman. But hey – at least it’s a social businessman.