The Barefoot Bank With Cheek
The Grameen Bank, in Bangladesh, which makes small
loans to some of the poorest people on earth, has become a
model for economic developers all over the world
by David Bornstein
BUSES and trucks barrel down Mirpur Road, in Dhaka, Bangladesh, blasting their horns and leaving trails of black smoke to settle on rickshaws and oxcarts. By the side of the road a high brick wall encircles four buildings in a compound, one of which is dominated by a tropical garden that opens to the sky. On many afternoons rain falls into the garden, and at their desks accountants can pause to listen to the sound of water slapping leaves. This is the head office of a bank that does its work in the countryside.
Thousands of visitors have traveled to Bangladesh to learn from this bank, and many arrive carrying tape recorders and note pads. When they enter the office, they find no receptionist, no carpets, no elevators, and few telephones. The rooms are equipped with ceiling fans, manual typewriters, paperweights, and stacks of ledgers. Only the computer room, on the fifth floor, is air-conditioned. Here programmers monitor operations and prepare reports, which they love to fill with wild-looking graphs depicting their organization's growth. The graphs all look basically the same: like ski hills, rising slowly at first, and then shooting up at impossibly steep angles toward the sky.
For two decades the Grameen ("Village") Bank has been extending small loans for self-employment purposes to some of the poorest people on earth--landless women in Bangladesh--and its financial performance has never been stronger. The bank's founder, the Bangladeshi economist Muhammad Yunus, continues to win international honors--the 1992 King Baudouin Development Prize, the 1993 CARE Humanitarian Award for Development, the 1994 World Food Prize--but his bank is hardly a one-man show. Grameen's loans are administered by more than 10,000 university and high school graduates scattered throughout Bangladesh--no small organizational feat in a country notorious for corruption and mismanagement, a country that since its birth, in 1971, has absorbed more than $25 billion in foreign aid and seen the majority of its citizens grow poorer.
The Grameen Bank, once dubbed the "barefoot bank," can no longer be described in quaint terms. With more than 1,050 branch offices that serve 35,000 villages and two million customers, 94 percent of them women, Grameen is the largest rural lender in Bangladesh, and the proportion of its loans that are repaid, 97 percent, is comparable to the repayment rate at Chase Manhattan Bank. Last year, after eighteen years of making small loans, Grameen had disbursed more than $1 billion; at the present rate the bank will cross the $2 billion mark sometime next year. "It's like McDonald's," Yunus says. "People know the quality of our service. Our job at head office is to make sure it doesn't deteriorate in any corner of the country."
Given that Grameen's banking system is based on trust and mutual accountability, that is quite a task. To qualify for a loan, a villager must demonstrate that her family assets fall below the bank's threshold. She will not be required to put up collateral; instead she must join a five-member group and a forty-member center and attend a meeting every week, and she must assume responsibility for the loans of her group's members. This is crucial, because it is the group--not the bank--that initially evaluates loan proposals. Defaulters spoil things for everybody else, so group members choose their partners wisely. If all five repay their loans promptly, each is guaranteed access to credit for the rest of her life--or as long as she elects to remain a customer. In this fashion Grameen is faithful to the Latin from which "credit" derives: credere --"to believe."
"The myth that credit is the privilege of a few fortunate people needs to be exploded," Yunus explains. "You look at the tiniest village, and the tiniest person in that village: a very capable person, a very intelligent person. You have only to create the proper environment to support these people so that they can change their own lives."
Pure idealism? Well, yes. Nonetheless, these words come from a man who has designed a bank that forces its borrowers to save money for emergencies, provides them with benefits in the event of death, and is in the process of instituting a village-based health-care and insurance program, which will be self-financing. Today, against the backdrop of two and a half decades of often-wasted international aid, Grameen's entrepreneurial approach stands out as singularly effective and sustainable. Up to 1994 the bank had revolved its loan capital more than five times. Along the way it helped millions of villagers to move from one or two meals a day to three, from one or two sets of clothing to three or four. Grameen members have borrowed money to pay for their children's education, to buy medicine, to build houses, to accumulate assets for old age, and--like the peddler Oirashibala Dhor--to pay for their daughters' weddings.
INSIDE, the mud walls were smooth to the touch. Above a table hung a framed birth certificate and a political-campaign poster featuring the party's logo--a riverboat. Another wall was decorated with yellowed pages from USA Today.
Oirashibala Dhor set her basket on the ground beside my translator. She appeared to be constructed entirely of angles--knees and elbows jutting sharply from beneath her plain white sari. Her hair was silver, her brow deeply creased, and she had only half her teeth. She was born, as she put it, "before the British-Japanese war of 1943."
Whispers could be heard from behind a bamboo screen. Two young sisters and an older woman emerged, and were joined by several neighbors and their children. Oirashi, as everyone calls her, took up a red capsule from her basket. "Lip gloss," she announced. "You put this over lipstick, your lips shine."
"How much is the lip gloss?" a young girl asked. "Give it to me for six takas."
Another girl, browsing through Oirashi's basket, inquired, "How much is this hair clip?"
"Don't be so extravagant," her mother said.
The girl dropped the hair clip and picked up a jar of Fair and Lovely beauty cream, which promised "noticeably fairer" skin in six to eight weeks.
"That's for older people," Oirashi said. She selected a glass bangle, polished it with her sari, and asked the girl if she liked the color. The girl nodded. Oirashi requested soap and water. She wet the girl's tiny wrist and then squeezed and twisted until the bangle slid on. The girl extended her arm to show her mother. Children at the door pressed forward to see.
"Stop blocking the door," an older woman yelled. "Let the breeze in."
"Nowadays children are so disrespectful."
"Please give me the lip gloss for three takas less," the first girl said, her final plea.
"Don't kill me," Oirashi replied.
Oirashi has been supporting herself and her two daughters since the death of her husband, twenty-five years ago. "He died of frozen Satan's gout," she told me on my recent visit to her village. "Nowadays the doctors call it pneumonia." Every morning except Sunday, when her Grameen Bank meeting is scheduled, she gets up with the sun, offers a prayer, places her basket on her head, and sets out to sell her wares. She walks for miles. Though she sells sandals, she never wears them. I asked her why.
"I'm just a simple peddler," she replied. "How can I be seen wearing sandals?"
As Oirashi walked along the narrow partitions separating rice plots, she drummed on her thighs. I asked about the basket balanced on her head. "It's not heavy," she replied. We approached a cluster of huts situated atop a mud plateau that rose four feet above the bristling green field. "Those are all Grameen Bank house loans," she explained. "All the old houses were washed away in the  cyclone."
Several women waved. "These women have become a lot braver because of the Grameen Bank," Oirashi said. "Previously, if any strange man came, they would go into their houses and sit behind the purdah" (literally, "veil"; figuratively, the Muslim code of conduct that confines women to their homesteads). "Now they come out and they talk."
Oirashi passed by one woman who called her over. "I'll only come if you cook me a hen," Oirashi joked. She had no time to waste with nonbuyers, she said. "People take a lot of time picking and choosing from my basket. If I could go to more places, I'd be rich."
Oirashi's overriding concern is finding a husband for her second daughter, who is in her mid-twenties and still unmarried. In Bangladesh daughters usually move in with the families of their husbands after marriage. Oirashi's first daughter lives ten miles away. But Oirashi doesn't want to be left alone in her old age. This time she is looking for a ghor jamai: a son-in-law who agrees to live in his mother-in-law's house. Finding one is not easy; most men look down on the idea. Oirashi knows that if her plan has a hope, she must sweeten the pot. She will have to come up with a sizable dowry and expand her house.
"When I have all the jewelry and money," she explained, "then I will tell my elder daughter and her husband to find a boy. After they have found one, I will go and see for myself. If I like him, then the wedding will take place."
"Will you ask your daughter's consent?" I asked.
"Of course," Oirashi said. "Is this my marriage?"
The wedding (dowry included) will cost more than 15,000 takas (about $375). For many villagers such a sum represents two or three years' income. Oirashi has been working to save it for the better part of a decade. Fortunately, in the past few years her peddling sales have increased. Oirashi often sells on credit, but when she buys merchandise in the bazaars, she does better to pay cash. Cash flow had always been her major business constraint. To overcome it, Oirashi joined the Grameen Bank. In six years her annual borrowing increased from about $60.00 to about $260. Each loan was for one year, payable in fifty equal weekly installments, with annual interest of 20 percent (calculated on a declining principal) due in the last two weeks. After her house was destroyed in the cyclone, Oirashi also assumed a $375 long-term mortgage, at eight percent interest, to rebuild it.
Like all retailers, with cash in hand she found herself in a stronger position. She could haggle with vendors over price, stock higher-quality merchandise, and take advantage of volume discounts. Before the Grameen Bank came along, Oirashi borrowed from moneylenders, whose interest rates ranged from 10 to 20 percent a month. "Now I always buy with cash," Oirashi explained. "Look--I do my business for profit."
FOR the thousands of men and women who staff the Grameen Bank, the story of their organization's birth has the resonance of myth. One afternoon in 1976 Muhammad Yunus was taking a walk in a village a mile from Chittagong University, where he was the head of the Department of Economics, when he encountered a woman weaving bamboo stools.
Yunus had returned to Bangladesh in 1972, after the country had become independent. Prior to that he had spent seven years in Nashville, Tennessee, completing a Ph.D. at Vanderbilt University. Yunus had been influenced by the student activism of the late 1960s, especially the civil-rights movement, and the message he carried home was that it was possible for young people to change society. As a professor of economics in Bangladesh, he asked his students if, for all their knowledge of equations and formulas, they really knew how 90 percent of the people in their country lived. He challenged them to close their textbooks and get involved with local villagers, and for four years he spent his afternoons with them in villages, studying the informal economy, organizing immunization programs, and helping local farmers to grow more food.
Yunus had never met Sufiya Khatun on his many walks through her village. Sufiya, a widow, was trying to support herself by constructing and selling bamboo stools. She earned two cents a day. When Yunus asked why her profit was so low, she explained that the only person who would lend her money to buy bamboo was the trader who bought her final product--and the price he set barely covered her costs.
Yunus's instinct was to dig into his pocket. But first he wanted to see if there were other villagers in similar circumstances. He and a few students canvassed the village and compiled a list of forty-two people whose capital requirements, in order to buy materials and work freely, added up to about $26.00.
Through the years he would recount that story hundreds of times. A decade later, testifying before the U.S. Congress Select Committee on Hunger in a hearing devoted to micro-enterprise credit, he recalled what had gone through his mind: "I felt extremely ashamed of myself being part of a society that could not provide twenty-six dollars to forty-two able, skilled human beings who were trying to make a living."
He gave his graduate students the money and instructed them to distribute it to the villagers. He arranged for the loans to be repaid in small installments at a local tea stall. A short time later he felt dissatisfied. "They couldn't come to me every time they needed money," he said. Where should villagers be able to go when they needed a loan?
Yunus paid a visit to the manager of a local bank. "He gave me a big laugh," he recalls. "He said the amounts were not worth the paperwork." Most of the villagers were illiterate, the manager explained, and they had nothing to offer as collateral. No bank lent money to people without collateral.
Two years later, with his graduate students, Yunus established the first branch of the Grameen Bank. Conscious of the dismal performance of credit cooperatives in Bangladesh, he resolved to be different on three counts: First, the loans were to be repaid, and on time. Second, only the poorest villagers--the landless--were eligible. Third, he would make an effort to lend money primarily to women, who were socially, as well as economically, impoverished.
With support from the Bangladesh Bank, the Ford Foundation, and the International Fund for Agricultural Development (IFAD), an aid organization created by the United Nations, Grameen was by 1983 an independent bank operating eighty-six branches and serving 58,000 clients. As it grew popular enough to surmount religious opposition, the bank began providing loans almost exclusively to women. "When a woman brings in income," Yunus explains, "the immediate beneficiaries are her children."
The following year, after years of development washouts, foreign donors began taking Yunus very seriously. In 1984-1985 IFAD, Ford, and the governments of Norway and Sweden stepped in with $38 million in low-cost loans. By 1988 Grameen had 501 branches and 490,000 borrowers. In 1989 Canada and Germany joined the team of donors, and the bank received an additional $87 million. In 1992 Grameen opened its thousandth branch office. It also raised credit ceilings and introduced various new kinds of loans intended to boost revenues. In the past three years disbursements have soared to $40 million a month, with only a marginal increase in staff. Grameen has moved, as one manager puts it, "from Mach one to Mach two."
TYPICALLY, Americans are reluctant to look to other countries for help with their social problems. Think of health care. However, as the current political debate rages over how big government should be, Grameen's experiences are more relevant to the United States than ever before. The Grameen Bank has received praise from U.S. commentators and policymakers on both the left and the right. Being Bangladeshi, it has the advantage of being seen as a perennial underdog. And, no doubt, the bank speaks to something at the core of the American ideal: what Ralph Waldo Emerson called "the heroism and grandeur which belong to acts of self-reliance."
Grameen is a political chameleon: it has the ability to affirm beliefs that both conservatives and liberals hold dear. From the right Grameen can be seen as an entrepreneurial institution that makes the case for less government; from the left it appears to be an enlightened social-welfare program that argues for the value of government involvement. Some see Grameen as an example of reinvented government. Muhammad Yunus disagrees. He sees his bank as an example of reinvented capitalism. In fact, he calls it a "socially conscious capitalist enterprise."
Consider: the Grameen Bank charges interest four points above the commercial rate. It never forgives loans, not even after a flood or a cyclone, although it restructures them when necessary. It provides no free services to its borrowers, charging fees even when it distributes such essential items as water-purification crystals, vegetable seeds, and iodized salt. Although the bank has received tens of millions of dollars in grants and low-cost loans from foreign governments, it remains a private enterprise, with 90 percent of its shares controlled by its two million borrowers. For all its efforts to contain costs, Grameen remains committed to a clientele that is inherently expensive to serve--a clientele that in the absence of an ethical imperative would probably never have been discovered by the free market.
Today Grameen's annual report lists more than 400 different kinds of businesses initiated by borrowers, who husk rice or make ice-cream sticks, trade in brass or repair radios, process mustard oil or cultivate jackfruit. For each activity the bank lists the number and amounts of loans disbursed. It would be a commercial banker's nightmare.
As a rule, the statistics on which Grameen prides itself most--volume of customers and disbursements--do not excite bankers. Two million small, short-term loans are much more expensive to manage than a few big, long-term loans. Bankers care about the costs and revenues associated with a loan portfolio. But in this area Grameen is also fast gathering strength. The bank's operating income jumped from $19 million in 1992 to almost $50 million in 1994, and is expected to exceed $60 million this year. In five of the past seven years Grameen has reported small profits, which are reinvested in its revolving loan fund; however, analysts are quick to point out that those profits are not "real," because the bank has received its funding at concessionary rates.
But recently Grameen has taken a number of decisions to demonstrate that it is serious about being seen as a capitalist enterprise: It has declined donor funds in favor of $150 million in loans at the bank rate from the Bangladesh Bank, and in the past two years has raised $125 million through bond issues. Despite much higher interest expenses, Grameen continues to report profits. The bank has begun providing an early-retirement option for older employees, to cut salaries; and, to reduce overhead further, it is testing computers in branches with access to electricity. As borrowers mature, they become more stable and their demand for credit increases. Down the road, if Grameen can shift from weekly to, say, biweekly installments and still maintain its rate of loan repayment, administrative costs will drop by a third without affecting revenues.
Laissez-faire or interventionist? Either way, Grameen is a performer--which is why, this past July, the World Bank broke with its tradition of financing primarily large-scale infrastructure-development projects by launching a drive to raise more than $200 million for Grameen-style lending, and why, over the past few years, many Americans have attempted to tackle poverty in the United States in similar ways. Part of a movement some call the "first Third World technology transfer," the Association for Enterprise Opportunity, a network of micro-enterprise development organizations established in 1991, lists 400 members across the country. Yunus is excited by the spread of these programs. "If the United States becomes convinced that poverty can be eliminated," he told me, "then it can be done."
But given the canyon of cultural and economic differences separating the two countries, the technology transfer poses difficulties. To begin with, Bangladesh has a long tradition of self-employment. By comparison, very few Americans--not even one in ten--work for themselves, and low-income Americans who wish to be self-employed typically require training, technical assistance, and, perhaps most important, access to business networks along with credit.
One of the veteran micro-enterprise programs in the United States, begun in 1986, is the Women's Self-Employment Project, in Chicago. WSEP has extended close to $1 million in loans to more than 300 businesses and has offered business-counseling services to 5,000 women. Its repayment rate is 93 percent. Mary Houghton, the president of Shorebank Corporation, which oversees the project, believes that WSEP has demonstrated that there is "a big market in Chicago for self-employment among single women who are either very low-income or on welfare." Micro-bankers have yet to develop a systematic, self-sustaining methodology for turning low-income Americans into successful businesspeople, she told me recently, "but they've discovered a fair number of ways by which people can add to their incomes by two or five or ten thousand dollars a year."
Because of the high cost of training and the low disbursements, to date no micro-enterprise lender in the United States has come close to breaking even, and only a handful have more than a few hundred borrowers. The people running these programs prefer to avoid comparisons with the Grameen Bank; many have abandoned the hope of achieving financial self-sufficiency. Instead they defend their program costs by framing the issue in terms of social justice, arguing that every American, rich or poor, should be entitled to a limited quantity of resources on loan, at the commercial rate or higher, provided that he or she demonstrates commitment, a desire to work, and what appears to be a viable business plan.
An attractive idea--but is it politically feasible? One of those who think not is Jeffrey Ashe, the director of Working Capital, based in Cambridge, Massachusetts. Ashe worked in micro-enterprise in South America, Africa, and Asia for more than a decade before he founded Working Capital, in late 1990, to provide group-based support, credit, training, and technical assistance to low-income people throughout New England. Unlike the Grameen Bank and other micro-enterprise programs, Working Capital does not target the poorest of the poor. Its market, best described as "the entrepreneurial poor," is made up of people already involved in income-generating activities who lack access to financial resources and other support services. However, like Yunus, Ashe does not attempt to turn poor people into entrepreneurs; he supports people who are already entrepreneurs, or at least show promising signs of soon becoming entrepreneurs. In this sense he is, in his approach, closer to Yunus's pragmatic spirit than are micro-lenders who target poorer clients. Writing in the July, 1994, issue of The Atlantic Monthly, Amitai Etzioni argued that it is "wise policy" for social programs to seek early success by starting with a "realistic notion of human transformation"--in this case, not expecting poor people just to go out and start viable businesses. Ashe agrees. In five years Working Capital has extended $1.5 million in loans, of amounts ranging from $500 to $5,000, to more than 1,100 businesses; its repayment rate is 98 percent.
Ashe is unique among his colleagues in his determination to demonstrate that it is possible to be a banker for poor Americans and still cover costs. "Almost everybody has rejected this out of hand," he told me recently. "But the truth is, for these programs to reach any appreciable scale, we have to show that they can be self-sustaining. And if we can prove that, we can blow this whole movement to another level."
"I figure that micro-enterprise in this country has a window of opportunity for the next four or five years," he added. "Right now there's interest among funders, but already major questions about cost-effectiveness are being raised."
Ashe has plans to franchise his operation, to support as many as 4,000 businesses by the end of 1997, and has started franchises in Delaware and South Miami. His cost per borrower continues to drop; it is somewhere between 10 and 20 percent of the cost in other programs; and he is looking for new ways to increase revenues, including raising the loan ceiling to $10,000 and charging membership fees to groups. He projects that with an investment today of $5 million over five years, Working Capital could generate $60 million in new jobs by the end of the sixth year and could break even in the seventh year.
"People latch on to the concept of micro-enterprise pretty fast," Ashe said, "but the trick is actually designing a structure that will produce sustainable results. More and more, as I slog through this on a day-to-day basis, I appreciate what Yunus has accomplished."