Grameen Bank Wins Nobel For Innovating Ways To Finance Bottom of the Pyramid Entrepreneuers.

Posted by: Bruce Nussbaum on October 18, 2006

Sorry I missed this very important event—the giving of the Nobel Peace Prize to Muhammad Yunus of Grameen Bank for his pioneering work in micro-credit. When I was in the Peace Corps, the conventional wisdom was that poor farmers—poor people in general—were terrible credit risks and could/would not pay back loans given them to lift them out of poverty. So the paradigm was to grant them money—just give it—because the only difference between rich and poor was, well, just money. This was very Ford Foundation-think.

Didn’t work very well, as we now know. Government bureaucracy and corruption absorbed most of the grant money. Micro-credit works because it is designed specifically for local entrepreneurs, most of them women, within local markets.

But—here’s a controversy for you—does micro-credit really work? My economist colleague Mike Mandel tells me there are lots of economists who think micro-credit is all heart but no result. He wants real numbers showing how much of the loans outstanding are really paid off. And he wants to know how you differentiate the benefits of the micro-credit program of Grameen Bank from the overall economic growth sweeping through India these past years.

Very interesting questions.

Reader Comments

Brandon

October 20, 2006 5:43 AM

From the small scale micro-loans we have been giving out in Siem Reap it is hard to question the good it does for the people that revieve the loan. Before we undertook this project the very poor had to pick between taking out loans at over 100% intrest and often 250% a year or not take out a loan and just keep their dream of a buisness a dream. We have kept our project small and have been able to keep our costs down but all of the people we have given loans to earn more money after paying back the loan than they earned before the loan except for one woman who says that after paying bag the loan she ears the same as before but since she now sells fish her family gets to eat better. Once they repay the loans than 100% of the people will earn more money than they did before. We have also had 100% of the people we have given loans to pay back and only three payments in total were even late, which they pay a small penetaly for. Different programs will very in how effective they are but in the village we have been working at those that haven't recieved loans are eager to get a loan because they have seen the life of their neighbors who recieved loans and expanded the buisness improve. I did not provide the data because it would not even be a drop in the bucket of the total amount of microlending but for our first trial village I don't know how you could call it anything but a success, 100% payback with all lenders earning the same or more than before after the deduction for repaying the loan is factored in. This compared to those who have not recieved the loans who almost all are earning what they did before we undertook the project. If you would like the figures just write us. The info can be found at www.journeyswithinourcommunity.org

niti

October 20, 2006 9:13 PM

I've heard that women repay at close to 90% rate of return vs. men usually repay the microloans at closer to 70%.

Anniece Ross

October 21, 2006 3:52 PM

Bruce:

you were talking about innovations in philanthropy, to which I replied asking when is help helpful. I said Grameen bank good innovation because it helps individuals help themselves. This fits Ted Jenning's matrix. The performance metric is certainly percentage of loans paid back, so Mike Mandel's question is the right one.

My reading of the history of the Grameen bank is that a very high percentage of loans were repaid - in the beginning- when the pool was small. I think as banks get bigger they must and do make riskier loans. Grameen lent to women who were already in business, but unable to succeed, because they paid such high interest rates, they could never make a profit to put back into their business. Grameen required a lower rate of interest, PLUS a group of Friends&family who would help the borrower NOT to fail, PLUS put peer pressure on them to succeed AND to pay back, since they were ALL penalized if they did not. Sort of like, if one of you misbehaves, you all get spanked.

BUT not all microcredit is designed like this. EX: Pakistan bank lends at 20% as opposed to, say, 40% or more. That's helpful. BUT they think regulation of loans is the key. It's NOT. What is helpful is not regulation by an institution, but the help of friends. This is my test of new projects for the Grameen bank and it is, as Mike Mandel says, real numbers. As you say, an interesting question. Regards, Anniece Ross

Anniece Ross

October 21, 2006 5:13 PM

Hmmm. Bruce.

Just read your headline again. Nobel Peace Prize not given for finance.

Woman representing Accion?? (also a microcredit org) made these connections to justify this unusual turn. Microcredit eliminates poverty, poverty arises from despair, despair and poverty cause violence, so eliminating poverty prevents violence, leads to peace, hence Peace Prize.

My reading of history is that people in despair do not hope for better. People with rising expectations that are disappointed become violent. So peace?? I am fascinated by the reasoning process, so we shall see.

Hope you will keep us informed of innovations in philanthropy and other designs for business which will better our lives and raise our expectations.

However, if eliminating poverty or disease can lead to peace, a well as brokering military settlements, failed or not, doesn't this open the way for Bill Gates to get the Nobel Peace Prize? Just asking. Regards, Anniece

jane

July 2, 2007 9:38 AM

please i need help! i want to srart a micro loan program back in my small village in kenya i live in sweden ,do you know how it realy work?
you can give me some help and examples
thank you

kikus

June 13, 2010 1:05 AM

интеретсно написано

kikus

June 14, 2010 6:35 PM

отличный пост, автор пиши ещё

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Want to stop talking about innovation and learn how to make it work for you? Bruce Nussbaum takes you deep into the latest thinking about innovation and design with daily scoops, provocative perspectives and case studies. Nussbaum is at the center of a global conversation on the growing discipline of innovation and the deepening field of design thinking. Read him to discover what social networking works—and what doesn’t. Discover where service innovation is going and how experience design is shaping up. Learn which schools are graduating the most creative talent and which consulting firms are the hottest. And get his take on what the smartest companies are doing in the U.S., Asia and Europe, far ahead of the pack.

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