Profile of Muhammad Yunus

An old article from BusinessWeek Online on Muhammad Yunus, founder of Grameen Bank, Bangladesh.

Muhammad Yunus: Microcredit Missionary

Gates Foundation Awards $1.5 Million to Grameen Foundation

From Grameen Foundation, USA

Grameen Foundation, a leading global microfinance organization, today announced it has received a $1.5 million grant from the Bill and Melinda Gates Foundation to support its work worldwide. The three-year grant will support Grameen Foundation’s strategic plan to reach five million additional new families, ensure that 50 percent of them permanently escape poverty within five years of becoming a microfinance client, and champion innovations that transform the microfinance industry. The unrestricted grant is GF’s third largest grant in support of this five-year plan launched in 2004.

Person-to-Person micro-lending

I chanced upon a brilliant model implemented at Kiva through a news article in Voice of America.

While organizations are being set up to provide microlending across the world, Kiva has a unique model.

It brings individual lenders and micro-lending organizations together. Kiva's partner microcredit organizations upload profiles of people who are looking for loan in their markets. Individuals anywhere in the world can then decide whether they want to fund any of these folks. You can transfer the money via Paypal and hence is instantaneous. The lending can be as low as $25, going upto $2,000.

The microcredit intermediary takes this money and lends the same to the end users, and charge an interest. Kiva does not charge any interest and I suppose the Internet lender also may not get any interest, but will get his principal back, and will also get an update of what the business is doing.

There is, of course, the risk of not getting your money back, but Kiva says its payback rate is 100%. Kiva's partner microcredit organizations have an average payback rate of over 96%. In the worse case scenario, you would have still helped poor folks across the world possible growth opportunities. Compared to giving your money to charity, this is a far better method.

We need a model similar to this in India!

ASA Bangladesh - Another major microcredit force

Besides Grameen and BRAC, ASA Bangladesh is another fast growing microcredit enterprise. From their website

Up to December 2005, ASA's Cumulative Loan Disbursement was Taka 148,197 million. Loans outstanding Taka 19,379 million among 4.18 million borrowers. At the end of 2005 ASA's Operational Self Sufficiency (OSS) is 275.24%, Financial Self-sufficiency 169.73% and rate of loan recovery 99.88%. Upto 2005 ASA operation expanded over 2,291 branches under 64 administrative areas all over in Bangladesh. ASA continues to perfect the role of financial intermediation by developing a variety of savings products that are quite successful at generating the necessary funds from local sources. ASA now offers customers liquid, semi-liquid and high return savings options that have attracted around Taka 3,036 millions.

ASA plans for 2006 to reach 2.741 Branches, 6.01 million borrowers with loan disbursement of Tk 45,183 and 6.88 million savings accounts by the year 2006 in Bangladesh alone, but also committed to sharing its successes in other countries. ASA is currently involved in several countries world-wide providing ASA experts to develop financial sectors elsewhere that are inclusive of low income groups. It will surely not be long before skeptics are convinced that a financial sector providing high quality products to all is achievable.

Is ICICI Bank providing microfinance directly?

An article in BusinessWeek Online seems to indicate that a whole bunch of commercial banks in India are directly into microcredit, providing loans as low as $130 (Rs. 6,000) to rural people.

Mor signed off on a one-year, $130 loan that will allow the family to buy a buffalo and sell its milk. And written into this loan contract is a most unusual clause. If the animal isn't milking, the family gets a moratorium on its monthly loan repayment. "The client would need to find other money to service the loan or even sell the buffalo to pay us, which would be counterproductive for both of us," explains Mor, deputy managing director at ICICI.

I think this may at best be a publicity stunt. I can't see Nachiket Mor signing a $130 loan with any of his customers except for a photo op. To my knowledge, ICICI Bank is only lending through other microfinance institutions. To quote from The Wall Street Journal article found at Echoing Green site,

ICICI Bank Ltd., India's largest private-sector bank in capital, has gone so far as to give Mr. Akula an open line of credit. The bank says its more than $10 million in loans to SKS have been low-risk and give it a slightly higher return on capital than it gets from its corporate borrowers. "This could be bigger than any other business that we have got," says Nachiket Mor, executive director at ICICI Bank in Mumbai, the city formerly known as Bombay. ICICI Bank teams up with about 100 microfinance institutions, through which it plans to hand out loans and sell insurance.

With the exception of The State Bank of India, I can't see any of the Indian banks or foreign banks based in India going into the rural areas. We really need models like SKS Microfinance come up across the country.

BRAC - more than Microcredit

From BRAC's history

Yet another one of BRAC’s innovations that has been replicated in about a dozen countries is the Non Formal Primary Education programme set up in 1985. The programme started with 22 one-room schools and has grown to about 49,000 schools in 2004, accounting for about 11% of the primary school children in Bangladesh. It fulfills BRAC’s goal of poverty reduction through access to education for those traditionally outside formal schooling. The BRAC schools teach the same competencies as the government schools. However, they enroll and retain a higher proportion of hard-to-reach children, such as girls who make up 65% of the student body. The importance of maintaining literacy outside the school setting has been addressed with BRAC’s 878 rural community based libraries (Gonokendras) and 8,811 KIshori Kendras that give members access to a variety of reading materials. The Adolescent Development Programme (ADP) trains adolescent BRAC school graduates, both girls and boys, in vocational skills, health awareness including reproductive health, and leadership.

What is a fair interest rate for microcredit?

Business Standard, 16th August 2006, has an article quoting a study by the Washington-based Consultative Group to Assist the Poor (CGAP) that even a 40% interest rate is helpful to the end customer.

Of course, the microfinance interest rates have to be seen in the backdrop of the prevailing bank interest rate in the country, credit card APRs and informal interest rates charges by village moneylenders etc.

In India, the personal loan (consumption loans) interest rates are currently between 14% - 24%. The credit card interest rates are upwards of 24% going all the way to 36% and more. Considering this, the microfinance interest rates in India are probably well below this - about 12% - 28%.

Quoting the BS article (which quotes the study):

According to the agency, attempts by governments to regulate this industry by capping the rate of interest in various countries have resulted in denial of access and withdrawal of players from offering these products and services thus forcing these very poor people to return to money lenders. There is no evidence of it actually having reduced the effective cost of financing for small borrowers.

The best way for governments and donors to lower interest rates without making microcredit unsustainable is to promote competition and innovation, both of which improve efficiency and lower prices, it says.

Interview with Vikram Akula of SKS Microfinance

The Tribune (12th August 2006) has a detailed interview of Vikram Akula, CEO of SKS Microfinance.

SKS is headquartered in Hyderabad and operates in 5 states of India. It operates on a model similar to that of Grameen Bank of Bangladesh. It started as a non-profit organization and then became a NBFC (Non-banking finance corporation). It has received venture funding from several people, notably from Vinod Khosla, SIDBI and Unitus.

SKS has branches in India as follows:

• 44 branches in 7 districts in Telengana region of Andhra Pradesh
• 19 branches in 5 districts in North-Eastern Karnataka
• 10 branches in 3 districts of Maharashtra (bordering AP)
• 10 branches in 4 districts of Orissa (bordering AP)
• 3 branches in 3 districts of Madhya Pradesh

They have currently priovided loans worth Rs. 320 crores to over 2.6 lakh customers. They have close to 98% repayment rate.

Read the detailed interview here.

Yunus demands private initiative to resolve problems

From The Daily Star (5th August 2006)

Muhammad Yunus, founder of Grameen Bank wants his countrymen to stop criticising their Government and start doing something positive by themselves.

While commenting on the lack of airservice between Chittagong and Dhaka, he said:

"A shuttle air service between Dhaka and Chittagong is very necessary, and I think instead of pressing the government to initiate it, the private sector can do it," he said, adding, "Money will not be a problem as it is easy to collect it by floating shares."

The ability of government is very limited comparing to collective power of people, Younus said mentioning the collective efforts of his Grameen Bank.

"We started operation of Grameen Bank 30 years ago allocating Tk 856 among 42 women, but last year our bank allocated Tk 4500 crore among 65 lakh woman members across the country," he said.

He said it had been possible only for the collective effort and inner spirit of the members of the bank, Younus said, adding that the bank could not do so if it had wasted time demanding government or other external support.

Grameen Bank

'Lending Promise' to fund Nepali women with microcredit

Press Release from SocialFunds.com (8th August 2006)

New Nonprofit, Lending Promise, to Lend Poor Women Dignity as Well as Money

Microcredit comprises tiny loans – often less than $25 per person – to people too poor to qualify for traditional financing. A loan goes to a group of co-signers, typically women. Although each one forms her own business such as a snack shop, farm, tour guide or handicrafts business, the women repay the loans as a group. Later, the groups often pool savings, making loans themselves to members who expand their businesses, Taylor explained.

According to Grameen Bank, the Bangladesh-based forebear of microcredit, although banks view poor people as bad credit risks, microloan borrowers have achieved an average repayment rate of 98 percent. That’s significantly higher than the 85 percent rate guaranteed by the U.S. Small Business Administration.

...

Lending Promise will give its first loans this fall to Nepali women. The world’s fifth poorest nation, Nepal is ravaged by a Maoist conflict that has caused an estimated 12,000 deaths and a decline in tourism – a major revenue source. Taylor, who traveled there in March, met over 75 mothers whose homes are without electricity or running water. "I asked children what they want to be when they grow up," she said. "Because villagers spend their time on tasks like hauling water jugs, most kids don’t think about the future. I want them to have dreams – and live them."

LendingPromise

Gates Foundation to put money into Microfinancing

From Seattlepi.com (2nd August 2006):

Seattle reaching out with loans. Gates Foundation puts new energy in microfinancing

Microfinance or microcredit refers to the practice of granting very small loans to poor people (usually in developing countries) for business projects aimed at helping them escape poverty. The approach, born of necessity in poor nations, has been around since the 1970s, largely because of the efforts of Bangladeshi economist Muhammad Yunus.

Perhaps the biggest thing going on now with microfinance is that the Bill & Melinda Gates Foundation is exploring getting into it in a big way.

...

"There are 550 million households that live on less than $2 a day," said Dr. Raj Shah, the Gates Foundation's point man on the microfinance front. The philanthropy, which met Tuesday with Daley-Harris, has made a few small donations in this area but plans to get much more involved in the near future.

Women in poor communities have been the focus of most microfinance programs, Shah said, and for good reason.

Bill and Melinda Gates Foundation

Microcredit in India

Right from the time I read about Muhammad Yunus and his Grameen Bank experiment, I have been fascinated by the idea of micro credit and how it could possibly help in resolving the problem of poverty in India. I intend to blog about this topic here.

Grameen Bank
Muhammad Yunus (Wikipedia)
Microcredit (Wikipedia)
Microfinance Industry Exchange