Last week Bangladesh's Grameen Bank and its founder, Muhammad Yunus, won the 2006 Nobel Peace Prize for waging a war against poverty with a revolutionary micro-lending system. CGD research fellow David Roodman has just released a working paper, Microfinance as a Business. After the Nobel Peace Prize was announced, Roodman discussed his findings in a Q&A.
Q: In awarding the Peace Prize to Muhammad Yunus and the Grameen Bank, the Nobel Committee praised Yunus as "a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries." How does this view compare with what you learned?
A: In studying microfinance from a business perspective, my coauthor Uzma Qureshi and I are asking questions that most overlook. How do Grameen and other large microfinance institutions cover their costs, scale up, attract private capital? I’ve come to think that Muhammad Yunus's real genius is not the discovery that the poor are "bankable"--after all, poor people have been borrowing from moneylenders for millennia. Rather he and his colleagues at Grameen developed financial products and management techniques that solved a tough business problem: how do you deliver millions of tiny loans to poor people lacking conventional collateral without losing your shirt?
Q: So what's the answer?
A: There are lots of them. The classic Grameen model, which Yunus and his colleagues developed from the late 1970s to late 1980s, involves: credit (as opposed to savings or other financial services); group operation, in which clients borrow in sets of five and are formally responsible for each other's loans; weekly meetings of "centers" (eight groups of five) to collect payments and conduct other business; and a focus on women. All these choices helped Grameen work efficiently, making it financially viable to give smaller loans, thus to reach more and poorer people. Unlike savings, credit requires regular, constant payments, which works well for transactions at the weekly meetings. Group lending shifts some classic banking tasks onto borrowers, such as judging who is credit worthy--I won't join a group if I think deadbeat neighbors will leave me holding the bag. And in rural Bangladesh, it seems that women are more susceptible to the peer pressure associated repayment.
Q: Is that how Grameen operates today?
A: One of the remarkable things about Grameen is that since 2001 it has actually broken from the model it made famous, with a package of reforms called "Grameen II." Borrowers are no longer jointly liable--if you default, I am not responsible. And Grameen now offers attractive savings products. The result has been that new burst of growth in an already large organization. Surprisingly, for the icon of microcredit, Grameen's savings portfolio surpassed its loan portfolio in late 2004--though much of that may be from not-so-poor people drawn to Grameen's high interest rates.
Q: How big is Grameen?
A: Grameen Bank is the largest microlender in the world, measured in number of borrowers, having recently burst out of a tie with its Bangladeshi rival BRAC. In 2005, Grameen's borrower count jumped from 4 to 5 million. Achieving such scale took vision, unorthodox creativity, experimentation, rapid growth (with all the management challenges that involves), and willingness to reinvent a seemingly mature organization. And I'm just talking about the banking unit. Grameen is now what business people would call a diversified conglomerate, with operations in solar energy, mobile phones, health insurance, and more.
Q: The Committee praised Yunus and Grameen for "their efforts to create economic and social development from below." Do you share the Committee's confidence?
A: If by "development from below" we mean fundamental transformations in the lives of the borrowers, then for me at least the jury is still out. I say that as a newcomer to the field who is asking tough questions and has much more to learn. There are many stories of microcredit success, but also stories of failure, and it is hard to sort these impressions out without systematic study. So perhaps the fundamental problem is the scarcity of rigorous analysis. In Bangladesh, there has been just one good study so far of effects on income, by the World Bank. Based on surveys of a couple thousand households at the beginning and end of the 1990s, researchers found that 100 taka lent to a woman raised her income by 5 taka net. So this is one finding of modest, positive impact.
Q: Is there hope for better data?
A: Yes! In August, Dean Karlan and Jonathan Zinman circulated a draft study of a "pay day" lender in South Africa. This is not what is usually thought of as microfinance, but the study design is rigorous and shows real benefit for those just barely qualifying for the short-term loans. I think we will see more excellent work in this vein from Karlan and his group Innovations for Poverty Action. The Abdul Latif Jameel Poverty Action Lab at MIT also has promsing studies underway in India.
Q: Why did you decide to look at microfinance organization as businesses?
A: It was fortuitous. The Dutch bank ABN AMRO asked CGD for a report on this topic and partly funded it. I believe it is the only international bank with retail microcredit operations, in Brazil, and it is doing wholesale lending to some two dozen MFIs in India. I am grateful for its support.