Could America do with some financial assistance from Bangladesh?

October 23, 2007 by gbrown

No, this is not a typo and it is the right way round, absurd as it may seem. Bangladesh, home to 150 million people living on just over $5 a day would not top most people’s lists as a hotbed for financial innovation.

Yet, here it is. Muhammad Yunus, 2006 Nobel Prize winner, who I have written on many times before, is bringing microfinancing to the US, starting in the heart of Queens.

Like most people I was unfamiliar with Yunus’s story until the prize was awarded last year and naturally became curious as to why this Bangladeshi Economics teacher was deemed worthy of the accolade.

It was in the middle of the 80s at the height of one of the country’s most savage famines that Yunus had his epiphany moment leaving the teaching complex of Dhaka university to return home. The sight of emaciated bodies and abject poverty struck at his very core, questioning the rationale behind teaching complex and often abstract economics theory in the lecture theatre when not even 500 yards away, people lay dying in the street too poor to eat.

Feeling compelled to at least remove his own discomfort, he looked for ways to help. And it was there, in one of the villages outside the capital that Yunus happened upon a discovery that would change not only his own world, but the world of nearly 300 million people who have benefitted from it over the last 2 decades.

There was a middle aged lady, a weaver by trade who fashioned beautiful bamboo stools. Despite her apparent skill, her family was poor. Yunus asked why? How could this be so? The lady never had enough money to buy the raw material to fashion her stools, so she borrowed the money from the merchant who in turn bonded the weaver to sell the stools to him, at a price he determined. The lady made only 2 cents a day from her labour.

2 cents…

When asked how much money she would need to buy her own materials, Yunus was shocked to learn that she only needed $2.

$2 was the difference between bonded wage slavery and self-determination. $2 was the difference between a life of poverty and a life of dignity.

Her life was worth $2.

Shocked by the discovery, Yunus took a student with him the following day to the villages to see how many other such cases there were. In total he found 2 dozen individuals who required an aggregate amount of less than $40 to set them and their families free, free to enjoy the profits of their own enterprise.

And thus was born microfinancing. Over the following decades Yunus institutionalized his efforts through the Grameen bank, mainly as a result of the established financial system’s reluctance to deal with individuals who had no collateral, credit history or were simply “underclass”.

This isn’t charity though.

This is a profit making business. Grameen bank charges interest as any other bank does, but differs in who it lends to and importantly, the size of the loan. Yunus proved many of the detractors wrong, that the poor would simply default on their payments or that they didn’t understand money enough to conceptualize what a loan was.

In a letter to the WSJ in 2002, Yunus wrote of a repayment rate of 98%.

98% of the loans to individuals who lived in abject poverty, were uneducated or simply led a life of begging, were repaid. The figures are remarkable.

Yet, let’s bring this back to the US. Could the concept of microfinancing work in the US?

It would be easy to say no… The US is not Bangladesh. The US is an advanced economy with a highly liquid capital market (even with the recent retractions following the bursting of the subprime bubble). Saying no would also help deny the issue, it may well go away by magic if we ignore it.

But, let’s not forget the 36 million Americans live below the poverty line. That’s 36 million people off the radar of even the most lax of subprime lenders. 36 million people who have little of no recourse to capital to start their own enterprise.

I wonder how this will work out. I believe there are qualitative differences between poverty in the US and Bangladesh. It would be naive to say that the former is a meritocracy and the latter a class based semi-feudal economy. Likewise it would be naive to say that generational poverty does not exist in the US as it does in the Bangladesh - it’s not black and white, more a sliding scale and what we’ll find is that in the US, the number of people living in poverty “by choice” (if I can use that phrase for fear of being flamed) is greater.

When I see the work of Yunus, I see people born into poverty who had no choice. For those people of a similar destiny, whether it be by race, family or lack of education - microfinancing offers real hope.