Discerning the Miracle of Microlending

Discerning the Miracle of Micro Lending

M. Bakri Musa

A slightly shorter version titled “Money Isn’t Everything: Poverty and Microcredit” was published in the Op Ed Page of the International Herald Tribune, February 14, 2007. Reposted with permission.)

Muhammad Yunus, the founder of Grameen Bank, is widely lauded for uplifting millions of Bangladeshi peasants out of poverty through his micro lending initiative. He awes his audiences with stories of how a loan of just a few dollars could be so consequential and life transforming to its recipient.

Yet attempts at replicating this wonderful idea elsewhere have been less than successful. Malaysia has a similar governmental program, with individual loans a thousand-fold larger, but its impact on poverty reduction has been unimpressive. Instead, the program breeds gross corruption, rent-seeking behaviors in its recipients, and a pile of dud loans.

Grameen’s success has less to do with the amount of credit extended, rather with the accompanying behavioral changes that the bank demands of its borrowers. Its success has less to do with the wonders of micro lending and everything to do with the miracle of effecting social and cultural transformations at the grass root level.

Using micro loans as the stimulus as well as the instrument, Yunus successfully changed the cultural activities and attitudes of his fellow citizens, from being inimical to productive economic pursuits to encouraging them. This in turn would require those peasants to need the services of a bank. That is the monumental achievement, not the miniscule value of the loans disbursed.

This caution is needed, as his winning the Nobel Prize for Peace would inevitably inspire others to emulate his program. Already various governmental as well as non-profit and even commercial entities are entering the field. There are even E-Bay-like enterprises linking borrowers and lenders.

These well-intentioned endeavors would fail as with the Malaysian experience if they were to focus only on the lending, and not on changing underlying attitudes and behaviors.

Grameen’s borrowers must commit to its “Sixteen Decisions” that include family planning, educating their children, not accepting or giving dowries, and “discipline, unity, courage and hard work in all walks of our lives.” Those are great values; they would help steer one away from the poor house. How many Bangladeshi families have been doomed to poverty because of large families and extortionate dowries?

The most important stipulation is that the loans must be for income-producing activities, or to use modern economic parlance, for productive purposes, not for consumption. That is wise advice, and not just for poor Bangladeshi peasants.

The useful lesson from Grameen is that cultural values, even those long entrenched, can be successfully modified. Grameen’s achievements are even more impressive considering that Bangladesh is a Muslim country, where concepts such as interest and contraception are considered “un-Islamic.”

The operational details of Grameen are equally noteworthy. By requiring weekly repayments, borrowers are constantly being reminded of their obligations. The close relationship between borrowers and lenders means that they know exactly the consequences of non-repayments: other potential borrowers (their fellow villagers) would be deprived of their opportunities.

Contrast that with the attitude of contemporary bank consumers. When missing their payments, the impact on other borrowers or the banks’ profitability never enters the borrowers’ consciousness. There is no perceived commonality of purpose between lender and borrower.

Grameen “bankers” meet their clients at their homes. Apart from bringing “personal banking” to a whole new level, the bank is spared the unnecessary overhead expense of branch facilities. Such personal visits would also enable Grameen lenders to sniff potential delinquent loans long before that first missed payment.

A medical metaphor will illuminate my point. Imagine an overweight, chain-smoking couch potato urban dweller seeking medical advice for his poor health. He was advised to lose weight, eat healthy foods, exercise regularly, quit smoking, and then prescribed expensive medications to lower his blood pressure and cholesterol levels. He followed the advice religiously and lived to a happy old age. When asked for the secret of his longevity, he gratefully attributed it to the miracles of modern medications, to the extent of even enthusing about their high price. Had he pursued a healthy lifestyle to begin with, he would have had little need for those pricey wonder drugs!

Grameen’s sensible covenants alone would ease the escape out of poverty; they might even have spared the peasants from such a fate in the first place. Muhammad Yunus’ miracle is in using those micro loans as a social stimulus to effect needed changes in personal behaviors and cultural values, with Grameen Bank being the enabling institution. This key point is often missed by those enthusiastic in replicating the bank’s success.

Covenants For Lenders and Borrowers

If I were to resurrect Malaysia’s failed micro lending program, I would insist on a comparable “Sixteen Decisions,” except that I would reduce them to ten, six for borrowers and four, lenders. I do not have the literary talent to make my “Ten Decisions” match the brevity, clarity, or gravity of the Ten Commandments, so here goes.

Decision One – Productive pursuits: As a borrower I will use the loan for productive pursuits only, and create enough value so as to cover its costs (interests and principal payments) and some left over for me, in that order. I would buy a truck ahead of a car so I could transport my goods to the market and thus create value. A car would too, but only if I use it as a taxi and not for ostentatious display. And I would buy a tractor ahead of a truck, as that would bring even greater value as I could then cultivate more land.

Decision Two – Modest and moderate lifestyle: I would not accept or give dowries for my family or myself, except token amounts as specified in my faith. I would not have multiple, elaborate, and expensive wedding ceremonies for my children or myself. One simple ceremony would do; with no separate celebrations at the bride and groom’s place, or additional feasts for betrothal, wedding and bersanding. I will not have multiple wives, instead love unto death the one I now have. In short, I will follow the example of our Holy Prophet, “Above everything, be moderate!”

Decision Three – Education: I will educate my children and ensure that they attend school regularly, help with their schoolwork, and participate in their school activities. I will turn off the television at home during their specified study hours and read to them before their bedtime. I also commit to lifelong learning on my part.

Decision Four – Health: I recognize that health is the ultimate wealth, and I will commit to a healthy lifestyle. I will not smoke or take illicit drugs and ensure that my household members sleep under mosquito nets to protect against malaria and dengue. When working in the sun, I will be appropriately attired, with long sleeves and a hat or umbrella. The harsh Malaysian sun tires and dries me out quickly, decreasing my productivity. Likewise my household members must wear footwear like a simple wooden sandal to avoid worm infestation. When I am healthy I will be productive and be able to repay my loan.

Decision Five – The Environment: A clean beautiful environment contributes to my health, wealth, and happiness. I will plant trees especially fruit trees in my compound. If I live in an apartment, I would cultivate plants like lemon grass or roses indoors. I will keep the area around my house properly drained with no puddles for insects to breed. I will dig latrines so as not to soil my environment. I will have garbage bins conveniently located in my home and property, and empty them regularly. Likewise, I will regularly cut the grass and trim the bushes.

Decision Six – Zakat: Zakat is a major pillar of my faith, ahead of the Hajj. To be able to give zakat, I must first have wealth. Implicitly Allah commands me to create wealth. I will use this loan faithfully to create wealth so I could give zakat to benefit my fellow human beings. I will consider not repaying my loan as a breach of the faith others have of me, and that will be a sin in the eyes of Allah.

Decision Seven – Precious Funds: As a lending officer, I will treat the funds as precious and treat them with the same prudence as if they are my own. I will loan them only to those most worthy and who could use them most productively without regard to political or other persuasions.

Decision Eight – Corruption: I will not tolerate corruption in any guise in disbursing the loans. If I suspect corruption, I will report it to my superior, and if they are corrupt, to expose it publicly.

Decision Nine – Borrowers’ Advocate: My duty extends beyond credit assessment and loan disbursement. I will be a vigorous and effective advocate for my clients to ensure the success of their ventures. If they are successful, then I am too. I commit to use the clout of my institution as well as my personal and professional skills to extract group, fleet and other discounts and then pass on the savings to my borrowers. I would arrange for them to form groups and co-operatives so they could leverage their collective actions.

Decision Ten – Seek out Borrowers: I will actively seek out potential worthy borrowers to support their deserving enterprises. I will use current borrowers as leads as well as do my own scouting.

The six covenants for borrowers are useful advice to anyone whether or not they are contemplating borrowing. Those were the advice my parents gave me and they have withstood the test of time and culture. They are as useful to me in Malaysia when I was growing up as they are now in America when I am raising my own family.