A Evening with Muhammad Yunus

Last month, I was at a Silicon Valley Bank sponsored event where we got to listen to Nobel Peace Prize winner Muhammad Yunus speak.  As most of you know he is the visionary behind microlending.  I had heard and read a lot about him before I met him, so the question I had in mind was, "Can microlending work in America?"  And I did get a good answer for that, and that's what this post is about but before we go there, let me talk very briefly about what he did in Bangladesh and why it worked. This is the very short version.

Muhammad Yunus started microlending in 1976 after seeing 42 people being hassled by loan sharks.  They were suffering, and according to Yunus, they were almost being tortured.  The total amount owed by these 42 people were $27 (that's twenty seven dollars).  He became the guaranteur of this amount.  Starting there, he created a bank, lent money to men and women, found out that money lent to men didn't come back, money lent to women was paid back.  So he started to lend to women.  He now has 7.5M borrowers, 96% are women.  99% percent of his loans are repayed.  They've even started lending to beggars.  You read it right, people begging for money in streets.  He gave loans to 100,000 beggars and 10% have stopped begging and have a business.  The remaining 90,000 are "part time beggars" they also used the money to become door to door salesmen.  Now that his bank has grown, it gives university scholarships, trains doctors, offers health insurance to the poor.  He trained doctors, but there weren't enough of them so the bank funded a medical school.  All this was done by lending money to the poor and sticking to his mantra which has been : "Poverty is not in the person, but in the sytems that created them."  In my personal opinion he's done more for his country than most presidents I've seen.

Now let's come to the situation we have here in the US.  47M people don't have health insurance, and there are probably another 47M who think they have health insurance, but find out they really don't when they need it (watch Sicko if you don't believe me).  The situation is worse with check cashing and payday loans.  According to Business Week the payday loans business is booming here as well, I quote:

"Plenty are profiting from the financial wreckage. Banks are increasingly pushing secured credit cards, which require borrowers to put down a deposit and charge stiff 19%-plus rates. CompuCredit, which specializes in cards for consumers with poor credit, added 500,000 accounts in the third quarter. Collection agencies, too, have moved into the credit-card game: PRM Financial Services offers debtors a card at a fixed rate of 18.9%. "We're talking to doctors, attorneys, and businesspeople," says Carol Freeland, a partner at PRM Financial. "Just because you make a lot of money doesn't mean you don't end up in trouble."

That may be why payday lenders, which advance customers money on their paychecks at rates of up to 500%, are migrating to more affluent neighborhoods. According to a recent Brookings Institution study, there were only a few hundred payday lenders in the U.S. in the 1990s; now there are more than 23,000, with 37% located in Zip Codes where the median income is at least $48,000. "People who never dreamed they'd go to a payday lender are going," says Gail Cunningham of the nonprofit National Foundation for Credit Counseling. " Business Week Feb 07 issue

I asked Muhammed Yunus personally after his talk; "What's the problem in America?" And his answer was very plain and clear. "The problem is the banking system.  It does not help the poor.  A lot of people can't open bank account, and if they do they pay heavy service fees".  He is right.  The banking systems wants to have nothing to do with the poor.  So the poor go to payday loan shops or check cashing outfits described above.  Muhammed Yunus also said something very saddening.  He apparently told this to a Congressman, and what he heard from the Congressman was that payday loans, and check cashing businesses were flourishing most in locations nearby military bases.  This normally would be hard to believe but coming from a Congressman, it's sad to hear that those who defend the country and risk the most are shunned by the banking system.  Now that should make us all think.

Comments

[Murat]

Great post, Baris. Coincidentally, Financial Times recently had an article on Grameen Bank's micro loans in NY:
http://www.ft.com/cms/s/0/d05bb6d2-dc30-11dc-bc82-0000779fd2ac.html