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What's the experience of borrowing in the developing world?
One of the best known examples of lending to people in poverty in the developing world is the Grameen Bank (GB). GB have been lending small sums (typically $25 to $200) to women in Bangladesh since 1976. This form of what is called 'microfinance' was unique at the time because loans were given with no need for the borrower to provide collateral.
GB was formed in the mid-1970s at a time of drought and famine in Bangladesh. GB's approach was to use the communities within which the borrowers lived as collateral. The bank lent small sums to rural groups of women, who were traditionally ignored by conventional banks. Members of the group would receive their loans individually, but only after the previous borrower had successfully started to make repayments on the debt.The loans were combined with training programmes to help women start up small enterprises such as retail or small-scale manufacturing and craft operations. If any member of the group got into difficulty with making repayments, the rest of the group would be expected to help. In this way the loans worked because the social group exerted pressure on each group member to repay.
GB's microfinance activity relies on peer pressure from within each group of borrowers. It also encourages support from the group to each member. The bank's staff have face-to face contact with each group of borrowers in a way that would be unrecognisable to people familiar with Western bank lending.
The results have been pretty spectacular, with the bank growing to become one of the largest microfinance operator and the model for many imitators across the world. From its modest beginnings in a small Bangladeshi village (the name 'Grameen' is based on the Bangla word for 'village') GB has over 3 million borrowers, 95% of whom are women. The bank offers services in more than 40 000 villages, with over 1000 branches.Critics of GB and other microfinance organisations point to what they see as shortcomings in these programmes: from the paternalistic rule system that borrowers must observe, to higher rates of interest than are charged to wealthier borrowers by traditional banks. Critics also say that GB fails to meet its aim of offering capital to the poorest of the poor. Only 'middle class peasants' can access the funds in reality, they say.GB and its founder, Professor Muhammad Yunus, reject these criticisms, pointing to the bank's continued success as a sign that its programmes work. GB claims a repayment rate of more than 95%, far in excess of the 30-40% repayment rates achieved by conventional banks lending to the landless poor in rural Bangladesh.
In 2006, Yunus was awarded the Nobel Peace prize in recognition of his and his bank's work. GB now aims to improve the lives of the rural poor through new ventures such as a mobile phone service and more educational programmes for the often illiterate bank borrowers. One hundred million households in South Asia currently receive microfinance. Professor Yunus says his aim is to introduce GB's services to Latin America and Africa.Finally, in a high profile retort to those critics who say GB cannot hope to reach the poorest of the poor, GB started a 'Beggar Program'. Yunus makes the point that it is hard to think of any group poorer than beggars. Lending them money, seeing them use it to set themselves up as traders, then having them repay the original loans, is a powerful response to the critics of microfinance.