Friday, October 13, 2006

As long as everyone is blogging about Grameen Bank...

As most of the globally conscious citizens of the world know by now, Dr. Muhammad Yunus, the founder of Grameen Bank, the original microfinance bank, has won the Nobel Peace Prize (technically he won half the prize while the Bank itself won the other half).

In short, microfinance is the ultimate antithesis to World Bank-style lending. Rather than massive loans given to governments of developing countries to undertake colossal mega development projects like dams, microfinancing finds single individuals, or sometimes a small group of individuals, and provides extremely small loans. Through a number of clever strategies, legitimate microfinance institutions like Grameen Bank are able to achieve extraordinary repayment rates. The individuals assuming the loans not only pay back the borrowed money, but develop skills to reinvest the surplus capital earned through the initial investment of the loan.

Here's what a few bloggers have been saying about Yunus and Grameen winning the award:

From Shobak, on the inspiration Grameen offers the world:
Current politics is a death-bound roller coaster, and the passengers can't disembark. People are always banging on about the resulting short supply of optimism. The stories are there, inside and outside the borders - vested with the Innovative NGOs, Tireless Activists, Young Turks and Culture Agitators."
The Globalization Institute Blog jumped on the optimism bandwagon, noting that the Institute "has been advocating a greater emphasis on microfinance in the international development community so we are delighted by this appointment. And we're doing research on how to take microfinance forward."

Kamla Bhatt has a nice summary of some of the major media coverage in her entry, including the following quote from an editorial by Gabriel Rozenberg, Economics Reporter for The Times:
Grameen shows us the poor and the destitute not as pitiable charity cases condemned to their lot, but as thwarted entrepreneurs who just lack the means to improve their families' lives. It is a profoundly optimistic view of human nature. With this inspired choice the Nobel Committee has lit a path that could lead to the eradication of poverty in our time.
And then, just in case there is too much optimism out there, we have The Economist offering its reaction in an editorial titled "Losing its lustre":
Friday October 13th, the Norwegian part of the Nobel Institute ... named the recipient of the 2006 peace award ... [T]he award was given to Muhammad Yunus and Grameen bank in Bangladesh, which promotes lending to the poorest, especially women ... [b]ut the Nobel committee could have made a braver, more difficult, choice by declaring that there would be no recipient at all ... This year’s winner is an admirable anti-poverty campaigner, but it is a stretch to call him or the Grameen bank peacemakers.
When The Economist also questions last year's winner, Kenyan environmentalist Wangari Maathai, claiming that "she has done a lot to plant trees in Kenya, but not much to promote peace," it becomes apparent that there are those who fail to understand how poverty, which emerges out of resource scarcity, is linked to conflict. "Peace," The Economist must not realize, is much more than the absence of war.

Now, what does microfinance have to offer the average citizen of a developed country who wants to help in the fight against global poverty? Most of us place some sort of vague trust in charitable and philanthropic organizations, believing that their modest work will somehow make a difference in the face of widespread poverty. Others believe that institutions like the U.N., or even the World Bank, are responsible for, and dealing with, the problems of poverty and inequality.

But these institutions are large and faceless, and if they are not working effectively to eradicate poverty, the average citizen feels powerless to change them. Many people might perceive microfinance as a tool of similarly large (though not as large as the World Bank) and faceless institutions, and therefore assume no ability to become involved. But the beauty of microfinance is that it is micro. This means that loan amounts are so small, on average, that even a lower-middle class American can contribute a small percentage of her or his annual earnings to a lender that can, in turn, make a loan to a farmer, shopkeeper, or other entrepreneur in need of a cash jumpstart.

But still, how would one find a bank engaged in microfinance, and do these banks give individuals an opportunity to make investments that can be turned around in the form of loans? They may, but there's a major obstacle in that few want to do the research to find out. There's an impressive organization, called Kiva, that has figured out a way to remove the obstacles. Kiva uses the Internet to allow people like me to lend money directly to a person in the developing world. This cuts out the massive overhead of a large bank. It gives me, the "lender," a sense that my money is actually making a difference in someone's life. If I'm happy with my investment, when my loan is repaid I can have Kiva roll right back into the lending pool so that I can help someone else.

At first I was skeptical about whether this was really a viable solution to global poverty. From the information on its website, including glowing endorsements from such media outlets as NPR, ABC News The Wall Street Journal, and Business Week, Kiva seems to have a solid foundation and a model that is already proving effective. I'm sure the most cynical among us can find reason to criticize Kiva's model of microfinance. The Economist, after all, found it rather easy to criticize Yunus and Grameen for not doing enough peacemaking to deserve a Nobel Peace Prize.

But I have to wonder, if such a model were in place six or seven years ago, when many cotton farmers in India began going deep into debt, with usurious interest rates, to buy Bt cotton from Monsanto and other biotech companies, would it have made a difference? In this case, probably not. The reason is that Bt cotton, and all of the other industrial inputs required to grow and harvest such volumes of cotton (or any other crop), are far more expensive than typical microfinance loans would cover.

What's at issue here is the use of technology at a human scale. For example, a hydroelectric dam is not a technology at a human scale. Huge institutional investors, and a stable government infrastructure for managing costs and overseeing construction, are central components to any large-scale dam project. Can a technology, whether a dam that produces electricty or a genetically engineered seed that produces increased yields, really benefit a person if he or she has little or no control over it, and in using it becomes severely dependent on others?

One of the ideas behind microfinance is that it gives people at the bottom of the pyramid a little bit of control over their lives. Not too many mega-dams have made profoundly positive impacts on people's lives. Nor have we heard many promising stories about genetically modified seeds leading to beneficial economic transformations in people's lives (the African farmers in my last post not withstanding). But the stories that come out of the microfinance community are truly amazing.

There are already plenty of organizations in India engaged in microfinance (see here for a thorough article on implementing the concept of microfinance in India, drawing on examples from elsewhere in South Asia). With time, hopefully, the legitimate and credible organizations that are doing good work will rise to the top and those that only aim to take further advantage of people will fall by the wayside. For now, I'm headed back over to Kiva to see if I can find a Ugandan barber, or a Kenyan street vendor, or an Indian tailor who need a small loan to invest in some improvements that will help grow their businesses.

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Anonymous said...

Hi Stephen,

Thank you for your post on microfinance. And thank you for writing about Kiva. In doing so, you have provided your readers with a feasible way to get involved in a worthy cause. You're right; people living in affluent societies don't think there is anything wrong with the concept of giving. It's a matter of finding the right vehicle. Perhaps you might consider extending the shelf life of Kiva's message by placing a permanent link or small banner on your site (easy to apply code is found at There is a heightened awareness towards microfinance due to the recent Nobel prize awards, so thanks once again for elevating Kiva's exposure.

Tim (volunteer with

Premal said...


This is Premal Shah, President of Kiva and I just wanted to say that I really enjoyed your analysis above -- very thoughtfully done.

I agree with many of your conclusions - here's to the optimists!