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How Grameen Bank Alleviates Poverty

March 29, 2009

Muhammad Yunus Speaks at Google

Muhammad Yunus innovated the microfinance model (lending small sums of money to the poor) 25 years ago in Bangladesh.  He is the key leader who reframed the global poverty alleviation discussion around empowerment and belief in the poor vs. dependency and cynicism.  Here are three “takeways” if you don’t have time to read the book.

  1. Don’t train the poor.  Empower them with access to capital. Yunus cynically describes how training programs prop up international aid institutions with employment and tasks to keep international aid workers busy without providing constructive improvement to the poor.  Oftentimes the poor are intimidated by training programs, and the programs can highlight there illiteracy or lack of aptitude, which further discourages them.   Yunnus argues that the poor have a “survival instinct” and that if you give them capital, they will deploy it efficiently to generate income.  As they make their own lives better, they will naturally seek out training that they want and will even pay for.  It’s not that training isn’t important.  It’s essential, but training comes later in the solution, not at the  beginning.
  2. It’s access to capital, not rapid population growth that primarily keeps poor people poor. To be clear rapid population growth is a problem.  However, the solution is not to focus on family planning.  Instead, solutions should focus on providing capital to the poor who can then use that money to generate increasing income over time, educate themselves, and educate their children.  As women increase their income and education level, they choose to have less children because want to provide a better standard of living and education to the children they have.
  3. When you help women, you help families and societies. Yunnus discusses how women in Bangladesh were historically excluded from the financial system.  He also explains that poverty strikes women hardest because: “if one of the family members has to starve, it is an unwritten law that it will be the mother” (72).  When women earn a little extra they invest that money first in their children and second in their home.  Men tend to invest in themselves first.

How the lending system works

  1. Members form into a 5 person lending group.
  2. Each member of the lending group must take training on Grameen lending and repayment principles and pass an oral examination to be eligible for a loan.  If one member fails, they all must retake the test
  3. Only two people get loans immediately.  After they prove they can repay over a 6 week period, other group members are permitted to borrow.
  4. If one group member is unwilling or unable to pay back a loan, the entire group becomes ineligible to borrow larger sums in the future.  This creates tremendous social pressure for groups to support each other and keep each person on track.

Repayment terms:

  • Loans last one year
  • Installments are paid weekly
  • Repayment starts one week after the loan
  • Interest rate is 20%
  • Repayment amounts to 2 percent of the loan amount per week for 50 weeks
  • Interest payments amount to 2 taka per week for every 1,000 taka of the loan amount
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