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    Finance & Development    March, 2000, USA



    IT HAS ALWAYS struck me as odd that credit is considered a good thing, has positive connotations, is a ‘’hurrah’’word, whereas debt is considered a thing has negative connotations, is a "boo" word. Professor Muhammad Yunus , the founder and managing director of the Grameen Bank of Bangladesh, has even gone so far to call credit a human right. Yet debt and credit are inevitably the same. Would anyone advocate imposing more debt on poor people (whether small farmers microentrepreneurs, or rural woman) as part of a strategy to eradicate poverty? The enthusiatic advocates of credit sometimes forget that loans at fixed interest rates present risks to the borrowers, including the risk of being unable to repay the loan. Small farmers living near subsistence level, for example, are notoriously, and rightly, risk averse. Credit can increase their vulnerability, whereas lower interest rates will discourage saving. For people at the lowest income levels, food and health are the top priorities. Withouth better nutrition, they are unable to work. As income rises, credit becomes more important. It allows people to receive training, buy inputs, and finance working capitals. At a slightly higher income level, training is a top priority. Yunus, who strongly opposes requiring traing as a condition for credit, maintains that none of his borrrowers needed training. However, I have observed a project in which the poor underwent traing in the hope of obtaing credit afterword, but late often found the credit to be unnecessary. With a knowledge of simple bookkeeping and cost accouting, they were able to increase the profits of their microenterprises enough to dispense with credit. Yunus—a man of vision, practical ability, and drive---has written a charming and often moving autobiography about how he came to be one of the most celebrated anti-poverty campaigners of our era. He started the Grameen Bank with a personal loan of $27 to 42 poor people in his village. The loan freed them from indebtedness to moneylenders and middlemen. The bank lends small suns, mainly to poor rural woman, who use it in enterprises that will improve their childrens welfare---for example, to build fish ponds or buy dairy cows and rice husking machines, people learn to help themselves. The Gramenn Bank uses peer pressure in small groups to encourage repayments, and its repayment record is spectacular. In comparison, big borrowers are notorious for that not repaying their loans.

    The Grameen Bank, a nongovernmental organisation (NGO), is frequently and rightly upheld as a wonderful model for lifting the poor out of poverty and has been replicated aroud the world, including in many rich countries. Its purpose is to transfer the burden of screening and enforcement from the lending institution to borrowers’ groups. The advantage of this is that costs are reduced; a disadvantage is that small groups of borrowers are less able than credit institutions to bear risks. But the models reduces moral hazard (the possibility that individuals or institution will change their behavior in unanticipated ways as the result of a contract or agreement; for example a bank whose deposits are insured againt loss may make riskier loans and investments) and adverse selection (a problem that arises when information known to one party, to a contract is not known to the other party, causing the latter to incur major costs; for example, individuals who have the poorest health insurance), which may overide the higher social costs of the wrong party’s bearing the risks.

    A less widely known aspect of the Grameen Bank is that it has dificultly finding enough workers to process the loans; that turnover is high, with more workers leaving than entering; that the credit extended represents only a tiny proportion of total credit (the bank has served only 1.4 million people out of Bangladesh’s population of 120 million, or about 1 percent; the credit provided by NGOs accounts for only 0.6 percent of total lending); and, most striking of all, that some borrowers make repayments by borrowing from village userers. An NGO like the Grameen Bank cannot replace governments or commercial credit. Instead, its function shoud be to work with the government, to exert political pressure on it, to change its policies, and to pioneer models that can be replicated. It is sometimes claimed that NGOs work without and against the government. In fact the Grameen Bank relies heavily on the government and, in 1990, received 60 percent of its capital from the Bangladesh government. It would have been interesting if Yunus had explained in greater detail the obstacles the Grameen bank faces in expanding its work. Is it recruitment of village workers? Is it finance? Are there managerial constraints? Is there an absence of desire to expand? But this is a splendid book, which ends with a hopeful message:"we have created a slavery-free world, smallpox free world, an apartheid-free world. Creating a poverty free would be greter thean all this accomplishments...This would be a world that we could all be proud to live in.’’




     
   
   
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