Banker to the Poor

I have recently taken a keen interest in microfinance. And considering that, at Credit Mobile, we are planning to start a company that would use mobile technology to help the rural popor, I felt I had to become an expert on the needs of the rural poor.

And I felt the best person to seek advice from was Muhammad Yunus.

"Banker to the Poor" is the autobiography of Muhammad Yunus, a Economics professor from Bangladesh who was so moved by the poverty that followed the Bangladesh famine (1974 - http://en.wikipedia.org/wiki/Bangladesh_famine_of_1974) that he started a new branch of economics called microfinance. And no, he didnt just teach it to his students, he implemented a revolutionary concept and started the Grameen bank (http://en.wikipedia.org/wiki/Grameen_Bank) which has spread its wings in 80000 villages over the world both in developed and developing countries alike. It had a turnover of USD 93 million in 2009, and 7.41 million members.

So what is micro-finance?

Imagine Nagamma, a widow with 2 kids residing in a village. She has no land and lives in a hut. Being an aging woman, she cannot engage in daily labour. She makes baskets at home and sell it to make some money but she doesn't even have money to pay for raw materials.

Private lenders see an opportunity and give her money at ridiculous interest rates (50-100% p.a). They make sure that after paying these loans back, she has just enough to feed herself and cannot save any money. Nagamma stays in poverty. Not because she is lazy. Not because she cant earn money. But because nobody wants to lend her a few cents to buy straw.

Why about banks, you ask? Banks consider these "micro" loans as having "high risk" of default and they ask Nagamma for collateral.
"If I had collateral, I wouldn't be asking you for money. I promise to pay it back with interest. Please trust me", says Nagamma.
"Sorry, the system doesn't work like that. We need collateral", says the branch manager.

And we are stuck!

Yunus realized that for people like Nagamma , their collateral is their life. You are giving them one chance to survive and fend for themselves. They know not to abuse it. They are probably the most credit worthy people you will find.

And that is the core of micro-finance. Lending small amounts to a large number of people who want it invest it to earn money. The typical recovery rate of loans is really high - around 98-99%. You earn money by charging high (15-20%) interest rates to cover your processing costs. It is usually structured as a for-profit social enterprise. And it has helped raise millions out of poverty in the last 20 years.

Apart from the obvious knowledge I gained in microfinance, the book was probably the best I read for a number of other reasons:

1. It is the journey of a successful man from a relatively well to do but conventional family in Bangladesh, who went to US on the fullbright scholarship, gained exposure, came back to his country and was moved into action by what he saw. Being a fairly successful student from a developing country studying in a developed country who wants to go back to his home country, it echoed very well with me.

2. Yunus doesnt tell you what to do. He says what he did. He tells you his experience and his take-aways from his experience.

3. It taught me about true initiative. Yunus was a man of tremendous initiative. The book shows how much change we can create if we got off our chairs and did something about things we feel were not right. He shows that most "experts" have no clue what they are talking about. T

4. It taught me what a social enterprise really meant. Why profit should not be the sole driver when you start a company if we want to achieve real growth. How the whole "profit maximization" assumption on which modern economics is flawed.

5. I used to believe in "be happy and satisfied with what you have" but wasn't quite comfortable with the complacency it induced in me as there was nothing to work towards. This book taught me how to find a balance. Now, I believe in "Be happy with what you have. But remember that there are people as deserving as you, who dont have even a hundredth of what you have." And I can be happy with what I have and have something to work towards!

I would highly recommend reading it if you are interested in microfinance, economics, social entrepreneurship, management or just want to broaden your view of the world.