This week’s Q&A features professor Muhammad Yunus, who won the Nobel Peace Prize in 2006 for creating a new front line against poverty with the founding of Grameen Bank, which lends small amounts of money to the poorest in Bangladesh. The practice, called microfinance, microcredit or microlending, now exists all over the world. Yunus sat down at the Royal University of Phnom Penh with the Post’s business editor Joe Freeman to talk about the state of the industry.
A lot of farmers here end up going into debt around the rainy season because of damage to crops. Does microcredit factor into the way they incur more debt by taking out more loans?
In any agricultural country, it’s the same thing. I’d say that’s poor-quality microcredit. Microcredit people should know how to have a good fit with clients’ lives. They should find it comfortable to pay you back and you should feel comfortable working with them. If it is a constant headache, you lend money and they don’t pay back, this is a non-starter. It will not go very far.
Once standards of living in countries like Bangladesh and Cambodia start to increase, will microfinance cease to be relevant?
We have six branches in New York City, and I just came from Los Angeles. We opened two new branches there. This is in the richest country in the world, but still, there is a big need. We have branches in Omaha, Charlotte, Indianapolis, San Francisco, Boston and Austin. We call it Grameen America.
The basic thing is that banks don’t lend money to people below a certain level. Are you familiar with payday lenders? Payday lenders are a terrible thing. It’s everywhere in the United States. Why? Because banks don’t do the job, so you have created a new kind of loan shark. Interest rates are 100 per cent, 1,000 per cent, 2,000 per cent.
Isn’t microfinance in general known for having pretty high interest rates?
In New York City, our interest rate is 15 per cent.
A recent trend of criticism says this method of loaning money doesn’t really work and that it keeps people in a cycle of debt. Is there some truth to that?
There are thousands and thousands of types of microfinance. So when you say microfinance is bad, we aren’t sure which one you are talking about. There are fake microfinance programs. There are genuine microcredit programs. There are very badly managed microcredit programs. There’s no generalising.
I read somewhere that 96 per cent of the clients borrowing from Grameen Bank in Bangladesh are women?
It’s 97 per cent.
Why is that?
Because impact in the family is much better. Women take care of this money very cautiously. Men are not as cautious. Men want to blow the money and go to the pub and enjoy themselves. Women are very cautious with what they do and want to get the best mileage out of the money they borrow. These are the same characteristics globally, it’s not just one country. If you look at Cambodia, you’ll see the same thing.
How would you describe the ideal candidate for a micro-loan?
First of all, it must be a woman. That’s number one. A woman who by definition doesn’t have a job because her husband works and she stays home. So if she is in a single room home, that qualifies. But being in a single room is not enough. If there is a leaky roof in a single room, that’s an extra qualification.
Single room, leaky roof, no furniture inside, that’s an extra qualification. So that’s how you push yourself to go all the way above and see that there is little inside. A few pots and pans, nothing else. That’s what we call poor people. That’s where we start.
And when we tell her, ‘Here is the money, we can give you it if you want’, and she says, ‘No, don’t give me the money, I don’t know what to do with the money’, then we know we are in the right place. And our job is to build up her confidence.
What are the mistakes that countries make when they copy this model?
One common mistake is they just read the book and say, ‘Oh that’s so easy!’ And they do it and flop. They don’t have the patience to learn how to do it. The idea is simple. But when you go and do it you need to understand certain procedural things. How you do it, how you speak, how you build confidence. Things we have refined over years and years and years. So you should spend some time with us or anybody who has done it for a while.
When does this model start to fail?
People misunderstand it, for one, or people misconstrue it and say, ‘Ah, this is great I can make a lot of money by lending money to poor people’. That abuses the whole concept. Microcredit was not created to make money for rich people or well-off people.
It was designed to help people get out of poverty. So if you are using this tool to enrich yourself, that’s the wrong purpose. I have seen big microcredit programs where interest rates are higher than 100 per cent. It should be less than 20 per cent. Those are the kinds of things we have been very critical about.
Should the government be involved in these institutions?
We try to make the government stay out of it, because government and microcredit don’t have a very good chemistry. When you lend money to the poor people through the government, it gets politicised. When politics and money get mixed up, the financial discipline gets hurt, the borrower knows you are giving money because you want a vote.
You talk a lot about social business. Should NGOs here be thinking more about creating a business to solve problems?
If they are interested in becoming sustainable. That’s very important. For NGOs you have to raise money all the time, otherwise you cannot do whatever program you want. But to create a social business, you need only the investment.
This interview has been edited for length and clarity.