Can Social Business Solve Poverty While Being Profitable?By Andrea Villar | Fri, 02/28/2020 - 09:02
When Muhammad Yunus decided to quit his job as an economics teacher to find a meaning for what he thought was a useless life, he had no idea that he would end up creating a bank for the poor that lends money without asking for paperwork, proof of income or even any kind of ID. To this day, the cumulative amount disbursed since Grameen Bank Inception sums up a total of US$29,854 million.
“I was teaching economics but I considered it a useless subject with no impact on people’s lives, only a topic for business. However, economics has everything to do with people and how to protect them. I felt useless because I wasted my time teaching something in the wrong way and I spent my life learning that,” said the Nobel Peace Prize Winner Muhammad Yunus at MELIXP in Mexico City.
With that in mind, Yunus started to knock on doors in the village next to where he lived in Bangladesh, India, to ask people if there was something he could do for them. “In the beginning, they did not trust me. But I spent summertime with them, I got to know them, they got to know me and finally the relationship began to take shape. In all the years that I studied economics I never had a chance to work with real people,” he said.
But the happiness did not last for long and it took no time for Yunus to notice the extreme poverty cases in the country. “It seemed like a problem of another kind that I had no idea I would get involved with. However, I saw that people in the village had a practice of lending a small amount of money to their neighbors based only on mutual trust. They made their own rules”.
In this way, a simple idea came to Muhammad’s mind: “I wanted to help and I told the villagers, ‘from now on if you need money come to me.’ Again, initially they did not trust me but once someone took a chance on me and saw that I gave money from my pocket, they were really happy. I told them they could pay me whenever they could, with no conditions.”
That was just the beginning and gradually the system became very popular. However, Muhammad was running out of the money he earned while he was teaching in the US. “I wanted to continue. I went to some banks to ask them to lend money to the poor but they repeatedly said no, so I decided to go and create my own bank.”
“I accused them (the banks) of having a system designed the wrong way. They lend money to people who have lots of money and do not lend money to those who do not have any. This is wrong and it should not be that way,” Yunus pointed out. So he set out to prepare for his new venture. After three years of paperwork and lobbying with authorities, in 1983 Yunus’ institution finally became a bank independent from the Bangladesh government. Grameen Bank started to give small loans, known as microcredit or “grameencrendit.”
The way the Grameen Bank works seem simple enough: each borrower must belong to a five-member group but does not need to present any collateral for a loan. The loan is given to only one person but the whole group is responsible for the debt. Each member has to pay for their own loan but if they have problems, the group may help them pay because they would not get any more loans from Grameen if they do not.
In addition, the bank does not take people to court if they cannot pay. The system is based on trust only. “I had no idea what this was all about because I studied economics, thus I created all the rules and procedures. Since I did not study banking, my mind was free and I could do whatever I wanted. If I had studied banking I guarantee I would never have thought of creating Grameen Bank because those rules do not fit. Traditional banks work for the rich and I work for the poor. They go after the citizens I go after the villagers,” Yunus explained.
After that, it was all a ripple effect and currently, the cumulative amount disbursed since Grameen Bank’s inception adds up to a total of over US$29.8 billion with a cumulative amount repaid of over US$27.5 billion, which means a recovery rate of 98.9 percent, according to Grameen Bank’s website.
Grameen Bank’s methods are applied in projects in 58 countries, including the US, Canada, France, The Netherlands and Norway.
Over time, some big companies such as McCain followed Yunus’ example and started to do social business from their trenches. In 2015, the Canadian company began a program to improve the quality of life of the European communities where it operates. Every year, McCain processes over 5 million tons of potatoes into French fries, yet 40 percent of its potatoes grown in Europe were thrown away because they did not match the specific shape the company’s machine required.
With Yunus’ support, McCain’s CEO created a new company to buy those throwaway potatoes and turned them into potato soup for those in need. Besides, the potato maker co-created with Yunus's team the ‘Campo Vivo’ social initiative in Colombia, which benefits underprivileged families of small Colombian producers by giving them direct assistance in agricultural best practices, technical concepts and entrepreneurship.
Success or Mirage?
Through the years, some detractors have said that the bank would not work if people did not give donations since the bank started getting most of its funding from the central bank of Bangladesh in the mid-1990s. For many others, Grameen Bank is a success story in microfinancing and a guide for other groups around the world.
Years after its initial venture, Muhammad Yunus stands by his position and ensures that businesses can be a different kind to what the economic theory dictates. “The financial system has led us to extreme problems because it lends money to people who have lots of money. The more money you have, the more attractive you are for the financial system. This is a ticking time bomb that will eventually explode and impact all those left behind,” said Yunus.