A Bank for the Poor And a Second Look at Microlending
R Empowerment came across a wonderful story about an individual who is changing lives and raising consciousness through a $27.00 initial investment to create a bank for the poor. His success in bringing individuals out of poverty prompted us to take a second look at microlending.
Microlending was first conceived in 1976 by Muhammad Yunus. During visits to the poorest households in the village of Jobra in Bangladesh, Yunus discovered that very small loans could make a disproportionate difference to a poor person. Village women who made bamboo furniture had to take traditional loans to buy bamboo and then spent their profits in repayment and interest to the lenders. Traditional banks did not want to make tiny loans at reasonable interest to the poor due to high risk of default. But Yunus believed that, given the chance, the poor would repay the money and hence microcredit was, in his opinion, a viable business model. He proudly assigned the moniker ‘social business’ to his model, where the agenda was to help people succeed in living their dreams. He called himself the
“Banker to the Poor”
As the ‘banker to the poor’, he recalls lending to beggars. It’s important to mention, these beggars evolved into entrepreneurs. Turning begging into an actual profession. He also began his ‘banking’ focusing primarily on women. Women are so often ignored or dismissed by banks. He centers his lending choices around the concept that “ALL people are entrepreneurs because we all work together to change our lives.” He delightfully compares entrepreneurs to bonsai seeds, trees that are never able to grow because they are confined to tiny spaces. In such a tiny container they have no choice but to become only a bonsai, where the same seeds gave plenty of personal space grow into full-sized trees.
Microlending is the space that any entrepreneur needs to flourish.
Yunus’ first outlay of capital toward this new concept was $27 of his own money. He lent to 42 women in the village, who made an average profit of $0.02 each on the loan. To them, it was very significant, it was their beginning. Thus, Yunus is credited with the idea of microlending and was awarded the Nobel Peace Prize for founding the Grameen Bank and pioneering the concepts of microcredit and microfinance.
A really charming introduction to microlending and its originator, Muhammad Yunus, can be watched on youtube. The video is comprehensive and captures the charm and heart of Yunus genius.
So, microlending, as it began in Bangladesh, had a very specific business model:
Lend out minuscule amounts of money to people, no strings attached, and repayment is entirely up to them, none is expected.
Yet the repayment rate was a very high percentage in the mid 90%s. Furthermore, those funds were used again to loan out to others. And, as recipients became successful in their dream businesses, they also became donors to the program to help others. And so the program continues to grow.
In 2006, Yunus and the Grameen Bank were jointly awarded the Nobel Peace Prize. “For their efforts through microcredit to create economic and social development from below”. The Norwegian Nobel Committee said that
“Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty”
Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development. Yunus has received several other national and international honors. He received the United States Presidential Medal of Freedom in 2009 and the Congressional Gold Medal in 2010. Source-Wikipedia
It’s important to mention, some microlenders are in the business of making money. However, some are on a generous mission of trying to alleviate poverty. Most have rather stringent requirements for the loans. Besides checking applicant’s credit scores, most microlenders also require loan recipients to take workshops on business plans, marketing, and money management. In addition to learning how to present detailed presentations of their business model to lenders.
Education is part of a bigger picture of helping business owners help themselves as they grow out of poverty.
Before the most recent recession in the United States, micro financing was a concept that was, for the most part, limited to the developing world. However, with the tightening of the credit markets and an increased demand for smaller loans, microlending’s (in all its various, diverse formats) appeal has grown tremendously. Fewer business owners are able to obtain traditional lending options (home equity, credit cards, or qualify for traditional bank loans). Yet the need for financing still remains. The interest rate for credible microlenders in the United States ranges from 5 to 18 percent, which is not only higher than the original ‘no interest’ loans, it is also higher than most bank loans.
R Empowerment is well-versed in the evolution of microfinancing and its new requirements as they relate to prerequisite education. Lenders now are not as courageous as in years past, or even in developing countries. They are more cautious and recognize the importance of making sure their recipients have primed themselves for success. The number one credibility requirement is education.
R Empowerment offers the gamut of primary financial knowledge and execution.
As a charitable foundation, we offer courses that will build an entrepreneur beyond just dreaming, but also have the tools to sustain that dream!
As a donor, you can become a vital part of that education for entrepreneurs. The young and not-so-young who are anxious to get out there. Taking control of their lives and making a difference in this world. Your donations help support our education centers. Therefore, we can support the upcoming business persons by offering the firm foundation they need before getting started.