Seed Capital

Turns out that some of the most effective investments in the world are microloans of $300 or less to impoverished women in impoverished countries.  The Nobel Prize Committee recognized this today with the announcement that the Peace Prize is going to Muhammad Yunus of Bangladesh and Grameen Bank which he founded to provide microloans. Grameen bank says it has loaned more than $5 billion to more than six million people in Bangladesh; and, around the world, other microfinance institutions have been founded on the Grameen model and often with Grameen advice.

Mary has been involved with US arm of Grameen since she retired from ITXC in 2003.  She’s on the Advisory Board of the Grameen Technology Center and drafts me from time to time when she needs some particularly nerdish advice.  I’m on the board of ShoreCap Exchange which provides technical assistance to microcredit banks around the world and Mary is active with them as well.  So we believe in microcredit – and understand that what is now a huge “industry” is almost the sole invention of Yunus. 

(BTW, Mary is ecstatic this morning about the Peace Prize.  She will be relentless in using it to help microcredit organizations market themselves to donors.)

It’s a sad fact that most well-intended aid doesn’t work in alleviating poverty.  Some necessary efforts like Red Cross Disaster Relief at best stop people from sliding downhill physically and economically after a disaster.  When done right, microcredit – which sounds like it would be a useless drop in a bottomless bucket – works.

Microcredit succeeds by three measures:

1)      in study after study, the recipients’ lives and those of their children are shown to be substantially and permanently improved a significant percentage of the time;

2)      the economies of the villages where the loan recipients establish their tiny businesses benefit both from the cash-inflow (or cash-retention) aspects of the businesses AND from having new services available;

3)      The loans get repaid at an incredibly high rate and with interest so more new loans can be made using the proceeds from the old loans.  The programs are not only self-sustaining.  They’re capable of organic growth.

Fred Wilson has blogged about the Grameen Phone ladies and contributes part of the ad revenue from his blog to them.  These women receive microloans to buy cell phones, car batteries, and antennas that go on top of long poles.  They become the village phone booth in places where there is no fixed line service and individuals are too poor to own their own phones.

The phone ladies often are able to lift themselves from extreme poverty.  Their children are able to go to school longer.  They get better health care.  They take better care of themselves (and have more choices) so they have lower HIV infection rates than their peers.  They often set up ancillary businesses to serve the people who come to the hut to make calls – and often are repeat borrowers and first time savers.  It’s capitalism at its best.

The village benefits because the new phone link provides vital information.  A family grows a tiny crop for three months.  They harvest it and put it on a cart.  They used to consult a shaman to find out whether to pull their cart north, east, south or west.  Now a simple phone call tells them where the best markets are and which roads are open.

Often the volume of calls convinces the local cellular company (which also benefits from having the phone ladies as agents) to build a tower closer to the village where call volumes now exist.  Some phone ladies may work themselves out of their initial business but they have proven themselves to be adaptable entrepreneurs.

The phone ladies have a fantastic repayment rate, better than 90%.  Multibillion dollar telcos haven’t done nearly as well.  These loans have relatively high interest – over 10% - to cover the cost of making such small loans.  But the only credit available before – if any was – was at rates approaching 100%/week.

Looking cold-bloodedly at microcredit, of which I was initially very skeptical, I think it succeeds because it meets a huge unmet market need.  Let’s go back to the phone lady program as an example:

The village needed communication and, in the aggregate, can pay for the benefit.  The market isn’t initially big enough for the cell company to serve.  They don’t even build a tower nearby (that’s why the lady has to put her antenna on a pole).  There is no business case for an entrepreneur at 100%/week interest.  But the microloan lets the local entrepreneur make a reasonable return (one with which she can both improve her family’s quality of life and grow her business).  She IS able to serve the formerly unservable market.

In a strange way, this is a long tail phenomenon: scale comes from the number of people served rather than the size of any individual transaction. The banks which provide microcredit do have to organize in a very special way both to fight back the ever-present danger of fraud and to efficiently make and service loans in such small denominations.

You can donate to Grameen here.

I blogged previously about Shore Bank, Grameen, and VisiCalc and about a village computing project.

Comments

[Kempton]

Dear Mary and Tom,

How wonderful that you both have been helping out the Grameen Foundation. I was ecstatic to hear that Grameen had won the Peace Prize which will give it the extra attention and spread it out even more. On the day of the Prize announcement, I was surprised to hear from CBC that there some local Canadian bank (a credit union in Vancouver, BC) is offerring mircoloan to some less fortunate Canadians too.

Here is my blog posting with link to a Charlie Rose interview,
http://kempton.ideasRevolution.com/2006/10/14/grameen-bank-won-2006-nobel-peace-prize/

By the way, is there an official Grameen Foundation presence in Canada? I would love to put some time in to help them if I can.

Cheers,
Kempton

[Tom Evslin]

Aswath:

You're right a usual. I should have made more of a point of the fact that with microcredit, as with everything else, the devil is in the details.

Some of the ingredients of the Grameen model's success seem to be:

1. The microcredit finance institutions themselves are usually profit making.

2. borrowers are organized into small support group. everyone in the group has to be current for any memeber to get a new loan.

3. administration is local.

4. loans are made to women and almost never to men (that hurts).

[Aswath]

There are reasons why microcredit works in Bangladesh and possibly in other places. But they are not apparent from a distance. Let me elaborate with a prior example. Soon after becoming Prime Minister of India, Indira Gandhi nationalized banks under the claim that banks are not loaning to the poor working class of India. The nationalized banks then loaned money (except they were not called microcredit, I think; I was not fluent enough in English then) to individuals for expressed purposes like buying a rickshaw (manual or auto powered). Lots of people signed up. You can see "Indented by so and so bank" (or something to the effect, I forget now) in many places. But the failure rate was high. I think the program withered away over a period of time - at least nobody talked about anymore.

Now there could be many reasons for the failure: the bank managers were measured on the amount they loaned out - so might have thrown the money away; most of the recipients were urban men where the stigma of default is not that acute. Whatever it may be, my point is that the mechanics is more important than the rudimentary idea. Based on the widespread success, it looks like the mechanics is portable.

[Ken Liffiton, Grameen Foundation]

This is certainly excellent news; everybody at Grameen Foundation is having a wonderful but very busy day managing the interest it has generated. We're thankful to you and Mary for your great support, and we're looking forward to even greater successes as awareness of the power of microfinance continues to rise.