Last week I went to hear Muhammad Yunus, winner of the 2006 Nobel Peace Prize, at the GDI, just outside of Zurich. Muhammad spoke for about an hour and a half, without notes, and without powerpoints. He was in Zurich to explain what he feels can be done to create a different kind of world. He was spellbinding. The room, filled with the business elite of Zurich (directors from the biggest Swiss private banks, successful entrepreneurs, editors of leading magazines, etc.) hung on every word. Muhammad captured his audience with a combination of a great story, an authentic spirit, enormous energy and humility, and sheer intelligence. (Now, I need to qualify my comments by saying that I also have a background in banking -- commercial banking, the kind who lend companies and people real money).
Muhammad told the story of how Grameen Bank came into existence, and then talked about his learnings, his hopes and his projects. Listening to him, you get the sense that to change the world all you really need to do is to question everything and use your common sense. Why do we have banks? What are they supposed to really do? Why are two thirds of the world not served by banks? Why are some people poor? Why is business only about maximizing profits? Are we as individuals really so one-dimensional?
He told about the very first and now legendary loan: 27$ of his own money to 42 people, successfully repaid. He replicated that system -- small amounts, weekly repayments -- lending through the bank that was on the campus at his university. As he describes it, having worked through this local bank where Muhammad acted as personal guarantor, “after all this lending experience with family after family, and village after village, these local bank managers would not change their mind, and were waiting for it all to collapse. If anyone tells me the poor people are not creditworthy, I will scream – I have seen it for myself! So, why don’t I have my own bank? ”
Muhammad finally received all the necessary approvals and opened the doors of Grameen Bank in 1983. The banks said “are you crazy? We have enough trouble with the rich people – they never pay us back!” However, Muhammad had the benefit of tracking statistics since 1976 (all reported clearly on the website), and came to the conclusion that anything banks would usually do – he would do the opposite.
The results are impressive. They have 7 million borrowers. The loan repayment rate is 98%. They lend $500 million per year, all funded by deposits. 70% of the banks deposits are from the borrower themselves. Their most popular product is a pension fund, where if you put a little amount in every week for 10 years, they will match it after 10 years – which works out to an approximately 12% interest rate. New branches are told that “we give you no money – first you take deposits, then you lend, and in one year you must break even for all costs”.
The business model works. Since founding in 1983, Grameen has been profitable for all but three years, and in 2006, Grameen Bank made a profit of US$20 mio.
After this kind of success, Muhammad would have conversations where the bankers would say, “Ah, you are lending to the Entrepreneurial Poor”. To prove the model works, Grameen put in place a program just for beggars. He says: “I don’t imagine anyone will every say that it’s an entrepreneurial beggar”.
To start the program, Grameen went out and talked to the beggars. In Bangladesh, beggars usually go house to house, say prayers for the family, and ask for a cup of rice from each house. At the end of the day, they have enough rice for a meal. So Muhammad asked, why not go from house to house and offer something for sale? The original loan was $10. With the expectation that maybe 2-3000 beggars would sign up for this new program.
After three and a half years, the program has 100,000 beggars. Over 10% are no longer beggars, they are now working as sales people, and some are now part time beggars. Muhammad describes the result: “If you get even 100 who stopped begging, it is a cause for celebration – it breaks the pattern of generations”.
Are banks peopleworthy? This was the question that Muhammad asked, which probably remained in the heads of the people that night. Ironically, the audience in Zurich, a world center for private bankers, might actually understand that message. Private banks must always compete for their business – and many of the relationships are genuinely personal and trust based. However, it would be interesting to have them compare repayment records and impact on borrowers with the credit committee of Grameen.
Muhammad’s story also reminded me of the great quote from Bill Gates a few years ago that “the world needs banking but it does not need banks”. Most readers interpreted that to mean that banking would shift to an online world, provided by telco’s or retail institutions, or even Microsoft’s.
However, the Grameen’s of the world force you to understand that the mental model about non-bank banks was nowhere near radical enough. Here is a business model that has been tested family after family, village after village, region after region, country after country, from Bangladesh to Costa Rica to Sarajevo to Zambia, and extended to other sectors. The numbers that this bank delivers, the impact of this bank, and the robustness of their model will rock the world.