Toward a new capitalism

Grameen Bank (Village Bank) in Bangladesh is the world’s most well-known microfinance institution. It lends $1.5 billion a year to 8.4 million people. The establishment of Grameen Bank shows that we do not always have to accept the systems we are given. Sometimes we have to think the impossible if we are really going to change the world.

Origins of Grameen Bank

My first venture into such small-scale lending was not carefully thought out or based on any previous research; rather, it was an instinctive response made when I came face-to-face with gross injustice.

In 1976, I was teaching economics in the port city of Chittagong in Bangladesh. At my university, I was talking about sophisticated economic theories and models, but when I looked at people living in the adjoining settlements, I saw a harsh practical reality where these theories were irrelevant.

The poor near my university often depended on loan sharks, who would lend money at interest rates of 1,000% or even more. Their recovery procedures were equally repressive. I thought that I could probably assist some of these poor people by lending money myself. I started with only $27, which helped a few families. Then I thought that more families will benefit if banks provided loans to the poor.

I approached banks to convince them to lend to the poor. However, the banks refused, arguing that the poor did not have any collateral to guarantee the loans. To get past this obstacle, I offered myself as the guarantor, which worked. The poor borrowed the money and returned it too. It was at this stage that I started arguing for separate banks for the poor. Eventually in 1983, I established Grameen Bank, a bank that has abandoned the whole idea of collateral.

Financial access to women and education loans

Typically, commercial banks used to provide money to men but not to women. At Grameen, we wanted to provide women with access to finance, despite the fact that commercial banks told us that in Bangladesh until that time money matters had always been handled by men and that women were not interested in receiving loans. We took the view that women could contribute equally or even more than men to a family’s development. So I tried to change the consciousness of women. It took us five long years to make this change and it was only during the sixth year of the bank’s operations that we had women borrowers. Now, 97% of Grameen Bank’s 8.4 million borrowers are women.

Almost all of the women who borrow from Grameen Bank lack formal education. We decided that this was something we should try to change so we encouraged our borrowers to send their children to school. Eventually education became a part of our program and we started educational loans which have helped educate hundreds of thousands of young people. Beneficiaries are usually attached to Grameen Bank for a long time, and I have seen many instances where the mother is uneducated but her daughter has been able to go even to higher studies through our loan programs. I personally believe that such mothers are as capable as their daughters, but since society has not given them an opportunity to receive an education they have remained illiterate.

International expansion

Grameen Bank’s activities have now expanded beyond Bangladesh. We run programs in the People’s Republic of China, Guatemala, Mexico, Scotland, Zambia, and many other countries. In January 2008, the bank started operating in New York City. People were skeptical in the beginning, saying that the realities in rural Bangladesh and urban New York were very different, and that Grameen’s model was not going to work in New York. However, we took up the challenge. What happened later was quite interesting. The second half of 2008 was marked by the beginning of the financial crisis, and in New York we saw huge commercial banks melting down on the other side of the street, whereas the new Grameen setup was flourishing. The urban poor in New York benefitted as much from microcredit as the rural poor in Bangladesh. People were impressed with Grameen, and we have started similar projects in Detroit, Omaha, Indianapolis and San Francisco. These successful initiatives had shown that the Grameen model had something to offer to excluded communities in developed countries, especially given the huge increase in inequalities in developed countries in recent years.

Roots of poverty and the role of social business

As Grameen Bank expanded, I started thinking more about poverty. Is it the fault of the poor? Why is, or was, a Grameen borrower poor in the first place? I hold that poverty has certainly not been created by the poor; rather, it is imposed on the people who suffer from poverty by the system. So the system itself is faulty. To remedy poverty, we therefore have to fix the system. For this, we need to repair the institutions that make the system. Some of the most important of these institutions are those offering finance. Ensuring the access of the poor to finance is thus at the heart of eradicating poverty.

Our conceptual framework for finance is wrong. Generally speaking, businesses tend to operate only for profit, and that is where the fault lies. So far I have started a lot of companies. Every time I see a problem, I start a company. To me, it makes sense to consider earning money as a means, but at the same time to have a purpose for using the money. Perhaps if we can widen our scope and combine two kinds of businesses—one for making money and another for solving problems—then the system will work more efficiently.

These businesses are called social businesses. Although charity may work on a few occasions, it is limited, because the money does not come back. But a social business is a self-fueling engine where the business becomes sustainable on its own. I believe in this business model, because I see enormous opportunities to benefit from the creativity and technology in today’s businesses. We have more sophisticated technology than ever before, and we can do things that were deemed impossible just a few decades ago. The youth today are full of imagination and creativity. If we can combine these two, we will have social businesses operating successfully.

The purpose of social businesses is not to make profit but to solve problems. And the yardstick for measuring the success of a social business is its ability to solve the problems that it targeted in the first place. A social business must have an objective in terms of impacting people, not in terms of counting money.

Change must be fundamental

If a system is not working properly, as with the financial system today, we have to throw it away and create a new one. Unfortunately we have never really tried to change systems fundamentally. Instead we devote our energy to incremental fixes that buy us at most two to three years’ breathing time. I strongly believe that it is within our power to redesign the economic system so radically that unemployment and poverty will be obsolete features from the past. We need a long-term vision to ensure that nobody will be poor, nobody will be unemployed, and nobody will be a recipient of government subsidy. We have to do it in a way that has never been thought of before.

The most important element is hope. For example, in the case of natural disasters, say the Tohoku region earthquake in Japan, or the cyclones or floods in Bangladesh, the loss is so enormous that it is hard for the people to imagine they will ever return to normality. The first priority therefore is to build hope so that people can overcome whatever they have gone through. The second priority is to restart the engine of the economy in that area. The third priority is to encourage and support the victims to stand on their own feet without making them dependent on charity. I believe that when the crisis is the deepest, opportunity is the greatest. We have to make sure that we do not just let it go, We need to seize the opportunity and create a system that is completely new and fresh.