Model development bank in Bangladesh inspires imitators

Dr. Muhammad Yunus heads a bank which has one of the best repayment records in the world. Over 98 percent of its loans are repaid on time. Perhaps more remarkable are the borrowers: All 200,000 of them are among the poorest people in Bangladesh. Indeed, the bank only lends money to those who could not borrow from normal banks because they have no collateral.

Launched in 1982 by Dr. Yunus, the Grameen Bank has become a model for development economists and is being copied in many countries around the world - including the United States.

Yunus has become the ``guru'' of micro-enterprise, a term which encompasses small-scale businesses of all sorts, such as street vendors and peddlers. Micro-enterprises often account for the bulk of economic activity in developing countries. Yunus has testified before US congressional committees about the subject and has been asked to consult with several private aid and relief organizations, as well as the World Bank.

``Any society with poor people must arrange a system in which credit can reach directly to them,'' says Yunus, who sees no reason why an idea that works in Bangladesh won't work on Chicago's South Side or in a little town in Arkansas - the two areas working with his ideas.

Grameen Bank was started with money from the Bangladesh Bank and the International Fund for Agricultural Development, a UN agency. It now has 260 branches throughout Bangladesh, has loaned the equivalent of $40 million, and manages to turn a yearly profit. The average size loan is $60 (the smallest is $1; the largest $200). Nearly 70 percent of the borrowers are women.

The guiding principle behind the venture, says Yunus, a Vanderbilt University-trained economist, is that the best way to address poverty is to unleash the productive potential of the extremely poor. The money can be used for anything which has the potential to create income.

Grameen Bank's success is often attributed to the way in which individual loans are structured. Borrowers are required to band together in groups of five and borrow money as a team. This way, individuals will ``encourage'' each other to make repayments on time. Missed payments can louse up the group's credit record.

Repayments are made weekly in small amounts, so that borrowers are not daunted by the need to repay less frequent, but much larger sums. The bank charges commercial interest rates.

Borrowers are required to set aside a portion of their income as savings for financing future projects. Bankers are in close touch with the borrowers, setting up shop in small villages and teaching the borrowers how the bank operates.

Some analysts question whether this approach can work in an individualistic and competitive society, such as the US. But Yunus points out that many people raised similar questions when he started the bank in Bangladesh.

``They told me that if you put two Bangladeshi people together, all they would do is fight. But that's not the case.'' Many bankers also told Yunus that the poor borrowers, free from the threat of having collateral seized by the bank, would never repay their loans. ``Our repayment record shows that to be a myth,'' he says.

South Shore Bank in Chicago has taken several steps to adapt Yunus's plan locally. There the average loan must be considerably larger - the bank has set an upper limit of $5,000. Also, the loans will only be available to groups of women.

Mary Houghton, executive vice president of South Shore Bank, says the decision to focus on women was influenced by the high number of women who have expressed interest in launching home-based ventures as well as the disproportionate number of female heads of households in the bank's neighborhoods.

Although his bank is popular with development specialists and the government in Bangladesh, Yunus admits that it has bumped up against some powerful opponents. His loans have cut into the business of moneylenders and traders, who often charge usurious interest rates for loans, and his willingness to deal with women has offended some fundamentalist Muslims. ``But a loan to a woman is the most effective kind of loan,'' says Yunus. ``Because you know that it goes directly to the children and the household. And that's the most direct way to address this problem of poverty.''