New Year Reception
Egon Zehnder International
Guest Speaker: Prof. Muhammad Yunus
Founder, Grameen Bank
Good evening, ladies and gentlemen and a warm welcome on behalf of Egon Zehnder International. In a few moments our guest of honor, Professor Muhammad Yunus, will surely inspire us with his speech on a subject which concerns us all. But before I hand over, I would like to thank you for accepting our invitation and for making your way to this event in spite of your busy schedules.
Most of my fifty colleagues at Egon Zehnder International in Germany are here in this room and I must say that we are very proud and honored by such an impressive audience. Thank you for being here. I would also like to thank you for the trust and confidence you have placed in Egon Zehnder International over the past year.
Actually, 2008 was a very good year for us, another record year in fact. Now we all know that times have changed, and while we might not grow in terms of fee value this year, we are determined to grow our team in Germany to be able to provide even better service and discuss your challenges with you even more intensely.
The market dynamics might shift a little; we actually might see a lower need for Executive Search, something we experienced in the last downturn eight years ago, when our Management Appraisal service tripled to account for more than one third of our business. We are seeing similar things happening right now, with our Leadership Development Planning and Team Effectiveness services really picking up. We've seen that happening already in the last few months and we expect this to grow even further.
But returning to this evening's event, it now gives me great pleasure to introduce Professor Muhammad Yunus. Having being awarded the Nobel Prize for his life-long crusade against poverty, he will be known to all of you. But just imagine the courage it takes for a thirty-six-year-old accomplished professor to start a business of which everybody says: "That won't work." Having returned to his native country of Bangladesh in 1972 after gaining his Ph.D. at Vanderbilt University, Muhammad Yunus started teaching at Chittagong University.
Life could have been so easy for him, but it wasn't: Professor Yunus was appalled by the poverty all around him. People were literally starving to death outside his door while he taught elegant economic theories. In the search for a solution to this intolerable situation, he started to lend his own money to artisans in the outlying villages. When this initiative proved successful, he founded Grameen Bank to offer microcredits to the poorest of the poor and to women in particular. This system has worked so well over the past thirty years that it has spread all over the world.
However, Professor Yunus did not stop there; he has gone one step further. Making use of the dynamics of capitalism, he has pioneered ideas of social entrepreneurship and corporate responsibility in what he calls "Social Business": a new way to fight problems such as poverty, pollution, insufficient health care and lack of education.
These are topics that concern us all, and I am very much looking forward to what Professor Yunus has to say in the next thirty minutes. We are very happy to have him with us this evening, to present his fascinating vision of Social Business. Welcome to Munich, Professor Yunus.
Prof. Muhammad Yunus: Thank you very much. I'm delighted to have the privilege of talking to you this evening.
People make names for doing big things. In my case I didn't do anything big, I did lots of small things and that happened on purpose, not by accident. The reason I wanted to do small things was because I was very frustrated in the context of a major famine going on in Bangladesh. People were dying of hunger, and there was I with all my economic knowledge, thinking that I could solve the world's economic problems but I couldn't. So, after realizing that I couldn't change a country, which is too big, and I couldn't even change the district where I teach that's too big, as well I thought: "One thing I can do is to make myself useful to one other human being, and that way I can feel a little better. I do at least know how to help one person, whatever difficulty he or she may be in." So that's what I set out to do.
I was teaching at the university. There is a village next to the university campus, and I decided to go to this village to fulfill my ambition to find a person and make myself useful to him or her. So I did a lot of little things like that. Then I discovered a very ugly thing inside the village: loan sharking lending tiny little sums of money to poor people, whose lives are then in the hands of the loan sharks, which makes them totally miserable.
Having seen this repeatedly, I wanted to understand it a little bit better. So I made a list of those people who were borrowing from the loan sharks. When my list was complete there were forty two names on it, and the total amount they borrowed was twenty seven dollars. I couldn't believe it. There I was, coming from the USA where I'd been teaching economics for a long time, and when you teach economics you get used to thinking in millions and billions; you don't relate to smaller amounts. So when you suddenly encounter the reality of twenty seven dollars for forty two people, it doesn't make sense to you.
Having said that, I realized what a difficult problem I was facing. Then it dawned on me the solution was so simple: I thought, if I give these twenty seven dollars to all these people and ask them to return the money to the loan sharks, they will be free, nobody can touch them anymore. So I immediately did that. I gave these twenty seven dollars to all these forty two people, so they could return their loans and be free.
What I didn't expect was what happened next. I thought I would hand them the cash and those people would be out of the hands of the loan sharks. But then something surprising happened: It was the happiness and enthusiasm that my action generated in all these forty two families. They looked at me as if I had performed a minor miracle. I jokingly said to myself: "If you can become an angel with twenty seven dollars, maybe if you give another twenty seven you'll become a super angel."
But what came to my mind seriously, was that if you can make so many people so happy with such a small amount of money, why shouldn't you do more of it? So, as one young teacher trying to combat the problems in one village, I thought, maybe I should do more. Then another idea occurred to me: Why shouldn't I put the bank located on the campus in touch with these people? Then instead of going to the loan sharks they could go to the bank, and all the problems would be solved. I thought this was such a beautiful idea. I was very enthusiastic. I went to the bank and talked to the manager; I thought he would immediately agree. He said: "No way; a bank cannot lend money to poor people." I tried to argue with him, but he just argued back. The more he tried to defend himself, the more agitated I became. I thought all the explanations he gave me were absurd, completely unreasonable. He told me that the poor people were not creditworthy. This just didn't make sense to me. He told me that a bank's business is not lending money to the poor but only lending money to the rich. That didn't make sense to me either. I thought banks should be lending money to people who do not have money. Why should they give more money to people who already have enough? Do you see how naive I was?
I decided to take my arguments to a higher level. But the high-level bankers I talked to also came up with lots of arguments why a bank cannot lend money to the poor. It still didn't make sense to me. It went on for months like this, until finally I learned something about banking and I used it. I proposed to them: "Why don't you accept me as a guarantor? I become the guarantor, I sign all your papers, I take the risk and you give the money." This time, since I spoke their language, they couldn't throw me out of the office. So they took a little bit of time, studied me, studied my financial position, and finally agreed to lend money with me as a guarantor.
I took the money from the bank and gave it to the people. The first time I did so, the bank manager said: "Say goodbye to your money, this money will never come back." I said: "I'll try and I'll find out." I tried some little rules, little procedures to encourage people to pay back and it worked. The money came back. I was so happy. But the more successful it became, the more reluctant the bank became. They had agreed to my proposal, thinking this would be the last time they would see me because it would all fail, and I would never come back. Now that it was successful every time, they thought: "My God, this thing's going to stay with us; we can't get rid of it."
Seeing their reluctance, another thought came to my mind: Now that I know that people can take money, start a business of their own and change their lives, I don't have to go to this bank. Why don't I create a separate bank for them? And that became another difficult proposition.
When I went to the Central Bank, they said: "No way." When I went to the government, they said: "Are you crazy? You want a bank for poor people?" It took me several years, but finally, in 1983, we got permission. We were so delighted that we could create our own bank. We called it Grameen Bank, which means village bank, and it was a bank to lend money to the poor. I had started out in that first village in 1976, so it had taken all that time and effort to finally create a bank.
Soon we started expanding and were very happy. Our first idea was to grant loans in such a way that 50 percent of our borrowers would be men and fifty percent would be women, because I had a low opinion of the banking system in Bangladesh, which not only rejects poor people but also rejects women. They don't give loans to women. They said: "Women don't come to us." I said: "They do, but your rules are so twisted, women can't get through them. You made special rules for women. You always want their husbands to come and co-sign everything. This is your problem." So I wanted to get rid of that practice and make sure that half our borrowers were women.
We concentrated on women and encouraged them to come. But they said, "No, don't give the money to me, I don't know anything about banking; I don't know anything about money." Some would say: "I have never touched money in my life, I'm scared to death." So we had to overcome those fears. It took us six years, from 1976-82, to reach that level of fifty-fifty. We were very happy that finally we made it. We proved we could overcome that problem.
Then we started noticing something very remarkable: Money that went to the family through women brought so much more benefit to the family than the same amount of money going to the family through men. Does that sound familiar? And repeatedly we kept seeing this: Children became the immediate beneficiaries if the mother was the borrower. Household improvements were immediately noticeable if the mother was the borrower. With women you see long-term progress; they have a long-term goal. You don't see that so clearly in men. Men want to enjoy the money right away, rather than wait for tomorrow. So we asked ourselves the question: "What is so great about 50:50? Why don't we forget 50:50 and focus on women?" So we started focusing on women and, they gradually came to account for 60 percent, 70 percent, 80 percent, 90 percent of our borrowers.
Today we are at 97 percent women. Today, Grameen Bank has seven and a half million borrowers, of which 97 percent are women who take tiny loans and invest in whatever they know to make money; to start a small business. The initial loan will be something like thirty or thirty five dollars. That's such an enormous amount of money to a woman that she literally trembles when she takes the first loan. She cannot believe anybody could trust her with such an enormous amount of money, and tears will roll from her eyes. She cannot believe she is holding that money. And she promises herself that, as there is somebody who has trusted her with such an amount of money, she will give her life to make sure that trust is not disappointed. Now, if you multiply that by seven and a half million, you get some idea of what Grameen Bank is.
People asked me: "How did you figure out all those rules that you say you developed?" I tried to explain, but they didn't understand what I was saying. So now I put it a different way. I tell them that whenever I need a rule in a particular situation, I just look at how the conventional banks do it. After all, they have been in business for a long time. When I find out how they do it, all I have to do is do the opposite! And it works beautifully.
Conventional banks go to the rich we go to the poor. Conventional banks go to men we go to women. Conventional banks love to do business in the city center we go to the villages. Conventional banks ask their clients to come to their beautiful premises to do their business with them we adopted a simple principle: People should not come to the bank; the bank should go to the people. That was our rule, and today, although it may be hard to imagine with seven and a half million borrowers all over Bangladesh, every week we are on their doorstep to do the business right there. They don't have to go anywhere. They save time, they can carry on with their daily work and we don't disturb them. Ever since we started in 1976, our repayment rate has never fallen below 98%.
Conventional banks will not lend you money unless you offer a lot of collateral. We discarded collateral. Conventional banks bring their lawyers to tie you up tight. We say: "No lawyers." In Grameen bank there is no collateral, there are no lawyers. Today we lend more than one hundred million dollars a month, which means more than a billion dollars a year. With no collateral and no lawyers. Many bankers ask me: "Can you sleep at night?" I say: "I sleep very peacefully. Why shouldn't I? My money always comes back. You're the ones having trouble now. With all your collateral, all your lawyers; it doesn't work." Back in 1976, the bank manager's verdict was that poor people are not creditworthy. Today, in February 2009, I invite you to ask yourself: Who is creditworthy? Because the poor are the ones who are still paying back at 100%, 99%, 98%. It is those banks that need all the collateral, all the lawyers they are the ones in serious trouble.
Conventional banks are owned by rich people Grameen Bank is owned by poor people. Conventional banks are owned by rich men Grameen Bank is owned by poor women. Because our borrowers are also the owners of the bank. We designed it that way. Our borrowers sit on the board, they make the decisions and it works perfectly.
The next thing we did was to start encouraging them to send their children to school, because these are all illiterate women and their husbands are illiterate, too. Literacy never entered those families. We thought this was a good chance to break the cycle of illiteracy. Why shouldn't we encourage them to send their children to school? This became very easy for us, because the mothers were our borrowers. They understood perfectly the meaning of sending their children to school. It was difficult for them in the beginning, but they struggled to make it happen, and soon we had all the children in school I mean 100% of them, and many of them worked brilliantly at school.
As the next step, we started giving scholarships. Today, Grameen Bank gives more than fifty thousand scholarships every year to those children who are doing very well. And when the time came for them to enter higher education, we encouraged them to continue. Since higher education is expensive, poor families couldn't afford it. So we immediately introduced education loans, and the children of these families started entering higher education. Right now there are 34,000 students from Grameen borrower families in medical schools, in engineering schools, at universities. So we are in the process of creating a whole new generation out of the poor people who joined Grameen Bank, a second generation who will be very different from the previous one. And we will be able to make sure this generation will never see poverty in their lifetime again. No matter what difficulties, what financial crisis, what disaster, flood, cyclone takes place in the country, they will never be pushed back into poverty again.
Then we did something radical, because of a controversy I became involved in. Many people kept arguing that you can only lend money to the poor if they are entrepreneurial. "Entrepreneurial poor people will benefit from your microcredits," they said, "normal poor people will not." And you know it always irritates me when people say things like that, because I believe all human beings are entrepreneurs without exception. As human beings, we are born with that capacity, so entrepreneurial ability is part of being human. Some people are fortunate enough to discover that talent; some people never have the circumstances to discover it, but that's the only difference. I wanted to demonstrate this in a program that I introduced at Grameen Bank, focusing exclusively on beggars. My thinking was that if beggars can show that they can be entrepreneurs then my theory would be proven, because being a beggar is the last stage of human survival. There is nothing below that. When you've lost everything, every other option, then you stretch out your hand every day. You beg for food to feed your children, to survive another day.
So we started talking to the beggars, trying to understand what their lives are like, and as we gradually got closer and closer to each other, we told them: "As you go from house to house begging, would you carry some merchandise with you, some cookies, some candies, some little toys for the families? That way you can give people options, whether they would like to give you something out of charity, or whether they would prefer to buy something from you, or maybe do both. It's up to them, but you would have more options than just saying: 'I'm hungry, please give me something to eat.'" The beggars liked that. We said: "We'll give you the money to buy this stuff that you want to sell." So we started giving loans, and in the beginning we thought we'd have maybe two or three thousand beggars in the program. Then we'd wait and see what happened, whether they would really make it work or not. And what happened? It became such a popular program that soon we had more than 100,000 beggars involved, and by the end of 2008, eleven thousand of them had stopped begging completely, because they had become successful door-to-door salespersons. The remaining ninety thousand are now part time beggars, because they are mixing the two, sometimes begging, sometimes selling.
They are very smart. When I talk to them, they tell me which house is good for begging and which one is good for selling. And I say to my colleagues: "You see, they didn't go to business school, but they understand market segmentation."
All this is such an exciting experience when you see things gradually change and what is happening in people's lives. And all through our experience we ask the crucial question, again and again: Who is responsible for this poverty? Is it the poor who are responsible for their poverty? Each time my answer is: No, they are not responsible. Poverty is not created by the poor people. Poverty is the outcome of the system that we have created, the concepts that we have designed, the policies that we pursue. Poverty is an artificial imposition on people, it's not a natural thing. Human beings are packed with unlimited potential. Whether they are born on the street or born in a palace, in terms of potential they are the same. One will become a prince because he was born in a palace, and the other will become a street beggar or a street criminal because he was born on the street. That's the difference. If you switch those two babies on the day of their birth the one born on the street transported to the palace, and the other from the palace transported to the street, what will happen? The one who was born in the palace but grows up on the street will become a street criminal; the other will become a prince. The circumstances make the difference, not the person.
Now let me switch the focus to Social Business. In the theory of economics, business has been described, conceptualized, as a mechanism by which you maximize profit. The mission of business is the maximization of profit. You know, the more I look at it and the more I consider my own experience, the more uncomfortable I feel with this description. It is the only concept of business in economics there is no other concept. But human beings are not one-dimensional; human beings are not born to become just money-making robots; human beings are much bigger than that. They want to make money; they want to enjoy making money, but there are many other things they enjoy that are not included in economics, and I think that's a flaw in the theory and the way we put it into practice. People get so engaged in making money they forget everything else. As a result, society accumulates many things that businesses cannot handle because they are too busy making money.
The way I see it, being self-centered, being selfish, is a part of being human. You cannot ignore it. It's an important part of every human being, but selflessness too is part of a being human. By this I don't mean that there are selfish people and there are selfless people. I mean that every human being is endowed with both attributes.
Now when we look at businesses, there are only businesses based one of these human attributes, which is the selfish side. To become a philanthropist you have to step outside of business, outside of economics. But if economics is a social science, all of me has to be included, not half of me or part of me. So I had the idea of starting businesses that are based on what you may call selflessness and that are aimed at doing things for others, rather than for the people who are doing the business. And I called it "Social Business".
Basically a social business is a non-loss, non-dividend company with a social objective. I have set up many of these businesses, but some of the recent ones have become more high profile. One is a joint venture with a major company, Danone of France. Together we created Grameen-Danone Company in Bangladesh as a social business. What does it do? It produces yoghurt. Danone is a big yoghurt company that makes delicious yoghurt. We wanted to use that for a social purpose. What is the purpose? There are millions of children in Bangladesh who are malnourished. So we created this company to produce yoghurt. We take all the micronutrients that are missing in the children and put them in the yoghurt: vitamins, iron, zinc, iodine, everything they need, and we make the yoghurt very delicious and very cheap, and sell it to poor families at a price they can afford. And if a child eats two cups of yoghurt a week and continues to do so for eight or nine months, what was formerly a young life wasting away for lack of nutrition becomes a healthy, robust, playful child. This is the purpose both Danone and Grameen have agreed on. We also agreed that we will never take any dividend out of this company except to repay whatever investment we have made. We can take back the investment, but not a penny more, because this is a social-cause-driven company.
In a profit-making company, you ask the CEO: How much money will you make this year? In a social business like this, you ask the CEO: How many children will you save from malnutrition this year? And next year, how many are you planning to save? Because these are the corporate profits, defined in terms of the company's social objective.
In the meantime, another company has approached us: Veolia again a French company, a water company. Together we created Grameen-Veolia Water Company in Bangladesh. Bangladesh has a serious drinking water problem. In most parts of the country, the water is highly contaminated by arsenic. Since there is no other water, more than 50 million people in Bangladesh out of 150 million drink arsenic-contaminated water. Children drink poison every day. What we did through this company was set up a small water treatment plant in a cluster of villages to produce very high quality water for the villages and sell it at a very cheap price. People pay the price and get pure water, the company recovers the cost. The price we have fixed for this water is one penny for four liters so that everybody can afford it. Currently that company is still "work in progress". If it becomes successful in terms of people accepting and enjoying it, and we get all the money back, we will keep on expanding. Many other companies have also expressed an interest in joining with us to create social businesses; some of them are German companies, like BASF. We have good discussions going with them and are in the process of finalizing our plans to create a BASF-Grameen social business in Bangladesh, also focused on nutrition. We also plan to produce treated mosquito nets. Mosquitoes are a big menace in a country like Bangladesh, so we want to produce the nets in a way that everybody can afford them. So that's another social business to ensure that you have nutrition and can protect yourself from mosquito-borne diseases.
Then we approached another company Adidas with a proposal, which they were very happy to consider. The objective that we have defined is that nobody in the world should remain barefooted. To begin with, Adidas would supply its brand name and produce shoes for less than one dollar, so that everybody can afford them. Adidas would recover its cost and at the same time people would get shoes.
Similarly we have been discussing with Volkswagen, giving them ideas about social business, and they are seriously considering producing a new kind of vehicle for Bangladesh and other countries where the road conditions are extremely poor. In addition, we want to create a green engine for the vehicle, which will be a multi-purpose engine, so that it's not just used for carrying agricultural produce. The idea is that the engine will never sit around doing nothing. You simply pick it up and it becomes an engine for irrigation, or for producing electricity, or for powering a boat. So it has multiple uses and we make it affordable for the ordinary people.
There are lots of such ideas and lots of possibilities, and if we can create this series of social businesses it will be wonderful. We got such a good response from Germany that some of my friends have already created a kind of institute called Grameen Creative Lab in Berlin, so that people can exchange ideas, discuss who is doing what and bring people together to create social businesses. Because social businesses can address all the problems that we have ignored and failed to address: poverty, malnutrition, disease, health care a wonderful subject for social business pollution, unemployment, street crime, alcoholism. Whatever problem you have, all you have to do is to bring together your business creativity, talent and an innovative idea of how to put it into a business format. If you can do that it becomes a wonderful thing.
Of course you can address all those problems by charity, too, but the problem with charity is that you give the money and things get done, but the money never comes back. So it's only a one-time solution; to repeat it you need fresh money. If you don't get the fresh money it stops right there. But if you can convert this into a social business, your money becomes very powerful, because it recycles itself and keeps on going. You can create an organization with a life of its own, a self-sustaining business like Grameen-Danone or Grameen-Veolia. Whatever investment we make, for the rest of our time we'll just be recouping the cost, without the need for any fresh injection of money.
After a company like Grameen-Danone gradually returns the initial investment, it will continue to go on by itself and touch the lives of many, many children. Once you've created that tiny little social business it becomes a seed, and all you have to do then is replicate that seed and plant lots of them, so that each one can grow and flourish.
I keep saying that, in this crisis, this is one idea which needs to become incorporated into our minds and vested in the political framework, so that we can address all those problems that we left behind, and create a world where nobody will be poor anymore. Because as I have said so often: Poverty is not part of human civilization. Poverty doesn't belong to human beings. Poverty belongs in museums and that's where we should put it and cleanse the whole world of poverty. Thank you.
That was a long story told in a very short time, so I'm sure that there are a lot of issues that need to be clarified or elaborated. If you have any comments or questions I'll do my best to answer them.
Question: How do you motivate the people who work for social businesses, or would you say the work is self-motivating?
Prof. Muhammad Yunus: Well, if you take the case of Grameen Bank, it's just like any other business. You hire people, give them good salaries, and give them good retirement benefits, so that they can give their full attention and energy to their work. Within the Grameen Bank we have more than 38,000 staff. It's a large number because we have to serve seven and a half million borrowers, and that takes a lot of people. They get their salary, they feel very good that they are doing something useful, and they enjoy the work because they are touching people's lives. Our workers are all local kids, high school graduates. But the Grameen idea has spread all over the world now, there's hardly any country that doesn't have it. It has become known as microcredit or microfinance, words that you'll keep hearing. It's also found in the developed countries, like France, where it has been running for twenty years now, in the UK, Spain, Italy, Canada and the United States.
There were many such programs in the United States but they were not working very well. People said: "Grameen Bank won't work in the United States, it's too different." So last year we launched our own Grameen program in New York City, in Jackson Heights in Queens, to demonstrate that the problem was not inherent to Grameen methodology. The problem was that the people trying to implement it didn't know what the Grameen methodology was. That's why we thought we should do it ourselves. We sent one of our staff from Bangladesh to New York City, to get things moving. The good thing was that he had never been to the United States before. So he landed in New York City and started work the way he would have done it in the villages of Bangladesh and it worked beautifully. We started in late January last year, today we have over five hundred borrowers in that program, all women, and they follow the same principles and rules as we follow in Bangladesh: Five women get together and form groups; loans are for income-generating activities and they are paid back in weekly installments. Every week the borrowers have to gather together in one corner of their homes, fifteen or twenty of them together, and the bank staff will come and do the banking with them. Repayment has remained very near 100%; it's currently at 99.6%. The average loan in New York City is 2,200 dollars. So we have a paradoxical situation: Where the big banks in New York City are falling, there's the Grameen program with 100% repaymentâ€¦ without collateral, without guarantees just imagine. This ought to make us stop and think about what could be done to the financial system as a whole. Why should this system exclude billions of people? Two thirds of the world's population do not have access to financial services. We need to and we can create an inclusive financial system where nobody is excluded, not even the beggars.
Question: Have you had any negative experiences in the programs you work with, and would you be prepared to share those with us in the sense of lessons learned?
Prof. Muhammad Yunus: Sure. First of all, whenever you do something new, everybody is against you, because we are all creatures of our own mindsets. We believe what we like to believe; we do what we are used to doing. If something new comes, we resist. First we are suspicious, and then we are aggressive and try to stop it, because it's new. Those things happened to us. Bankers hated us because we said: "Look, this is working." They said: "It's crazy, it cannot be happening. We have trouble getting our money back with all the collateral and all the legal papers, and you are saying that you have neither collateral nor lawyers, and your money comes back? You must be manipulating your books." So the suspicious people were all around us. And then, we lend money to women, which, it would seem, is the greatest crime anybody can ever commit. Men become very angry, even the husbands of the women that we are lending money to are not in favor. They feel totally insulted. They say: "How dare you give money to my wife while I am still alive?" They thinks it is their prerogative to get everything, rather than their wives. So the husbands formed a strong opposition party to the whole program, to the extent that, in the beginning, it created tension in the families. The women were scared of their husbands who wanted to snatch their money, because they could not believe their wives could independently own money. All money should be their money, they felt. So we had to go make a huge effort to ensure the tension levels didn't go too far and could be reduced.
That was a very elaborate process I won't go into the details but we succeeded.Â We went through lots of training sessions with the women borrowers and our goal was very clearly stated: We must protect the money and protect the marriage. "Don't give up one for the other. We have to find a way to protect both," we said, and we succeeded.
The most critical part of this tension is that the husbands cannot believe their wives can actually handle money. They have always thought their wives were simple women who needed directing every step of the way otherwise they wouldn't know what to do. If the women get the money, they think, they will waste it, and in the end the bank will come and ask the husbands to repay the loan, so they are very worried men.
We had to repeatedly explain to the husbands that, no matter what happened to that money, we would never come to them and ask them for it: It's between us and their wives. We would offer to give it to them in writing: "We will never ask you for that money." But still they didn't feel comfortable. They were sure that when their wives took the money, and the first weekly installment was due, they wouldn't have the money. They would have to come to their husbands to ask for the money to pay the installment. So when a woman doesn't come to her husband when the first weekly installment is due, he is very surprised. He wonders what's going on. Maybe she still has some money left from the original loan. The second week she has to come but she doesn't. The third week she simply must come but she doesn't, and he begins to see what is going on here. And then finally she clears up the whole loan. He doesn't say a thing, but he watches and thinks, and his attitude towards his wife changes: She's not as simple as he thought. She knows something, and the relationship becomes quite different in the second year. And by the third year they are drawing very close to each other, because now he has started admiring her ability.
He had never understood that his wife was capable of bringing money into the family, because she was supposed to be there to do the cooking and look after the children and now she is bringing in money. In many families of those seven and a half million Grameen borrowers, women have become the number one income earner of the family. So it's quite a trustful mission in a very conventional, traditional society, to see the woman coming to the front and she owns a bank, that's another thing.
Question: There are major cultural issues here and you are confronting traditions that have become established over centuries. Don't you come under incredible pressure to let the men take the loan. Don't they simply insist that they should be the ones to get the money?
Prof. Muhammad Yunus: Oh, they do it all the time, because they cannot accept the fact that the wife should get the money. So when the Grameen Bank comes to a village for the first time, it is the men who surround us. "Ah, yes we are very poor," they say, "give us the money." We tell them: "Yes, of course we'll give you the money, but our rule is that we start with the women. If you are interested in having the money, we're coming to your village at such and such a time. Why don't you send your wife to talk to us? If you want to borrow the money yourself, though, you will have to wait until we have finished talking to all the women." We use a lot of tactics like this, and luckily we get away with it.
In 1984 we introduced a housing loan, because we thought this is such an important thing. The housing is so badâ€¦ I'm not sure if you understand poor people's housing. The roof is made of rotten straw or something similar, you can see the sky through the openings, and in a monsoon country like Bangladesh all the water comes in, and it's muddy inside, so you raise your children in the mud. We thought we'd offer a housing loan so that people can have a solid roof and a sanitary latrine and a clean house. But we also introduced a little rule to go with it. We said: "To qualify for a housing loan from Grameen Bank you have to show us a document proving that the land belongs to you the wife. After all, we're giving the loan to you, so you must show us that the land belongs to you."
Of course, the land doesn't belong to the women at that stage. So the wife will say: "Well, this land doesn't belong to me. It belongs to my husband, I'm in my husband's house." To which we say: "We're sorry; we cannot give you a loan. But you can do one thing: Why don't you encourage your husband to transfer the title of the land to you?" She says: "He will never listen to that." We say: "We know, we know, but just in case he agrees, we will be very happy to give you a loan. If he has difficulty in understanding, why don't you send him to us? We'll explain it to him."
Well, the need for better housing is so drastic that, one after another, the husbands started agreeing. Then they went through the huge process of transferring the title of the land to the name of the wife. It's not easy to transfer title of ownership. You have to go to lots of government offices; you have to establish that the land belongs to you in the first place, and then go through the whole legal process. Finally, after three or four months, they succeed, and the wife joyfully brings us the document. "Look," she says, "I have the land title." Then we give her the loan. And then, one after another, other husbands start agreeing because their wives keep saying: "Look, her husband did it, why don't you do it for me? We will have a better house. I'm not the only one who is living in the house, you live there too, our children will live there too so, what is the big deal?" Finally they yield, one after another. We have given nearly 700,000 housing loans.
You have to realize that, in Bangladesh, divorce is very easy. All you have to do is say: "I divorce you" three times and that's that. But in these 700,000 households those words are not spoken, because the husband is very smart. He knows that if he divorces his wife, he has to pack up and go, because the house is in her name and it's all documented. You know, if any government passed a law that the land title should be with the wife, that government would fall right away! But we did it so quietly; nobody said a word about it.
These are the problems when you do new things and you have to be very skilful in the way you manage them. On top of all that, the religious people were very much against us as well, again because we were giving loans to women. They said: "Religion will be destroyed if you give loans to women. Women are not supposed to do business, not supposed to go outside, and not supposed to be seen by other people." Religious opposition became so strong that we were a little bit uneasy as to how we would overcome it. So we came up with a strategy. When people questioned our approach on religious grounds we said: "What's the problem? When the Prophet married the first time, whom did he marry? He married a businesswoman. First he used to work for her; she hired him and he worked for her, everybody knows that, and then later on he married her. So if you want to be a good Muslim, you should follow in the footsteps of the Prophet and marry a businesswoman, because that's what the Prophet did. And incidentally, if you are looking for a businesswoman and you can't find one, come to us, we have lots of them." Nobody could deny this story, because it is such a popular one everybody knows it. The religious people couldn't cope with this one. They simply said: "No, you are destroying our religion; the women will be out on the streets and all over the place." To which we replied: "That's not religion. Religion is religion; this is about life, and if a woman can make herself a better life, why shouldn't she?"
Question: Grameen Bank employs thousands of people and they have to be paid. How do you calculate the mark-up factor or the interest rate at your bank, because in the beginning it must have been very difficult?
Prof. Muhammad Yunus: In the beginning it was very simple, because we followed the conventional banks' interest rates. If they can cover everything, we can cover everything, so we didn't even think about it. As I explained earlier, we hand out more than one hundred million dollars in loans every month, which makes an annual total of over a billion dollars.
Where does this money come from? That's a major issue: It comes from our deposits. Grameen Bank doesn't take any international money or money from the government or any other bank. It doesn't borrow from anybody. All the money is generated within the system itself. We have two thousand six hundred branches all over the country, and each branch is financially independent. Each branch is required to mobilize deposits in its own area, and lend the money to the poor people in that area. So you don't go to other people to get money, it's within your jurisdiction.
Initially each new branch has one year to mobilize local deposits, start lending money to the poor and become profitable. Right from day one when we start the branch, we tell our staff: "We don't give you any money you just go out there and open a branch." All we give them is an address, they go there, and then they have only one year to reach breakeven. More than 80% of our branches succeed in reaching breakeven point within one year. The remainder take maybe 13, 14 or 16 months, but they get there fast.
So the deposits come from local people. We give them good interest; Our deposit rate starts at 8 ½% and goes up to 12%, which is a very attractive interest rate. And we charge 20% interest on borrowers for the top loan product that we have. The second type of loan that we offer is the housing loan, which I mentioned earlier. The housing loan interest rate is 8%. Note that our minimum deposit rate is 8 ½%, but we are lending money at 8%, meaning that we lose money on housing. You see, a housing loan is a long-term loan, and if you charge a high interest rate, it represents a big amount, so we decided to keep it very low. In fact we subsidize it from the 20% that we charge on the other type of loan.
Then there are the student loans that we give to the students of Grameen families. During the study period, there is zero interest. They don't have to pay anything while they are studying. Once they complete their education, interest starts at 5% and stays at 5%. That is also cross-subsidized. Finally the loans we give to beggars are at zero percent. We tell the beggars: "This amount will never grow, so don't worry about it." And the second thing we say is: "There is no time limit in which you have to pay your loan back, so there is no maturity date; nobody can ever say that you have defaulted because if there is no maturity date, how can you default? You are completely free zero interest, no maturity date. But if you pay us back, you can take another loan, bigger than the one before, and you can move on." They feel very comfortable with that, and of the over 100,000 beggars that we have, many are on their second or third loans. And despite the fact that we have no guarantees, no lawyers, no collateral, no maturity date, no interest, still the money comes back. That is the system. That is how it works.
So if you take the weighted average of the whole thing, our mark-up works out at about 8Â½ to 9 percent. And we make profit, which goes back to the borrowers, because they are the shareholders, they are the owners. Some years we have paid 100% dividends, some years we have paid 50% dividends and some years we have paid 20% dividends. It depends on how much money we have made in that year and how much we want to allocate to reserves. The board decides what to do. So it's a full circle.
Question: All the things you just described, particularly the returns, are the envy of the entire financial industry. Talking of microfinance or microcredit, we have seen a couple of funds being launched. I would be curious to hear if you think they will be able to deliver the types of returns you just mentioned, or are we being set up for disappointments by the male-dominated financial industry?
Prof. Muhammad Yunus: Let me clarify one thing in this respect, because it's the subject of great controversy between me and others: I keep repeating that we created the microcredit idea not to make money for ourselves but as a vehicle to help poor people to get out of poverty. So our plea to everybody is: Please don't come to microfinance to make a profit. The sole aim of this idea is to help people to get out of poverty. The controversy came because some people became so excited about microfinance that they wanted to make money out of it a lot of money. And some of them succeeded. They took their companies public and made personal profits running into millions of dollars. When the press started asking for my comments I said: "Look, we don't consider those things as microcredit. They are just using the name to look good, that's all. We are in the field to make this tool available so that people can free themselves from poverty. Those who are making money are not following in the footsteps of microcredit, they are following in the footsteps of the loan sharks; they are in the same category. We fight loan sharks; we don't embrace them."
We made the rules on how much interest should be legitimate for microcredit, and the rule that I try to popularize is "cost of funds plus 10% maximum mark-up". If you can keep within this range, you'll be in what we call the green zone of microcredit you are one of the good guys. If your interest rate is between cost of funds plus 10-15%, then you are in the yellow zone, meaning that you are a little bit high. We'll still consider you microcredit but try to come down to the green zone. If the interest rate is cost of funds plus 15% and above, you are in the red zone. You are no longer microcredit, you are simply another loan shark, misusing the name of microcredit. That is how we define it.
When we make money, that money goes back to the borrowers, it doesn't go outside. That is the protection the Grameen Bank has. It makes a profit, but the profit goes back to the borrower, not a penny goes to anybody else. So in that way it's complete: The borrowers don't mind what they pay because they know that ultimately they'll get back the surplus for themselves. That's the whole scenario we try to present.
Question: I work for an organization that supports social entrepreneurs all over the world and we find in our work for social entrepreneurs that they often have difficulty finding financing to bring their ideas up to scale. So my question is: With your experience with the Grameen Bank, which has achieved staggering scale, how would you change the financial system to make sure that social entrepreneurs and their businesses that may not generate as much money as other high return investments, can find the adequate funding to realize their ideas and achieve scale like your idea has?
Prof. Muhammad Yunus: In Bangladesh we tried to achieve that. We that is to say the government of Bangladesh created a microfinance wholesale fund for NGOs who do microcredit in Bangladesh. They need the money because the law doesn't allow them to take deposits. Any NGO can go in and borrow money to lend to poor people, with the result that microfinance has spread all over Bangladesh very quickly. Today we reach out to 80% of the poor families in Bangladesh. Bangladesh has a population of 150 million and half the population live below the poverty line. So out of that half, microcredit has reached 80% of families. And within the next three to four years our hope is that it will reach 100% of these families. So there are enough funds available within Bangladesh; we don't have to go outside. For other countries we are encouraging others to create such funds. We have already succeeded in creating one such fund, with Credit Agricole. This is known as the Grameen Credit Agricole Microfinance Fund. It is set up as a social business; it is not designed to generate profit for Credit Agricole but to support microfinance and other social businesses. And talking of social business outside microfinance, another initiative has recently been taken in Monaco, to create the Monaco Social Business Fund. This is still work in progress but hopefully within a month or so a social business fund will be created, so that anybody who wants to start a social business can turn to the fund, take the money and start their business. If you have an idea for a social business, you've designed a beautiful business plan for solving a social problem that you feel very strongly about, and money is not available, that fund will be available to support you. I hope many more such social business funds will be created to encourage everybody to move in the direction of social business, and to plant the seeds of social businesses, so that these can be replicated and we can resolve the problems that we face every day.
Question: American banks tried to copy you in some way. They lent money to poor people so that they could own their own homes; we know that as sub-prime. Obviously something went wrong. What do you advise the American banks, besides that they should probably lend the money in future to women?
Prof. Muhammad Yunus: Follow Grameen Bank policy! Get the husbands to sign over the title of their land that would be the best thing. But seriously, I don't like the term sub-prime, because if that's the word we use to describe the level of risk to which the U.S. banks were exposed, what would you call us? Sub-sub-sub-sub-prime? We don't have inadequate collateral, we have none. But still our model is not risky. We know our money will come back. We sleep peacefully at night. No, the sub-prime crisis came about because of the very aggressive way it was marketed, making potential borrowers feel that they would be stupid if they didn't sign up to get a loan.
Usually, when you ask a bank for a loan, they ask for some equity. You put some of your money in the bank and the bank finds the rest. You put up 20% and the bank 80%, or you find 10% and the bank 90%. In the USA, however, most of the time the reverse was true: You got 110% of the money. You got to keep 10% and 100% was the cost of the house. And because the housing market was rising so fast, when you became the owner you also became rich. Some people bought not just one house; they bought five houses or ten because the deal was so good or that's how the marketing went.
Also, when a bank had granted the loan, they would never see the borrower again; they wouldn't follow up what happened; they wouldn't even make a phone call. All they did was take the papers that the borrower had signed and sell them to get the money for themselves. Then those papers were sold to somebody else, who made money by bundling them up with many other things and selling them to somebody else. So the relationship between the borrower and the lender disappeared. I think that was the basic problem in the sub-prime crisis: over-aggressive marketing and the disappearance of the relationship between the borrower and the lender.
Professor Yunus, thank you very much for sharing your insights with us.