Book Notes and Main Takeaways: “Bank to the Poor” by Muhammad Yunus

(LM → my personal comments)

On Grameen bank and micro-credit

I was only trying to relieve my guilt and satisfy my desire to be useful to a few starving human beings.

A university must not be an island where academics reach out to higher and higher levels of knowledge without sharing any of their findings.

I decided I would experiment on the microlevel by helping the villagers of Jobra grow more food.

Despite such skepticism, I kept trying to bring the academic world and the village together by championing a university project called the Chittagong University Rural Development Project (CURDP).

I was angry, angry at myself, angry at my economics department and the thousands of intelligent professors who had not tried to address this problem and solve it. It seemed to me the existing economic system made it absolutely certain that Sufiya’s income would be kept perpetually at such a low level that she would never save a penny and would never invest in expanding her economic base.

Governments and population agencies are not putting nearly as much effort into changing the quality of life of the poor as they put into their scare tactics, such as pressuring illiterate men and women to physically remove their ability to procreate. UN studies conducted in more than forty developing countries show that the birth rate falls as women gain equality. The reasons for this are numerous. Education delays marriage and procreation; better-educated women are more likely to use contraceptives and more likely to earn a livelihood. I believe that income-earning opportunities that empower poor women and bring them into organizational folds will have more impact on curbing population growth than the current system of “encouraging” family planning practices through intimidation tactics. “Family” planning should be left to the family.

These decisions are a demonstration that the poor, once economically empowered, are the most determined fighters in the battle to solve the population problem, end illiteracy, and live healthier, better lives. When policy makers finally realize that the poor are their partners, rather than bystanders or enemies, we will progress much faster than we do today.

no matter what cataclysm, weather disaster, or personal tragedy befalls a borrower, our philosophy is always to get that person to pay back his or her loan, even if it is only at the rate of a half penny a week. This discipline is meant to boost the borrower’s sense of self-reliance, pride, and confidence.

Why give credit first? I firmly believe that all human beings have an innate skill. I call it the survival skill. The fact that the poor are alive is clear proof of their ability. They do not need us to teach them how to survive; they already know how to do this.

They do this because they begin with the assumption that people are poor because they lack skills. Training also perpetuates their own interests—by creating more jobs for themselves without the responsibility of having to produce any concrete results. Thanks to the flow of aid and welfare budgets, a huge industry has evolved worldwide for the sole purpose of providing such training. Experts on poverty alleviation insist that training is absolutely vital for the poor to move up the economic ladder. But if you go out into the real world, you cannot miss seeing that the poor are poor not because they are untrained or illiterate but because they cannot retain the returns of their labor. They have no control over capital, and it is the ability to control capital that gives people the power to rise out of poverty. Profit is unashamedly biased toward capital. In their powerless state, the poor work for the benefit of someone who controls the productive assets.

The growth of the consultancy business has seriously misled international donor agencies. The assumption is that the recipient countries need to be guided at every stage of the process—during identification, preparation, and implementation of projects. Donors and consultants tend to become overbearing in their attitude toward the countries they help. Furthermore, these consultants often have a paralyzing effect on the initiatives of the recipient countries. Officials and academics in these countries quickly adopt the figures mentioned in the donors’ documents even if they personally know that those figures are incorrect.

Aid-funded projects create massive bureaucracies, which quickly become corrupt and inefficient, incurring huge losses. In a world that trumpets the superiority of the market economy and free enterprise, aid money still goes to expand government spending, often acting against the interests of the market economy.

Development should be viewed as a human rights issue, not as a question of simply increasing the gross national product (GNP). When the national economy picks up, the situation of the poor is not necessarily improved. Therefore development should be redefined. It should refer only to a positive measurable change in per capita income of the bottom 50 percent of the population.

When I talked about micro-credit in the 1980s, whether to World Bank economists or journalists, most people assumed that I was trying to alleviate poverty by lending to small businesses that would then expand and hire the poor. It took people a while to see that I actually advocated lending to the poor directly. Policy makers tend to equate job creation with poverty reduction and economists tend to recognize only one kind of employment—salaried employment. And economists tend to focus their research and theories on the origins of wealth in the former colonial powers, not on the microlevel reality of poor people in Third World countries. Whatever attention is given to poverty comes under the rubric of so-called development economics, a field that emerged only after the Second World War and that has basically remained an afterthought or reinterpretation of the main body of economic theory.

In reality, credit creates economic power, which quickly translates into social power. When credit institutions and banks make rules that favor a distinct section of the population, that section increases both its economic and its social status.

Microeconomic theory, for example, which plays a central role in the analytical framework of economics, is incomplete. It views individual human beings as either consumers or laborers and essentially ignores their potential as self-employed individuals. This theoretical dichotomy between entrepreneurs and laborers disregards the creativity and ingenuity of each human being and considers widespread self-employment in Third World countries as a symptom of underdevelopment.

Micro-credit is not a miracle cure that can eliminate poverty in one fell swoop. But it can end poverty for many and reduce its severity for others. Combined with other innovative programs that unleash people’s potential, micro-credit is an essential tool in our search for a poverty-free

”The poor,” I said, “are very creative. They know how to earn a living and how to change their lives. All they need is opportunity. Credit brings that opportunity. Perhaps our two societies are different and thousands of miles apart, but I don’t see any difference between the poor of Bangladesh and the poor of Chicago. The problems and consequences of poverty are the same.”

The work provides them with an important source of income and helps them and their families to cope financially. More important, however, the Norwegian project promotes micro-credit as a tool for social integration and an effective way to add new meaning to people’s lives.

These astonishing results proved to us that once Grameen borrowers grew in self-esteem they would readily express their opinions.

How did we define “poverty-free”? After interviewing many borrowers about what a poverty-free life meant to them, we developed a set of ten indicators that our staff and outside evaluators could use to measure whether a family in rural Bangladesh lived a poverty-free life.

These indicators are: (1) having a house with a tin roof; (2) having beds or cots for all members of the family; (3) having access to safe drinking water; (4) having access to a sanitary latrine; (5) having all school-age children attending school; (6) having sufficient warm clothing for the winter; (7) having mosquito nets; (8) having a home vegetable garden; (9) having no food shortages, even during the most difficult time of a very difficult year; and (10) having sufficient income-earning opportunities for all adult members of the family.

On his vision for more social businesses

but rather a specific example of a new kind of enterprise—an enterprise driven by an attitude that I labeled “social consciousness.”

In the United States I saw how the market liberates the individual and allows people to be free to make personal choices. But the biggest drawback was that the market always pushes things to the side of the powerful. I thought the poor should be able to take advantage of the system in order to improve their lot. Grameen is a private-sector self-help bank, and as its members gain personal wealth they acquire water-pumps, latrines, housing, education, access to health care, and so on. Another way to achieve this is to let a business earn profit that is then taxed by the government, and the tax can be used to provide services to the poor. But in practice it never works that way. In real life, taxes only pay for a government bureaucracy that collects the tax and provides little or nothing to the poor. And since most government bureaucracies are not profit motivated, they have little incentive to increase their efficiency. In fact, they have a disincentive: governments often cannot cut social services without a public outcry, so the behemoth continues, blind and inefficient, year after year.

In Grameen we always try to make a profit so that we can cover all our costs, protect ourselves from future shocks, and continue to expand. Our concerns are focused on the welfare of our shareholders, not on the immediate cash return on their investment dollar.

There is little doubt that the free market, as now organized, does not provide solutions to all social ills. It provides neither economic opportunities nor access to health and education for the poor or the elderly. Even so, I believe that government, as we now know it, should pull out of most things except for law enforcement, the justice system, national defense, and foreign policy, and let the private sector, a “Grameenized private sector,” a social-consciousness–driven private sector, take over its other functions.

I am not a capitalist in the simplistic left/right sense. But I do believe in the power of the global free-market economy and in using capitalist tools. I believe in the power of the free market and the power of capital in the marketplace. I also believe that providing unemployment benefits is not the best way to address poverty. The able-bodied poor don’t want or need charity. The dole only increases their misery, robs them of incentive and, more important, of self-respect.

Poverty is not created by the poor. It is created by the structures of society and the policies pursued by society. Change the structure as we are doing in Bangladesh, and you will see that the poor change their own lives. Grameen’s experience demonstrates that, given the support of financial capital, however small, the poor are fully capable of improving their lives.

Somehow we have persuaded ourselves that the capitalist economy must be fueled only by greed. This has become a self-fulfilling prophecy. Only the profit maximizers get to play in the marketplace and try their luck. People who are not motivated by profit making stay away from it, condemn it, and search for alternatives.

The challenge I set before anyone who condemns private-sector business is this: If you are a socially conscious person, why don’t you run your business in a way that will help achieve social objectives?

I profoundly believe, as Grameen’s experience over twenty years has shown, that personal gain is not the only possible fuel for free enterprise. Social goals can replace greed as a powerful motivational force. Social-consciousness–driven enterprises can be formidable competitors for the greed-based enterprises. I believe that if we play our cards right, social-consciousness–driven enterprises can do very well in the marketplace.

I believe in the central thesis of capitalism: The economic system must be competitive. Competition is the driving force for all innovation, technological change, and improved management. Another central feature of capitalism is profit maximization. Profit maximization ensures the optimal use of scarce resources. This is the feature of capitalism that led us to create the image of a greedy (almost bloodthirsty) person in the role of profit maximizer. We have presumed that the profit maximizer has no interest in achieving social objectives.

If all of us started to view every single human being, even the barefooted one begging in the street, as a potential entrepreneur, then we could build an economic system that would allow each man or woman to explore his or her economic potential. The old wall between entrepreneurs and laborers would disappear. It would become a matter of personal choice whether an individual wanted to become an entrepreneur or a wage earner.

The second change relates to how an entrepreneur makes investment decisions. Economic theory depicts the entrepreneur as only a profit maximizer. Indeed, in some countries, like the United States, corporate law requires the maximization of profits. Shareholders can sue an executive or a board of directors that uses corporate funds to benefit society as a whole rather than to maximize the profits of the shareholders. As a result, the social dimension in the thinking of the entrepreneur has been completely bypassed. For social science and society itself, this is not a good starting point. Even if social considerations have a very small role in the investment decision of an entrepreneur, we should allow them to come into play for the overall social good.

LM: Benefit Corporation struct now allows for a company to pursue social and environmental goals alongside or even over profit maximization

The market, of course, needs rules for the efficient allocation of resources. I propose that we replace the narrow profit-maximization principle with a generalized principle—an entrepreneur maximizes a bundle consisting of two components: (a) profit and (b) social returns, subject to the condition that profit cannot be negative. (Actually, neither of these components should be negative; but I make this conceptualization in order to stay close to the existing profit-maximization principle.)

All investment decisions can be taken within a range of options. At one extreme, the capitalist will be guided purely by the profit motive. At the other extreme, a social entrepreneur will continue to be in the market for as long as his or her socially beneficial enterprise is at least breaking even.

Under this principle, a social entrepreneur could, for example, run a health-care service for the poor if it is financially viable. Other such enterprises might include financial services for the poor, supermarket chains for the poor, educational institutions, training centers, renewable energy ventures, old-age homes, institutions for handicapped people, recycling enterprises, marketing products produced by the poor, and so on.

Would these types of social-consciousness–driven entrepreneurs be rare and difficult to find? I don’t think so. The more we look for them, the more we’ll meet them and the easier we will make it for a person to become one.

In between these two extremes, the bulk of entrepreneurs mix profit and social considerations in a way that takes them to their highest level of self-fulfillment. Through various means of social recognition and rewards—I am thinking of prizes, honors, public acknowledgment—societies can influence more and more entrepreneurs to move in the direction of social-consciousness–driven investments.

Where should one place Grameen philosophy in the spectrum of political ideologies? Right? Left? Center? Grameen supports less government—even advocating the least government feasible—is committed to the free market, and promotes entrepreneurial institutions. So it must be far right. Grameen is committed to social objectives: eliminating poverty; providing education, health care, and employment opportunities to the poor; achieving gender equality through the empowerment of women; ensuring the well-being of the elderly. Grameen dreams about a poverty-free, welfare-free world. Grameen is against the existing institutional framework. It opposes an economy grounded solely on greed-based enterprises. It wants to create social-consciousness–driven enterprises to compete with greed-based enterprises.

Grameen does not believe in laissez-faire. Grameen believes in social intervention without government getting involved in running businesses or in providing services. Social intervention should come through policy packages encouraging businesses to move in directions desired by society. It should provide incentives to social-consciousness–driven enterprises to encourage the competitive spirit and strength of the social-consciousness–driven sector. All these features place Grameen on the political left.

Who will or can get involved in this? Social-consciousness–driven people. Social consciousness can be as burning, or even more burning, a desire as greed in an individual human being. Why not make room for those people to play in the marketplace, to solve social problems, and to lead human lives to a higher plane of peace, equality, and creativity?

The public sector has failed. Or at least it is on the way out despite our best efforts. Bureaucratization cushioned by subsidies, economic and political protection, and lack of transparency is killing it off. It has become a playground of corruption. What started out with good intentions became a road to disaster. With the demise of the public sector, the only thing left for the world is the personal gain–based private sector. This is not an inspiring prospect. If nothing else, we should remember that greed and corruption are prone to lure each other into solid partnership at the slightest opportunity. Before the world surrenders to greed and corruption, we must seriously examine the strength of social consciousness as a contestant.

I have always disagreed with this kind of definition of development. I think it misses the essence of development. To me, changing the quality of life of the bottom 50 percent of the population is the essence of development. To be even more rigorous, I would define development by focusing on the quality of life of the lower 25 percent of the population.

If we can convince ourselves that we are actually the crew of this spaceship, and that we must reach a specific socioeconomic destination, then we will continue to approach that destination—even if we make mistakes or take detours along the way. We need to know the destination—if not in a precise way, then at least a generalized way.

When we want to help the poor, we usually offer them charity. Most often we use charity to avoid recognizing the problem and finding a solution for it. Charity becomes a way to shrug off our responsibility. But charity is no solution to poverty. Charity only perpetuates poverty by taking the initiative away from the poor. Charity allows us to go ahead with our own lives without worrying about the lives of the poor. Charity appeases our consciences.

The rule of “strongest takes it all” must be replaced by a rule that ensures everybody a place and a piece of the action. “Free trade” must mean freedom for the weakest. The poor must be made active players, rather than passive victims, in the process of globalization. Globalization must promote harmony and partnership between the big and the small economies, rather than become a vehicle for unhindered takeovers by the rich economies. Globalization must ensure the easiest movement of people across borders. Each nation, especially poor ones, must make serious and continuous efforts to bring information technology to the poor people to enable them to take maximum advantage of globalization. Social entrepreneurs must be supported and encouraged to get involved in the process of globalization to make it friendly to the poor. Special privileges should be offered to them to let them scale up and multiply.

Millennium Development Goals set by the Millennium Summit of world leaders at the United Nations in June 2000. The most daring of these goals is an entirely achievable one: halving poverty by 2015. I am totally convinced from my experience of working with poor people that they can get themselves out of poverty if we give them the same or similar opportunities as we give to others. The poor themselves can create a poverty-free world. All we have to do is to free them from the chains that we have put around them.

LM: this goal was met. In 1990, 36% of the world’s population lived in extreme poverty. By 2015, that number fell to 12%, more than a 50% reduction. Key Factors were: Rapid economic growth of China and India, Brazil and Mexico conditional cash transfers (Bolsa Família), improvements in healthcare, educations and infrastructure. This goal was replaced with a new one: Sustainable Development Goals (SDGs) replaced the MDGs, with a new goal: end extreme poverty by 2030.

I believe that one of the best ways forward is to encourage social entrepreneurs. The behavior patterns of a social-objective–driven entrepreneur, i.e., a social entrepreneur, are as follows: He (or she) competes in the marketplace with all other competitors but is inspired by a set of social objectives. This is the basic reason for being in the business. He may earn personal profit as well. This personal profit may range from zero to a significantly large amount, even larger than his personal-gain–driven competitor. But in his case, personal profit is a secondary consideration, rather than the prime consideration. On the other hand a personal-profit–driven entrepreneur may contribute in achieving some social objectives. But this will be a by-product of his business, or a secondary consideration. This will not make him a social entrepreneur.

The higher the social impact per dollar invested, the higher the market rating of the social entrepreneur. Here, the “market” will consist of potential investors who are looking for opportunities to invest their money in social-objective–driven enterprises. Social-investment dollars will move from low social impact enterprises to higher impact enterprises, from general impact enterprises to specific and visible impact enterprises, from traditional social enterprises to highly innovative and efficient enterprises. Social-objective–driven investors will need a separate (i.e., social) stock market, as well as separate rating agencies, financial institutions, mutual funds, venture capital, and so on. Almost everything that we have for profit-driven enterprises will be needed for social-objective–driven enterprises—such as audit firms, due diligence and impact assessment methodologies, regulatory framework, standardization, and the like—only in a different context and with different methodologies.

There is only one type of competition: competition to amass more personal wealth. The moment we open the door to making a social impact through investments, investors will start putting their investment dollars through this door as well. Initially, some investors will divert only a part, and maybe a small part, of their investment money to social enterprises. But if social entrepreneurs show concrete impact, then this flow will become larger and larger.

If the social enterprises can demonstrate high impact and creative enterprise designs, a day may come when personal profit–driven enterprises will find themselves hard-pressed to protect their market share. They’ll be forced to imitate the language and style of social enterprises to stay in business.

If socially motivated people can dedicate their lives in politics to bring change in their communities, nations, and to the world, I see no reason why some socially motivated people will not dedicate their lives to building and operating social-objective–driven enterprises. So far they have not done so, because neither the opportunity nor the supportive framework exist. We must change this situation.

LM: specially in regards to the risk. opening a business has intrinsic risk that may fall upon the entrepreneur. I guess I can see a society where people will choose help others instead of making tons of money (specially if you already have enough money to sustain your lifestyle) but I don’t see it happening if on top of that theses people can face legal charges because of the businesses they are running. (just like it’s happening to Yunus now)

Information and communication technology gives us reason to hope that we are approaching a world free of power brokers and knowledge brokers. Individuals will be in command. There will be no screening authority on center stage. This is particularly exciting for all disadvantaged groups, voiceless groups, and minority groups. Any power built on exclusive access to information will disintegrate. Every common citizen will have almost as much access to information as the head of a government. Leadership will have to be based on vision and integrity, rather than on the manipulation of information.

LM: “Leadership will have to be based on vision and integrity, rather than on the manipulation of information.” -> not really what has been happening in the short term (last 25 years). In the long term information manipulation has reduced (according to Why Trust Matters book).

Another “access” I would like to see is access to the market: I would like to see all barriers and protections around world markets disappear. Protectionism is built up in each nation in the name of the poor, but its real beneficiaries are the rich and clever people who know how to manipulate the system. By contrast, the poor have a better chance in a bigger open market than in a smaller protected market. Everyone would benefit from the free flow of commodities, finances, and people.

So I began to imagine another dimension—a dimension where human beings want to be of help to other people, to create a new kind of world through economic activity. This requires a new kind of business—one that I call a social business.

A social business is a non-loss, non-dividend enterprise, created with the intention to do good to people, to bring positive changes to the world, without any short-term expectation of making money out of it. That is the subject of my new book, Creating a World Without Poverty. It describes how social business can change the world and end poverty on this planet.

When you are running a business, you think differently and work differently than when you are running a charity. And this makes all the difference in defining social business and its impact on society. There are many organizations in the world today that concentrate on creating social benefit. Most do not recover their total costs. Nonprofit organizations and nongovernmental organizations rely on charitable donations, foundation grants, or government support to implement their programs. Most of their leaders are dedicated people doing commendable work, but since they do not recover their costs from their operations, they are forced to devote part of their time and energy, sometimes a significant part, to raising money.

Social business competition will be about pride, about establishing which is the best team to achieve the social objective. Competitors will remain friends. They will learn from each other. They can merge with each other at any time to become a stronger social force.

LM: What about the egos of each entrepreneur?

To attract investors, I propose the creation of a separate stock market, which could be called the social stock market. Only social businesses will be listed there. The existence of a public marketplace for trading shares in social businesses will have many benefits.

Notice the differences between these two kinds of social businesses. In the first case, it is the nature of the products, services, or operating systems of the business that creates the social benefit.

With the second type of social business, goods or services produced might or might not create a social benefit. The social benefit created by this kind of company comes from its ownership. Because the ownership of shares of the business belongs to the poor or disadvantaged (as defined by specific, transparent criteria developed and enforced by the company directors), any financial benefit generated by the company’s operations will go to help those in need.

On other Grameen social businesses

We also adopted a bonus scheme to boost production. If fish from a pond exceeded a predetermined target, the staff was rewarded. The poor, who had stolen fish under the government’s management, now became our best farmers, protectors, and partners out of self-interest in their profit share.

Grameen’s experience with fisheries demonstrates that new grassroots systems can be designed and developed from scratch so that the poor can better control sophisticated technology and share in a macroeconomic project. Technology is an essential prerequisite for raising productivity, but it must be directed so that the increased production does not simply end up in the hands of the wealthy.

Still, the buyers did not show any interest in purchasing this local fabric. It was too difficult. They explained that they could not go door to door to each single weaver in Bangladesh to acquire the hundreds of thousands of yards they needed. It was much easier to place a huge order with the Indian suppliers, who could provide them with whatever they needed, right on time.

In 1993, we created an independent nonstock, not-for-profit company we called Grameen Uddog (“Grameen Initiatives”) to link the traditional hand-loom weavers with the export-oriented garment industry. The weavers, thrilled to participate in the export market, created a beautiful new line of fabrics. We called it Grameen Check.

Cynics and critics of our ambitious project claim that high tech will be wasted on the stone age mentality of most of our borrowers. The truth is, we are finding quite the opposite. Without the benefit of a telephone, our villagers waste a lot of time, money, and effort getting messages to dispersed family members.

In place of social security, we decided to offer them shares of successful Grameen companies, non-Grameen companies, and Grameen mutual funds. Basically, when a Grameen company such as the Grameen Fisheries Foundation reaches a profitable level, we transform part of it into a for-profit company coowned by Grameen borrowers and the general public through stock options.* In most cases, shares yield dividends and also appreciate in value. To meet a sudden crisis, borrowers may sell some shares for immediate cash.

Main takeaways

• Micro credit
  • There are different types of poverty. The way you help someone earning less than $1 per day is different from how you help someone earning $5 per day.
  • The social aspect of forming loan groups of five people is just as important as the money itself:
    • They help each other, exchange ideas, and provide encouragement.
• A social business is a non-loss, non-dividend enterprise, created with the intention to do good to people
  • it’s main product or service might generate social benefit
  • and/or it could generate excess profit to social causes
  • and/or it could bring more equality by distributing dividends or equity to all employees