“The banking system has been a terrible disappointment because it failed”

November 2012

Conversation with Professor Muhammad Yunus, Nobel laureate and founder of Grameen Bank, on – going back to the core principles of microfinance – the failure of investment banking approach to microfinance in India – the need to be tied to the real economy – microfinance in the US

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Here is the transcript of the video.

1. Introducing financial services to the poor

Emmanuel Daniel (ED): Professor Muhammad Yunus, you have created the concept of sustainable banking in Bangladesh and now it’s a global phenomenon. Let’s go straight into where it is today and what the rest of the world can learn from the model that you’ve created. Especially for the commercial banking industry and the investment banks, which are trying to emulate or use micro-finance, the business that you had actually disciplined by a few core principles and made it into a commercial entity. What are the core tenants of the industry that we still need to keep adherence to?

Professor Muhammad Yunus (PMY): What I tried to do was to bring financial services to the poor, which was not considered a viable proposition. I tried to bring financial services to extremely poor people in the villages back in 1976 and it worked. I then created a bank out of it, called it Grameen Bank, or Village Bank, in 1983 and expanded the bank across Bangladesh. Now, we have eight and a half million borrowers in Grameen Bank, 92% of whom are women.

ED: Being a woman is an important component?

PMY: It is important in terms of family values. The borrowers own the bank. It is a self-contained bank.

ED: The bank’s liabilities and the assets are self-funding?

PMY: They are self-funding. This is becoming known as micro-credit, or microfinance all over the world.

ED: Micro-credit is micro-credit only if you have this as a formula base?

PMY: The basic feature focuses on the poorest people within financial services – savings, loans and insurance – and particularly focuses on women and it’s without collateral. That’s a very important thing. It lends money for only income generating activities. The basic principle is people should not go to the bank, the bank should go to the people. This idea has spread all over the world.

Some people took advantage of this idea and built micro-finance organisations to make money out of the poor. That has demeaned the whole system. These organisations are using the system not to achieve the original mission but to achieve a different mission, a mission of making money. Our mission is to help people get out of poverty. We need to help the poor build up their own lives so that they can come out of poverty, but some organisations didn’t have the patience they went ahead with their own missions.

ED: During which period did this phenomenon come about?

PMY: Back in the late 1990s.

ED: Was this driven by commercial bankers or investment bankers?

PMY: It was driven by individuals. The whole thing came from a big wig hailing from Mexico. He made lots of money and wanted to establish an IPO in New York City and make millions more. That immediately drew everybody’s attention. They’re now calling this microfinance, but people have been criticising them; we created microfinance to fight loan sharks and somebody’s using the same method to become loan sharks. As I said, this is a completely reversal of the whole system.

ED: How did you keep your own perspective?

PMY: Making money brings happiness; it brings joy because you are successful. This is one kind of joy that you get in life. Another kind of joy is making other people happy; by making other people happy, you make yourself happy. Before I created Grameen Bank, I was an economics professor in in Chittagong University, so this was a side project. When the project developed and became a bank, I became the chief executive officer. I took the same salary I used to get as a professor. I had my regular salary and didn’t need any more money. I want to do things which others say could not be done. That gives you a lot more excitement. I got involved with issues such as malnutrition, healthcare and energy, and created company after company.

ED: Were they all funded by the organic business?

2. Developing the Social Business idea

PMY: We made sure Grameen Bank didn’t invest in other companies. All these companies are problem solving companies. I didn’t want to make money for myself in those companies, any one of them. We have cities of companies, these problem solving companies without any intention of making any personal money out of them. Then we started calling them by a special name. I called it Social Business. Many other countries are adopting Social Business ideas because microfinance is focused on financial services.

ED: It then progressed onto the next level where you fortunately collaborated with commercial entities, such as telecommunications companies.

PYM: That’s right.

ED: How did you manage that aspect?

PMY: When we started talking about it, many people became interested in joining Social Business. For instance, we collaborated with Damoine, a French company, to produce yogurt to solve the problem of malnutrition in the country.

ED: But they come into that relationship with a very clear profit motive.

PMY: It wasn’t clear from the beginning. Anybody who wants to do business with me knows right away that I don’t believe in profiting from those suffering from poverty or poor health. The only way they can do business with me is by having the same spirit. They know right from the beginning that this company will never give a dividend to anybody. The only thing the owners can take back is their original investment, over a period of time, and nothing more than that. However, there was a misunderstanding with our telecommunications venture.

Telecommunication was different at that time; we were not doing it as a Social Business. We wanted to convert it so that it became a Social Business. The idea was that we partnered with Telenoma with an understanding that after six years, the company will sell the shares to Telecom, another department, to be converted into a Social Business venture, as Telecom was not owned by anyone. That way, the venture would be dedicated to helping the poor. It became very successful within six years, and the organisation did not want to sell, saying that while our intention as exceptional, it could not be legally enforced.

ED: What do you do to ensure a robust governing structure?

PMY: Just like anybody else. You need a good CEO, and clear instructions on what needs done. In the beginning, you will encounter difficulties; you are coming from another world where you want to make money. Here, you don’t have to make money; you want to make a difference for the people. We have a similar structure compared to other banks. Only the purpose is different.

ED: Now that you’re not part of Grameen Bank, you’ve got more time to be international in a way.

Professor Yunus: I was always international although I was with Grameen Bank. Throughout my career, I handled more than sixty companies, and so divided my time accordingly while also promoting the idea of Social Business and microfinance globally.

ED: Right now, where are the frontiers of your work?

PMY: Social Business as an idea is catching up. Microfinance is everywhere too. Grameen Bank can now be found in the US, where we have five branches in New York providing microfinance services. We have over ten thousand borrowers in New York.

ED: You’re applying something that succeeded in a Grecian economy into an urban economy.

PMY: That’s because people need money, whether it’s in a village or in a city. Furthermore, this is an empty space.

ED: What are your thoughts about today’s banking system?

3. Reinventing today’s banking system

PMY: It is quite clear that the banking system has been a terrible disappointment because it has failed to provide the kinds of service that we need.

ED: Are we talking about capitalism, or the banking system?

PMY: I’m talking about the design of the banking system. Capitalism is a bigger issue with a fundamental flaw too. Today’s banking system seems to prefer to serve those who come from a more privileged background. It does not go to the real people. I would even say that the majority of the world population doesn’t have any access to banking services. These people go to loan sharks for loans. In New York, these loan sharks are referred to as Pay Day Lenders, charging interest rates of one hundred, one thousand or even two thousand percent. The banking system has to be redesigned so that financial services are available to everybody. In previous years, people may say that this is not possible. But look at where microfinance is today. Nothing is impossible. It can be done; it can be done very well, even better than the conventional system. The financial system has moved away from the real economy. It has become a sort of speculating economy. It has transformed into a gambling casino of sorts. That has created greed, which in turn, took the whole banking system in a different direction. We need to reinvent banking system. We have to wake up, take the system apart, and start building it up again. The banking system’s objective should be to provide financial services to every single human being on this planet while being relevant to the real economy.


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