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KUMF / KGPR T. M. Power Micro-Credit and the Nobel Peace Prize The Nobel Prize committee startled some by naming an American-trained economist as the winner of the 2007 peace prize. Muhammad Yunus won the Nobel Peace Prize for his 30 year old effort to fight poverty in developing countries by extending credit to individuals and households so that they could make small investments that made the households more productive and self-sufficient. Most of the loans are tiny and go to very poor people, often women struggling to feed their families. The conventional banking assumption was that such desperately poor people without anything to offer as collateral for their loans simply were not reasonable candidates for credit. Besides, large numbers of small loans were an administrative nightmare, generating very high administrative costs in addition to high risk. The result, in most poor neighborhoods, both in developed and developing countries, was that this market was served by what used to be called “loan sharks” who extorted very high interest rates and used their own private enforcers to make sure the loan shark got his money back. This type of credit drove households even further into poverty. Muhammad Yunus and his Grameen Bank sought to reverse this, showing in the process that low income households were relatively safe credit risks and reservoirs of entrepreneurial creativity that could put those small loans to highly productive uses. The results were substantial improvements in household well being and a growing pool of credit that could be shared by an expanding group of households. What was interesting about this experiment was the way it harnessed primarily commercial institutions, markets, and individual households in the fight against poverty and the pursuit of economic development. Although this was considered a “radical” or “counter-intuitive” approach to both economic development and household credit, the American experience and that of many other developed countries a century ago suggests something quite different. We forget that it was churches, social clubs, and labor unions that originally did the innovating in bringing credit to relatively low income American households. Starting with burial societies, households began pooling what little capital they had so occasional, very expensive, life events did not bankrupt families. Contributing a penny or nickel each week or month over many years assured that when you or a member of you family died, they could be buried with the normal religious and ethnic rituals. But that was just the beginning of the cooperative insurance programs that developed at the grassroots. We forget that the types of insurance we now take for granted were originally offered by “mutual insurance companies” that were like credit unions. Each person paying for insurance was an owner of the insurance company and all “profits” were plowed back into the insurance in the form of reduced rates or improved benefits or annual dividend payments. Some of the nation’s largest insurance companies continue to be mutual societies or other types of non-profit institutions although over the last quarter century most of them have been converted into normal commercial businesses and swallowed up by national and international corporations. Savings and Loan Associations were another example of non-profit, cooperative institutions developing to support the needs of relatively low income households. Although savings and loan associations got a bad name in the late 1980s because of their political and financial shenanigans, they began as a way for a community to share its capital so that members could save up a down payment on a home and then purchase a home. They too were cooperative institutions owned and managed by member savers and borrowers. The credit unions that still play an important role in many of our communities were similar cooperative institutions either built around the church, the workplace, the union or some other community-based organization.
Ultimately commercial banking institutions with the support of
various government loan guarantee programs entered these “consumer loan”
markets. Previously banks had restricted themselves to business loans,
largely operating on an “old boy network” the primarily supported established,
relatively safe businesses. It took cooperative, grassroots financial innovation
over a half-century in Of course, it may be that things have gone “full circle” by now with predatory commercial credit card companies playing the role of “loan shark,” begging people to go into debt for all sorts of silly, unproductive, or, even, destructive reasons and then sticking them with suffocating 30 to 40 percent interest rates. Lending and borrowing money to pay for current consumption is the opposite of the responsible behavior that Dr. Yunus and the Grameen Bank promote. Rather than supporting increased productivity and economic development, American’s current credit card binge can only serve as a drag on productivity and future household well being. We’ve come a long way baby! |