The lack of a well-functioning credit market is often a hindrance to rural villagers and farmers in developing countries. Living from harvest to harvest, the rural poor are vulnerable to the vagaries of the weather. When the previous harvest fails, far too often rural farmers are forced to borrow sums to plant the next crop at extortionate interest rates that keep them indebted to the money lenders.
To break this cycle of poverty, a new form of lending to the poor has emerged: microfinance.
Microfinance institutions typically focus on making small loans—typically from \($25\) to \($200—to\) rural entrepreneurs to begin or expand a small business. Microfinance lenders oftentimes provide other services to the rural villagers they serve, including offering savings accounts, life insurance, and basic health care.
The founder of the microfinance movement is Muhammad Yunus, an economics professor at Bangladesh’s Chittagong University. In 1976, he made a small loan out of his own pocket to local craft makers in a nearby village. That \($27\) loan was the inspiration for the Grameen Bank, the world’s most successful microfinance institution. Since its founding in 1983, the Grameen Bank has lent more than \($5\) billion to 5.3 million people and inspired more than 3,000 imitators who have reached an additional 93 million clients. Yunus and the Grameen Bank were awarded the 2006 Nobel Peace Prize in recognition of their accomplishments.
Traditional banks focus on making large loans to credit-worthy, ongoing businesses. Yunus turned Grameen’s attention to the needs of the rural poor in Bangladesh. Most bank loans are to men.
Yunus believed that Grameen should focus on lending to women because they were more likely to recognize the needs of their families and their communities: 96 percent of Grameen’s loans are to women. Often they were illiterate, so Grameen dispensed with paperwork. Often they lacked collateral, so Grameen developed a new lending model based on trust and peer pressure. Loans are made to individuals in lending groups, consisting of 5 to 10 members. Social pressure from members of the group encourages each borrower to make her loan payments on time. Default rates on Grameen loans are remarkably small: 1 to 2 percent, on average, although they soared after the catastrophic 1998 flood that devastated Bangladesh.
Buoyed by the success of its microfinance operations, the Grameen Group has developed new ways to alleviate rural poverty. Grameen Telecom has teamed with Norway’s Telenor to provide cell phone service in rural villages. The Grameen Bank provides small loans to “village telephone ladies” to buy a cell phone. The telephone lady then charges villagers a small fee to use the cell phone, which has allowed local entrepreneurs to identify new markets and lower their costs of doing business. The Grameen Group also created a joint venture with Danone SA, the giant French food conglomerate, to improve nutrition in Bangladesh through the provision of healthier foods and to reduce poverty by developing new markets for poor local farmers. Grameen Danone’s first product is low-priced Shoktidoi yogurt (Bengali for “yogurt that makes you strong”), which sells for about 6 eurocents a cup. Shoktidoi yogurt is formulated to address nutritional deficiencies of the local children—an estimated 56 percent of Bangladeshi children suffer from malnutrition—using locally sourced milk and molasses made from dates.

Case Questions 

1. How transferable is the Grameen Bank’s business model? Would it work in your country? How important are the cultural values of Bangladeshi society to its success?

2. Numerous banks and venture capitalists have established for-profit microfinance companies to provide small loans to villagers in India and in numerous African nations.
Yet some critics have argued it is immoral to profit from the poverty of these impoverished peoples. Do you agree? Should microfinance be limited to not-for-profit organizations like Grameen Bank?

3. Grameen Bank has teamed with Telenor and Danone to provide telephone service and a low-priced, but nutritious yogurt. Can you think of any other goods or services that could benefit the rural poor through joint ventures between nonprofit organizations and for-profit international businesses?