The Father of Microfinance
June 28, 2021
Born in 1940 in a Bangladeshi village, Muhammad Yunus has consistently challenged current economic theories and created new ways to empower the poor and underserved.
After receiving his PhD from Vanderbilt, Yunus returned to his home country, Bangladesh, in 1972. At the time, a famine was sweeping through the nation and Yunus saw the people struggling. He was frustrated by the discrepancies between what he was taught and what he observed; people were struggling, and without a bank account they lacked access to financial services or credit. Yunus began loaning out his own money to women in his community. He created loans of around $27 and formed borrowers into groups to encourage peer facilitation and peer pressure, thus increasing repayment rates. He proved that the poor, even without collateral, could be counted on to repay their loans; the repayment rate of over than 95% Yunus observed was greater than repayment rates through traditional banks. Thus, he determined the poor were not a credit risk or unbankable.
Due to his success, Yunus started the Grameen Bank in 1983 as a bank for people lacking accessing to financial institutions and credit. Unlike other banks, Yunus’s bank was focused on improving the lives of the borrowers, not increasing the profits of the bank. Yunus was awarded the Nobel Peace Prize in 2006. Since then, thousands of microfinance institutions have successfully implemented his model. As you may know, Wisconsin Microfinance lends to females, utilizes the lending groups, and provides loan education and support for our borrowers, all methods from Yunus’s model.
Even today, Yunus continues to rethink and redesign neoclassical economic models. His most recent book, A World of Three Zeros, focuses on three achievements Yunus envisions for the future: zero poverty, zero unemployment, and zero net carbon emissions.
- Zero Poverty: Our current economic system is helping the rich get richer while the poor get poorer, increasing poverty. Innovations such as microfinance can change this.
- Zero unemployment: Yunus claims that zero unemployment is possible because humans are naturally entrepreneurs, though capital constraints in our current model prevent this. Microfinance institutions are designed to support entrepreneurs, even when they have no business background.
- Zero net carbon emissions: Yunus sees that our profit focus is contributing to climate change and sees a future with more social businesses. He believes that since profits are such a strong incentive, it is better to focus on profits and social responsibility separately. This way, social responsibility and the common good cannot be wiped away by the drive for profits.
Though he wrote A World with Three Zeros before the COVID-19 pandemic, Yunus believes it is even more possible to reach these goals now. He asserts that the pandemic has exposed some of the errors in our traditional economic system and has provided us with the opportunity to restart with a new mentality. As Yunus said in a May 2020 article opinion piece, “we have to recognize that we are the economy and “the economy” is a means.It facilitates us to reach the goals set by us. . . We must keep on designing and redesigning it until we arrive at the highest collective flourishing, resilience and happiness.” In this sense, we are in control of our future; instead of allowing the current systems to burden us, we must remember that these are dynamic systems, and we must alter them to benefit us as a collective group.
The creativity and belief in individual ability that Yunus preaches are the same factors that led to the start of Wisconsin Microfinance. After the 2010 Haiti earthquake, billions of dollars of aid poured into the nation. Aid was seen as the classic and most common vehicle of relief after natural disasters. However, Tom Eggert and his UW-Madison students saw that aid didn’t help people whose livelihoods were destroyed. Though aid has a role after natural disasters, it is a short-term solution that carries the danger of creating dependency. Thus, Wisconsin Microfinance set out to raise funds to create microloans in Haiti. In contrast to aid, these microloans are paid back, giving the borrowers a sense of responsibility and motivation. Additionally, the loans go directly to the people, empowering them to start businesses that can sustain themselves and their families in the long run. Hence, Wisconsin Microfinance isn’t only modeled after Yunus’s microlending principles, but also his belief in thinking outside the box and taking action.