Muhammad Yunus, the founder of Grameen Bank and a proponent of 'social business', a not-for-profit business model to combat unemployment and other social evils, does not mince his words when it comes to micro-credit for the poor. The Nobel Peace Prize winner is dismissive about some recent innovations in the microfinance sector and warns about the direction they are taking. He also believes that micro-credit should be kept outside political influence to run it as a sound financial institution. "The best scenario," he says, "is when a micro-credit bank is owned by the poor." Excerpts from an interview with Shamni Pande:Q. You started the concept of BoP and micro credit revolution. How have they panned out and what are some of the key takeaways for you?
A. I must first clarify that we do not use the term 'Bottom of the Pyramid', or BoP, as it is being used by other groups who see it as a market opportunity. I feel their approach gives a wrong impression about micro-credit. Unlike them, we don't see it as a market opportunity, but as an opportunity to get people out of poverty. Our effort has been to fight loan sharks in the village, bring financial services to the poor, especially women, so they can start generating income. As our activities expanded, we created Grameen Bank, which now has presence across Bangladesh with over 2,500 branches. We have 8.5 million borrowers, 97 per cent of whom are women, and the Bank is owned by these borrowers. It lends over $1.5 billion and all the money comes from within its own system. It does not take money from the government. We also encourage savings and, every week, an account holder has to put some money in his or her account. Today, the total savings is nearly $2 billion. We also encourage mothers to send their children to school, we give them higher education loans and some children go on to becoming doctors, engineers, etc.
The idea of micro credit spread both within the country and outside as it was picked up by many NGOs. Now, micro credit has become a global phenomenon. Along the way we had some problems, such as the fact that people misused the concept of micro credit and used it for the wrong purposes. They used it to make money for themselves, rather than seeing it as an opportunity to help people come out of poverty. We have got into controversies while trying to explain that their approach was not what micro credit is all about. They should not even call their models micro credit. Some such activity happened in India as well about four years ago, particularly in Andhra Pradesh. It had made headlines across the world. Reports said micro credit in India is finished, and this created tensions and problems. I tried to explain to the world that the problem was not about micro credit in India, but in just one state. Although there was a large concentration of micro credit organisations in that one state, it was not that all players were involved in it. Only a few micro credit players led to the problem as they wanted to make money for themselves, by floating initial public offering (IPOs).
Luckily, a commission was formed and the RBI stepped in, and, luckily, the problem is now resolved. But we still need to take certain steps. One, a legislation is still pending (for the past 3-4 years) on micro credit. I feel it is a good thing that it has not been passed, as it is not a good legislation to begin with. It needs to add certain things. For instance, the legislation should allow micro credit banks to be created, so that they do not have to remain dependent on money from outside.
Commercial banks will never take up micro credit in a big way. They will always do it in a small, as a token (activity). Therefore, I feel there should be a legislation that allows a separate bank to be created - a micro credit bank. They can take deposits and lend money to people, but they do not have to depend on donors to give them money. Once, that door is opened it can become a fast-expanding micro credit programme.
Q. But don't you see encouraging signals? The Indian government is encouraging banks to operate in the micro credit space. Bandhan has already got a banking licence. Many other micro credit players, such as SKS and Vikram Akula, are also applying for licences. Aren't these steps in the right direction?
A. No, they are not. Akula's initiative is in the wrong direction to begin with. And Bandhan, too, is taking a conventional banking license. That would require a lot of investments and clearances, such as hiring of experts to run a bank. But in doing so, you are hiring the wrong kind of people for micro credit. That is a wrong start. In my view, one should start a micro credit bank with a mandate that it would appoint a CEO who has at least a decade's experience in micro credit. A decade of experience in commercial banking is useless. In fact, it will be counter-productive. There should be a separate law to create micro credit banks because the existing law allows the creation of banks for the rich. You need a banking law to create banks for the poor. These are two different things.
Q. You think India does not have that framework in place?
A. It's not about what I think. It is about reality. That's the fact. Now that the legislation is still to be enacted, we can add this bit (a separate banking law for micro credit) in the pending legislation. Once the legislation happens, another thing will automatically come up - having an independent regulatory authority for micro credit. Since they are given privileges to take deposits, and so on, the independent authority becomes very important. You can say that you have an independent banking regulatory authority, why don't you let them do it. Then, again, we'll make a mistake. The existing banking authority is looking after banking for the rich, how they need to behave, etc. How will it know about how the banks for poor should behave? So, you need a separate banking law and a separate authority to monitor the sector.
Q. But Micro Finance Institution Network have been proactive in taking self regulatory measures. Where is the problem?
A. It is a good step, but a small step. It does not solve the problem of sourcing of funds to lend. Self-regulation would mean, 'we shall not do this, and not do that'. But who will stop you? I am doing micro credit, you're doing micro credit. Who are we to tell each other? It sounds good and they have good intentions as well, but, in reality, it is not effective. This is so, because some of them are leaders in the micro finance industry. Every community has its own hierarchy, so who will go and tell them if something is wrong.
Q. How does one deal when the political system gets in the way? You had to deal with it back home, and here, too, there was a view that certain politicians felt threatened with the growth of micro credit in Andhra Pradesh. They came down heavily on the industry as private money lenders were affected.
A. The problems surfaced because an opportunity was created. And politicians, in turn, saw a good opportunity to make mileage out of it. It is good to keep micro credit at a distance from political influences. Because when political influence gets in, financial soundness starts eroding. For instance, every politician will demand that interest rates should be kept very-very low. It is a popular thing to say for them. The poor do not have the ability to pay. So, they will ask why the industry is charging them for credit and demand interest-free loans. This is the direction, politics takes you in. But the reality is that one has to cover the cost of running an organisation, otherwise you'll not get anywhere. The other thing is that if you let micro finance alone, then SKS-type things happen. They charge higher interest rate and this harms the motive of micro credit.
Q. So, it's a catch-22 situation?
A. No it is not. You can define it well. The way RBI has done it by putting a cap on interest rates. This solves all the problems. There are ways as long you are running it properly and a regulatory authority is present to monitor your activities. Politicians come in when the money starts coming in. They come in when the state's money comes in, and the organisations start depending on funds from state sources. Then micro finance will have to play to their tune. However, if micro finance institutions can generate their own money, politicians will not be able to come in. Basically, micro credit should be kept outside political influences to run it as a sound financial institution. The best scenario is when a micro credit bank is owned by the poor, like the Grameen Bank. That way all the ownership and exploitation issues disappear.
Q. Do you believe that Grameen Bank remains the best model in micro credit, or do you see equally robust models elsewhere now?
A. I hope there are equally robust models elsewhere. It should not be the only one in the world. But, so far, no one has created a bank for the poor and owned by the poor. Grameen Bank is self reliant and it has its own pension fund, insurance programmes, technology programmes, education loans, etc. I haven't seen such comprehensive package anywhere yet. Others have some features, but not all of it.
Q. Grameen Bank was your baby, but you had to step down as Chairman because of political issues. What is your involvement with it now?
A. Technically I do not hold any office at Grameen Bank, but it is the same team that I have worked with all these years right from its inception. The same team is still running it, so we are not far away. We are family members. However, I do not sign any document now. The Bangladesh government has tried to take it over as a government-run bank, they changed the law as the law did not allow them to control the bank. I have been out of Grameen Bank for four years now, but still the government has not been able to put another managing director. There are complications in the law and you cannot impose a government-appointed managing director just like that. So, they changed the laws to make it happen. But even after all those changes, the government could not penetrate the bank. It has retained itself as the original bank as it was. But the government does have the legal power to take it over anytime, but it has not done so yet. So far so good, but it can change anytime.
Q. So you feel there is a need for a robust institution that does not allow outside influence, and India is far from having such a robust micro finance institution?
A. Yes. The legislation should allow for such a structure here.
Q. What do you think of Prime Minister Narendra Modi's Jan Dhan Yojna and the 2015-16 Union Budget seeking financial inclusion by announcing insurance and pension schemes for the poor?
A. If you list them, I will keep checking them as all good. There is no problem with them. But the real test is not in announcements. The real test will be to get things done, and, 10 years later, if somebody says that he had done a great thing. Today, so far, it is about good intension, and I am not minimising the importance. But the day has not come when one can say that it has changed everything for the better. We have to wait and see how it is being implemented and how many people are affected by it. It has been rolled out very fast, but speed and quality often compete with each other. If you do too much (at the same time), then quality goes down. If one has to retain quality, then one becomes slow. So, one needs to balance the two. I wish him all the luck and he has good intensions and they are all very positive announcements, but only time will tell.
Q. Given that you are the standard bearer for the industry, how come you have not expanded beyond Bangladesh with the Grameen Bank model?
A. Despite several invitations, we decided not to go to other countries and do it ourselves. It is a simple thing. The local people should do it. There is enormous creative power in every region and varieties of programmes can be introduced. Given the pressure, we have taken up small steps to merely showcase how it can be done in China, Brazil, Columbia, Mexico and in the US. But these are all local organisations. We just help them with our people to get them started and to show how it is done. In the US there are 19 branches, of which, eight branches are in New York, two in LA, two in San Francisco, and one each in Houston, Nebraska, North Carolina, Boston and Indianapolis, among others. They are called Grameen America and they are doing excellent work and all borrowers are women.
Q. What is your involvement in India?
A. We have many friends here. Virtually every major person running micro credit here started out either as a visitor to our organisation or as a student, or have worked with us at some point in time. Vikram Akula was a student doing his MBA in Chicago, when he came to Grameen Bank during vacation and was really excited about it. He came here and created his for-profit company and that's when things started falling apart. He told shareholders that they can make money by helping the poor by lending. That was a wrong message. He should not have done that.
The point is, we have many friends here and NABARD has been working with us for many years, way before they even introduced the self-help programmes. They have been very curious and very supportive. Former prime minister Manmohan Singh, when he was the finance minister, also visited our office and we had a long discussion on how this can be done in India. So, there is curiosity and interest both from the government and from private players. But some came out the right way, the others went the wrong way.
Q. So you are not involved in any way at all?
A. We are not active in micro credit in India. But we are active here in the social business. India is one of the seven countries where the social business is taking roots. The other countries are Brazil, Columbia, Haiti, Albania, Tunisia and Uganda. The social business is growing spontaneously in Germany and Japan as well.
Look at the CSR (corporate social responsibility) legislation in India, where 2 per cent of the money has to be given. I was very excited to see it. This could transform the Indian situation, provided social businesses can be taken as CSR financing. But I just leant that the draft law included social business as an eligible subject for investment, but in the final law it disappeared. So, social business is not eligible to receive finance from CSR money. But it is possible for the government to add it at a later stage and they do not have to go back to the Parliament for that.
Q. What do you exactly mean when you talk about social business?
A. I am talking about businesses that are created to solve people's problems. Poverty is a problem. Hence, there is a business model to solve it, on the condition that no one will take profit for themselves. It is a profit-making business, but profit stays with the business. The investor can only take back the investment money and nothing more. Our social business, at the level of the company, does not give dividend to its investors. It gives the principal back. It deals with health problems, old-age, sanitation, housing, environment, technology, almost anything.
Q. What is your experience with the social space?
A. Grameen Bank is a social business. Other than that we have 60 companies in Bangladesh. We came here, in India, three years ago as a small pilot project with a small fund called Yunnus Social Business Fund in Mumbai. We have invested in seven businesses here. We give very low-cost debt at about 3-4 per cent interest per annum. That keeps me busy and keeps me excited. Yunnus Social Business is headquartered in Frankfurt and through that office we have businesses in seven countries, including India. We have local people, local money to run, identify and manage the work. Some are individuals, others are foundations.
Q. People are now talking about the exits in the impact investment space. This, people say, is good as it encourages money to flow into it. What is your view?
A. There is a whole range of it and some of it is good. But we chose an area where we say there is zero-profit for us. Your only entitlement is to get exactly the amount you invested in the business. Hence, we delink ourselves completely from making any money at all for ourselves. We place ourselves where there is zero-personal profit, but the company makes profit. Am not saying others are bad and we are good, but that is a position we take. We take that position because when the profit motive is there, then it automatically blinds you to many of the opportunities that require funding. Once you delink yourself from the motive, you suddenly see many options that you would not have seen otherwise.
Q. Why should profit be a bad word, if it can get money to flow into a space where it is needed?
A. Please underline my words. I am not against anybody. And neither are they bad. My view is that profit is the legacy of conventional businesses and if you leave that legacy, you may discover something completely different. For instance, this is a no-smoking room and if someone says can I take a puff, what is the harm. You have to decide if you want to allow the person to smoke or not. If you allow one, then the concept of 'no-smoking' is gone and the environment is disturbed. Someone else will say, what is the difference between one puff and two? Where will you draw the line, and how?
Q. Micro finance dominates the space of what you can differently call social, bottom-of-pyramid, or impact. They have done well and many investors have been successfully. In fact, business groups and banks are getting into the space. Are you worried?
A. It is difficult for me to make a statement, as I do not know what micro finance means to them. We have defined it as a small loan given to the poor, particularly poor women, for generating income without any collateral. The objective is to get them out of poverty. However, there are some who take collateral, but call it micro finance. They are giving money to buy consumer goods, and they call it micro finance. So, what is micro finance, I do not know what is the reference.
Q. So, you are saying that the micro finance space in India is getting muddied?
A. Not just in India. Everywhere in the world. It is getting confused. Within micro finance, there is the right micro credit and wrong micro credit. We have to draw a line. Whatever that does not fit in my definition, I call it wrong micro-credit.
Q. But are you worried about the direction it is taking in India?
A. I am hopeful. There are very committed people here. Very few people took it in the wrong direction. Others are very committed.