Banker of the Poor

Urstruly,

I saw ur question. ``IF`` the option is available...I guess u dont have that option so far.

I suggest u a proposal to make this Quranic precept possible in Pakistan. For a start, pl collect Rs.10 from each Pakistani (as share capital) every month. Excluding children and retired, u are left with 10 crore people. The sum comes to abt Rs. 100 crores. If u seek help from overseas Pakistanis @ USD 10 per month...it wud probably be $10 mio (assuming that u have a million overseas Pakistanis) i.e roughly Rs. 60 crores. So a monthly sum of Rs. 160 (100+60) crores. If we can trim this to even Rs. 100 crores that wud be a great sum. Keep giving interest-free loans to the poor Pakistanis. By an year you`ll have been amassed a bigger sum of Rs. 1,200 crores.

This is not a silly idea but a concrete proposal. As a votary of Quran you should do this to remove poverty whilst complying with Quran. The question is, can u undertake this mammoth proposal? (U need diamond balls to do this).

Dr. Yunus is an achiever. Dont get disturbed by 20-30% interest rate. This annual rate boils down to Rs. 2-3 per month for Rs. 100 which I think is FAIR and affordable. The golden rule in Dr. Yunus`s model is collective responsibility for loan repayment which is making his model successful, I guess.

In India, national banks had obligation to lend 1% of their net assets as DIR loans (Differential Interest Rates; last heard that the rate was 4%. bankers call this scheme with poking fun: Dont Insist on Repayment Scheme) without any collateral security. That DIR was a proven failure but the rule was not changed so far.


I can go only this far......

Urstruly one more thing. Have you entertained the possibility that your idea is not in practice because it may not be practical?
As they say, even a thousand mile journey begins with a single step. You can set ambitious goals but if you are not taking any steps to implement them, then they are no use.

#33 urstruly, i am beginning to wonder if there is not a serious disconnect. Microcredit is NOT a welfare system so stop comparing it to what`s going on everywhere else. As others have mentioned its purpose was to finance those who would not otherwise be financed by traditional institutions and make them self reliant. In that it seems to have achieved notable success. Several million lifted out of poverty due to a non-governmental effort is phenomenal and Dr. Younis has deservedly gained recognition for that.
Going back to distributing risk over the entire community of borrowers, it doesn`t sound cruel to me and i don`t quite grasp what your problem is. My insurance rate goes up, among other things, if there are catastrophes that put heavy demand on insurance companies. I can either agree to share in the burden or go without insurance. I know what i`d choose every time. Borrowers having to shoulder the burden of a fraction defaulting is very reasonable. Why should i pay for building some fancy freeways in michigan when i can get around just fine on my bicycle? It`s part of the social compact.

khurram:

Thanks for your feedback. I read one of the websites that you had mentioned in your feedback. It is captioned “Grameen Bank, which pioneered loans for the poor, has hit a repayment snag,” by Daniel Pearl and Michael M. Phillips. It was published in the Wall Street Journal on November 27, 2001.

It is true that the article mentions that Grameen Bank faced some problems such as the repayment snags, etc. It was reported at the end of 2001 and now we are into the year 2007. The bank is still operating. The article did not mention that the bank was closing shop because of those problems.

Dr. Yunus gave his Nobel lecture on December 10, 2006 and he didn’t mention any serious problem. I am certain that the websites that you have mentioned would have come to the notice of the selection committee for the Nobel award also. I don’t see any good reason why Dr. Yunus would hide such problems if they were really grave.

Please do not misunderstand me. I am not a spokesman for Grameen Bank nor am I trying to promote it and its business affairs. I was impressed by one man’s (Dr. Yunus’s) yeoman effort to help the poor and that was the only reason I wrote the article. The bank was established in 1976. Although 30 years is a short time in the history of a successful bank yet long enough in another sense. If the bank were sitting on weak or defective foundation, it would have sunk by now. Any new venture encounters some budding problems but if the problems are not fundamentally grave, it should be able to ride out of them. I hope that Grameen Bank would survive for the poor to draw sustenance from it. I don’t have any personal stake in the bank.

If nothing else, Dr. Yunus has created a model in the form of Grameen which others can follow and improve upon. Dr. Yunus ended his Nobel lecture by stating, “I believe this honor that you gave us will inspire many more bold initiatives around the world to make a historical breakthrough in ending global poverty.” Let us hope so.

Mohammad Gill

Jeez, looks like the mullah types think that Prof. Yunus was a kaffir for his innovative help to the poor. What is it with muslims these days that they just cannot tolerate anybody`s success, especially if he is a fellow muslim? Anyone succeeding is immediately tarred and feathered as an agent of the west. Should everyone remain in the dumps to provide a never ending supply of suicide bombers?

Re #8,

``The appropriate thing in the context of the article is to see if Grameen is helping the poor or not....``

Indeed!
I wish Mr. Gill had examined both sides of the issues.
Here are some perspectives from the other side,

http://www.hinduonnet.com/businessline/2002/09/25/stories/2002092500810900.htm
``Is microcredit a debt trap?``
http://www.leftbusinessobserver.com/Micro.html
``Microcredit, microresults``
http://www.zmag.org/sustainers/content/2006-10/19bond.cfm
``Nobel Loan shark?``
http://online.wsj.com/public/resources/documents/pearl112701.htm
``Grameen Bank, Which Pioneered Loans
For the Poor, Has Hit a Repayment Snag``

#34 You seem to be having some trouble understanding that talking to a cow owner could be for any reason other than that of doing a feasibility study that particular cow owner. Let me explain the difference - if had had so chosen, I could have spent all my time in dhaka, wearing a suit and tie, being driven around in air-conditioned cars, and talking only to central bank officials and senior government officials in their air-conditioned offices and fine restaurants in dhaka. I could have written a report based on these discussions and that would have been sufficient. Instead, I chose to also go out in the field and meet with your ``cow owners`` and satisfy myself that what I was going to recommend was going to make sense. I was evaluating the entire nation-wide system, not just one cow-owner.

Now do you get it?

#22 by Urstruly Re: # 19

Could you or someone else, in heaven`s name tell me, how micro-credit through banking system is any different from the local usuary lender ... with Walmarts and Kmarts replacing the Moma Pappa corner stores. ... what was the default rate with usuary lenders; was that also 2% or was that 0%. Why the hell did the usuary lenders not go out of business if everyone defaulted? Why on earth can`t we use our brains to critically what west forces us down our throats.

Urstruly ... in case of Bangladesh, the factors are a bit different.

First, the organised `Arhti` system does not exist in B`Desh, who traditionally finance from the seeding till the harvest at very high interest rates, against pledge of the crop and in case of crop failure, the pledge of the borrowers daughters` hand in marriage (or slavery) and so forth. This system cannot be broken so far in Pakistan because agriculture is vast unlike B`Desh and the `Arhtis` have a stranglehold over the entire agricultural supply chain. Therefore the MF banks in Pakistan cannot move into this sector. It is too high risk and if banks try to move in, they cannot recover anything since guns are drawn if a debt collector dares to enter the `Arhtis` domain. B`Desh does not have this problem.

Second, Microfinance requires a non-migrant population because there is no collateral. B`Deshis culturally are not as mobile as Pakistanis/Indians, besides their borrowers are too poor to move anywhere. So it works.

So yes, at-least in Pakistan, the Walmarts/K-Marts are trying to take over the business of the typical moneylender (the sood khor Pathan if you will) for consumption in time of dire need. That`s all. But at-least they will not kill or kidnap the entire family for default. However I do agree with your central thesis.

As for the matter of interest, it is simply forbidden in Islam. There`re no ifs and buts. And yes, a system can work without `rent` for capital, which is interest. But that requires a realization that money does not have any `time value`, which gives rise to interest in the first place. But I guess that`s not the subject here, as well as it is a subject of deep introspection into why Islam forbade interest to begin with.

Later ...

How is Interest I earn by lending my money any different than the rent I get if I rented my house? Any non religious explanation is appreciated,

Thanks,
Avkrishna

Re: # 32

The technical name for the procedure that is used to evaluate the potential cow owner is called feasibility study. A feasibility study is done by every bank for every potential business venture.

For charities you do not do feasibility studies or worry about repayment.

Re: # 31

As I said, borrowers cannot be charged for the default of others. This is as cruel as it sounds. Since what I am proposing is a publically administered fund which is established with public taxes and zakaat, the whole society bears the cost of defaults. Which means there would be a greater check and balance from the public to keep the freeloaders off the program. What I am proposing is not a scheme that has just been transmitted from planet Mars. The publically funded welfare programs are established in almost every West European country and in North America. This has not made people leave their jobs and start living off of welfare. In other words, an overwhelming number of people want to excel in life and would find ways to further themselves.

urstruly #30: ``charity`` means giving something for free. a grant is money given for free with no repayment required. an interest-free loan is money given for free with repayment of the principal only required. what is so shocking in this?

and btw, that was not a ``feasibility study`` to give a loan to one cow-buyer as you say, but (as i explained earlier) was part of a broader effort to satisfy oneself that there was real substance to microcredit and it was not merely a gimmick. Which, as I explained in #27 is part of a vast global effort at poverty alleviation. And these efforts, as I also mention in #27, includes debt forgiveness as part of a broader measure geared to bring some law and order in these countries.

The only ``debt forgiveness`` in the ``Islamic polities`` that you talk about has been as in Pakistan, where the rich have taken vast sums in loans with no intention of repaying and getting their ``qarza maaf``!!

#29 You`re just arbitrarily defining terms. If, say, there`s $10k available and $1k of that is annual administrative cost, then $9k is available to lend in the first year. If 10% of the borrowers default, cow died, business failed, whatever the reason, at the end of the first year, there`s only $8100 in assets. Now what?
You can view that part of the interest that goes into growing the program as tax that the successful borrowers pay into the program so more people can borrow.

Re: # 27

``- interest-free loans and grants are like charity.``

lahol wila quwat. How the hell is this charity. Never in my life I have knocked at the door of a begger and demanded the dime back which I gave him in charity two years ago. Interest-free loans are business transactions like any other with documentation and the promise of payback. Just as you or a Grameen banker do feasibility study of a potential cow buyer before lending him loan, you also do feasibility study of the interest free debtor for his potential business venture. Just as interest based loan`s debtor, the promise of payback by a interest -free debtor, is only a promise. His business may fail - but he has to payback through some other source - may be through another loan just as a defaulted Grameen customer does.

In an Islamic polity the forgiving of loan to the unfortunate defaulters would also be institutionalized as well as it would be a societal virtue too, as directed by our Holy prophet (pbuh).

Re: # 28

Administration costs to disburse loans through an organization are valid and do not fall into the category of interest and so are the cost of inflation and depreciation of capital over time. These are valid costs. What is invalid is the ``profit`` and the ``risk`` factor cost``; risk being invalid because it is purely speculative and every business in the world has risk associeted with it, yet no business charges ``risk cost`` to its customer and yet billions of businesses survive in this universe.

As far as diminishing capital is concerned, there are many other ways to replenish the pool of money other than charging interest, e.g. investments, trusted business ventures and many many more. In an Islamic polity, citizens enjoy an added benefit through Zakaat (mandatory alms), a part of which can be used to replenish the capital pool. Not to mention the taxes.

My point is that that the micro-credit and all business loans should be disbursed through publically funded semi-governmnet non-profit organizations.

Look, I may be an idealist but I am not an idiot. I sit on the board of a non-profit housing organization that ``rents out`` houses to low income families. Rental cost is 30% of the income whether the earner(s) in the house make $100 or $1000 a month - the only restriction is that they should have a source of income. Of course this is just token money, so that we do not find ourselves supporting free loaders. Those who cannot pay 30% of their income are put on a list of welfare housing which is provided free of cost (it has a separate administration). All our administration and budget costs are covered by two sources; municiple taxes, and rent from a number of houses that are rented out at market value. Business is absolutely non-profit, yet capital pool is maintained in a way that there is room for growth. The point is that if you put your mind to it, nothing is impossible.

What I really find mind boggling is that, as consumers, the people on chowk are propbably the only ones who want to pay extra money from their pockets for their borrowed money when they shouldn`t. Would you ever try to pay $120 at Walmart while your total bill was only $80 had you find out that paying $80 would be Islamic? This is ridiculous for crying out loud. It is insane.

Urstruly, ask yourself this - why are you hanging out here theorizing on the impossible when you could be out there putting your ideas into practice?
When you give out a loan, there`s a cost associated with it due to cost of administration, credit risk and a built in margin (``profit``) to grow the program, even at zero inflation. This cost is reflected in the interest charged. In the case of interest-free loan, there will be a net diminution of principal when you factor in these costs. You simply cannot sustain something like that without fresh injection of capital every time.