In 1974 a young Economics professor of Chittagong University had just returned from the US after his doctorate in an exoteric topic when the famine struck Bangladesh. He approached the people of a village near the University as to how he could help them and discovered that their biggest problem was that they were so heavily indebted to the moneylenders that they had almost lost their freedom of individual action. The moneylenders were charging exorbitant rates of interest that were multiplying the outstanding amount exponentially beyond the paying capacity of the poor villagers. He offered to provide his own personal funds to them so that they could pay off the moneylenders. Professor Yunus felt that this was a kind of donation from him to get the villagers out of an adverse situation. To his utter surprise, he found that the villagers paid back the full amount to him. This experience led him to think that the poor were better borrowers and the loans extended to then were relatively safe and secure. Unlike the influentials they were in no position to delay a default on their loans because if they did so they would be cut off from access to funds in the future and this will destroy their earning capacity.

The question that arose in Professor Yunus’s mind was as how to persuade the bankers to replicate this limited experience of one village without requiring any collateral – the standard recipe of conventional banking. With the help of his students he experimented with the idea of creating a new type of agricultural cooperative – Three share farm. The landlords would contribute the use of their land during the dry season, share croppers their labor and Professor Yunus the cost of running the deep tube wells. But in this experiment he realized that the widows, divorces or abandoned women with children to feed were too poor to be even share croppers. They were landless and assetless and without hope.

So Professor Yunus turned his attention towards this group of the poorest of the poor – the women. He took out a loan of $ 300 from a state – owned bank on his personal guarantee in December 1976 and the Grameen Bank was born.

The rest is history. From a zero base in 1976 the Microcredit movement has reached out to more than 100 million people in the developing world. Bangladesh itself has 22 million borrowers and a number of non-governmental organizations are spread over every nook and corner of the rural areas of Bangladesh providing the credit. Grameen, BRAC and ASA are the three largest providers of microcredit, schooling, health facilities, water supply etc. to the rural poor. Their network and impact are much greater than the government. While political bickerings and rivalries, frequent hartals and other similar disruptive activities have preoccupied the successive governments in Bangladesh the civil society drawing upon the innovative work of Professor Yunus has taken upon itself the challenge to alleviate poverty and made impressive headway.

Grameen and Professor Yunus’s work has shattered some popular myths about banking. Unlike the rich, the poor particularly women are more reliable and better credit risk. The banks do not have to reply upon collateral and securities as the only tool to recover their loans. A knowledge of the borrowers’ needs, staying close to them, monitoring their performance and helping them out when the conditions turn adverse are the critical success factors for ensuring almost 100% recovery. Litigation and chasing the borrowers in the courts for executing the decrees and realizing the securities are counterproductive.

Doesn’t this monitoring impose higher costs upon the banks for lending to the poor? It sure does. Grameen Bank has charged 20% from its poorest of the poor borrowers and all successful microfinance institutions (MFIs) such as Bank Rakyat of Inonesia have lending rates much higher than offered by the conventional banks. But the record speaks for itself. The non-performing loans or defaults among MFIs are among the lowest. Politicians all over the world make rhetorical speeches blaming MFIs that they are charging more from the poor than the conventional bankers charge from well to do commercial borrowers. Little do they realize that for the poor it is not the pricing but access to credit that is the main problem.

What is the alternative available to them? The poor cannot borrow from commercial banks because they have no collateral to borrow.

They can only resort to moneylenders or arhthis (middlemen) who extract their pound of flesh and turn them into virtual servitude with the principal amount outstanding for ever while exorbitant interest rate of 50-60% exhaust the entire installment payments made by the borrower.

While the MFIs charge 20% which is higher than the average lending rate prevailing for

the commercial borrowers this is the best option available to them.

The sooner our policy makers and politicians understand that it is not the pricing of loans that is the main culprit but the preferential practices of commercial banks for people with property, steady income, land or factory or other assets that keeps the

poor away from the banks. Microfinance institutions modeled after Grameen Bank are

the only viable solution for catering to the credit needs of the poor.

Pakistan is a late starter in this field but the growth and demand for credit by the poor have been impressive.

Pakistan is one of the pioneers that has brought Microcredit under the regulatory and supervisory ambit of the State Bank of Pakistan.

This ensures that the savings and deposits of the poor in the MFIs remain secure and the activities of the MFIs are carried out under the vigilant eyes of the regulator.

No charlatans or fly-by-nights can now enter microfinance and take the poor for a ride because of the stringent licensing requirements required by the State Bank.

Pakistan Poverty Alleviation Fund, Khushali Bank, Rural Support Programs and Kashf Foundation are some of the leading players in microfinance in Pakistan today but the out reach so far is only 600,000 out of a potential client base of 6 million households.

We have a long way to go but Professor Yunus has shown us the way.

There couldn’t be a better person to deserve the Noble prize for poverty alleviation than him. We in Pakistan should be particularly proud of him because he is a friend, guide and mentor for most of us working in this field.

The writer, former Governor, State Bank of Pakistan is currently Chairman, Kashf Foundation, a non-governmental organization based in Lahore providing microfinance to poor women.