Grameen Bank: Muhammad Yunus and microcredit
Changing the collateral rule to let the poor borrow — the tutorial’s model of social business.
- Sector
- Microfinance
- Source
- Week 4 tutorial mini-case (both tutorial decks)
The case in brief
In a Bangladeshi village in 1974, Muhammad Yunus observed that craftspeople were skilled but limited by the availability of credit. He saw an opportunity in micro-loans with no collateral and low interest. Repayment was very high, Grameen Bank was created, and the model was adopted nationwide (tutorial slides).
Grameen works on the assumption that even the poorest can manage their own financial development given suitable conditions. Yunus and Grameen Bank jointly received the 2006 Nobel Peace Prize “for their efforts to create economic and social development from below”. By then more than seven million borrowers had received loans, over 95 per cent of the loans going to women or groups of women, and the bank had inspired similar microcredit institutions in over one hundred countries (NobelPrize.org).
Key facts
- Founder
- Professor Muhammad Yunus
- Observation
- 1974, Bangladeshi village: skilled craftspeople limited by lack of credit (tutorial slide)
- Innovation
- Micro-loans with no collateral and low interest (tutorial slide)
- Recognition
- 2006 Nobel Peace Prize, shared by Yunus and Grameen Bank
- Borrowers in 2006
- More than seven million; over 95% of loans to women (NobelPrize.org)
Analysis through module theory
Poverty trap and institutions (North, 1990)
Conventional banks require collateral that the poor do not have; loans do not work on trust; without collateral there is no guarantee of repayment. The collateral requirement is an institution — a rule of the game. Grameen changed the rule and proved it unnecessary through high repayment.
Social business (Yunus, 2007; Yunus & Weber, 2010)
The objective is overcoming poverty (principle 1) and repayment keeps the model financially sustainable (principle 2). The tutorial calls Grameen a famous model of social entrepreneurship and of social business.
Martin & Osberg (2007)
Grameen acts directly — it lends — and creates a new equilibrium in which the poor are treated as creditworthy. That combination is social entrepreneurship, not social service provision.
Discussion questions
- 1.Which level of innovation is microcredit without collateral: incremental or radical, sustaining or disruptive? Justify each.
- 2.Is the innovative element a service, process or business model innovation? Why not the others?
- 3.What would an international social entrepreneur need to replicate Grameen in a new country?
Takeaways
- Social entrepreneurs often succeed by changing an institution that everyone else takes for granted.
- A social business must still be financially sustainable — repayment is part of the mission, not in conflict with it.