The man who reinvented banks

The man who reinvented banks
Sunday Herald, by Steven Vass

Professor Muhammad Yunus paces into the room with the quiet dignity befitting his status.

This is the father of micro-finance, the founder of the Grameen Bank, which lends money to severely poor people to start businesses. Originated in his native Bangladesh in the 1970s, it has been rolled out and imitated in developing countries around the world. In 2006 it won him the Nobel Peace Prize.

Yesterday the 71-year-old doctor of economics stepped off a flight from Jakarta – the previous stop in his world crusade against poverty – and straight into a press conference in Glasgow for the launch of the Grameen concept in this country. He didn’t have the stamina for all the press interviews afterwards, but thankfully he now looks as fresh and bright as a Bengali water lily. Which is probably just as well, given that he will also today be attending his swearing-in ceremony as chancellor of Glasgow Caledonian University.

"Poverty is a common experience everywhere," he says. "If you are poor you face the same problems- What we are addressing is rejection by the financial system."

Grameen works by sending loan officers into deprived communities and finding people who are interested in setting up small businesses but cannot get bank credit. Yunus stresses that it can be any kind of activity, having in the past included everything from street vending in Bangladesh to dog walking in New York, where Grameen launched four years ago.

The candidates have to organise themselves into support groups of five people, who train together in the ways of Grameen and refine one another’s business ideas. In this period they must make small savings deposits to show commitment, likely to be £2 per week for three months. Then they borrow up to £1000 for a year, without any need for a formal business plan, and sign no legal contract, only a social one.

"They choose what to commit to," says Martin Cheyne, chairman of the Grameen Scotland Foundation. "It might be sending their children to school, or not drinking or not taking drugs. They then get the peer support of their group to do that."

This support comes through weekly meetings, which the loan officer also attends to collect repayments. The interest rate is just shy of 20% APR, meaning that they pay about £1100 for each £1000 they borrow in a year. Assuming the business develops as planned, there is scope to borrow up to £7500 more through two subsequent loans. After that, participants are expected to be sufficiently established to get additional credit from a bank.

To put this system in place, two loan officers are being seconded from Bangladesh for up to three years. There will also be a chief executive who will be recruited locally, followed by two local loan officers. They will quite possibly operate out of an office in Glasgow Caledonian, whose principal, Pamela Gillies, has been behind the drive to bring Grameen to Scotland.

Starting from 2013 they will be looking for candidates in deprived parts of Glasgow, holding events in local community hubs and the like. They will advertise in Tesco stores, since Tesco Bank has signed up to handle the finance to allow for the fact that Grameen has no banking licence.

In year two they aim to expand into North Ayrshire, with Inverclyde and West Dunbartonshire in line for subsequent years. The target is to have 500 borrowers by the end of the first year, with a view to eventually having about 1500 borrowers in each of the four council areas. The concept would then be broadened to other impoverished parts of Scotland, while Barnsley, Preston, Liverpool and Manchester are also expressing an interest.

Grameen has so far raised donations of £100,000 from the Scottish Government and £100,000 from Stagecoach shareholder Ann Gloag, plus a zero-interest loan of £500,000 from Tesco Bank which the European Investment Fund is poised to match. This will cover the first couple of years, giving the bank time to raise the additional £2m that it reckons it needs to be self-sustaining.

From that point the idea is that it lives off loan interest and member savings.

The organisation has been trying to launch in Scotland since 2009, but struggled to get funds. Other high street banks including RBS declined, as did others such as Sir Tom Hunter, who invests in Grameen elsewhere. Reports at the time that the welfare system would be a problem appear to be wide of the mark. According to Martin Cheyne, Grameen is actually assuming that the income from these micro-businesses will not be large enough to affect welfare payments, at least not in the early stages.

With these obstacles overcome, will it work? Grameen claims to have lifted tens of millions of people out of poverty worldwide. A 2011 report supported by the UK’s Department for Overseas Development and the universities of London and East Anglia raised doubts, citing "inadequate data" and "weak methodologies" being used to measure the impacts. On the other hand, winning the support of a Nobel Committee takes more than a few rosy anecdotes.

Some contend that Grameen is wrong to think you can help the poor by saddling them with debts they cannot always repay. Chris Cook, a microfinance specialist based in Linlithgow, says: "You don’t help people out of poverty by putting them into debt. The answer is to invest in people."

Professor Yunus, who stepped back from running Grameen in Bangladesh last year amid a battle for control by the government, counters that you have to distinguish between good debts and bad debts. He says: "When people worry about debt it’s mostly coming from the idea that it’s a consumer loan. In micro-credit, it’s all about income-generating loans . That’s not a burden. That’s a facilitation."

He also defends the Grameen APR, arguing that the money is simply what is required to finance more lending and operations, and is not used for profit.

A more concrete objection is that Scotland has plenty of well meaning initiatives that lend money to poor people. Above all, there are the credit unions (CUs). According to the British Association of CUs, the Scottish branches have more than 250,000 members with more than £210m in savings and £180m in loans. As well as basic savings and loan services, the bigger CUs also offer other facilities such as current accounts, mortgages and foreign currency. They have also just been given the power to make business loans, although it has been happening informally for years. And while they too are not-for-profit and only charge the loan interest necessary to keep ticking over, many of them survive charging rates around the 12% APR mark.

While there are 109 CUs in Scotland, Glasgow is the heartland. This is partly because it has a higher proportion of deprivation but is largely due to a big drive by the council to promote the benefits of CUs. This has taken membership from 3% in 2002 to 22%, compared to 2% across the UK (CUs are much bigger elsewhere – Canada and the US have around 50% membership, while Ireland has more than 70%).

Liz Campbell runs Castlemilk Credit Union in Glasgow, which has around 3700 members. Castlemilk, like many CUs, has experienced a surge in bad debts since the start of the economic crisis and has had to reduce staff numbers and curb lending.

"It’s crazy for the Scottish Government to be giving £100,000 to Grameen," she says. "Give it to us. I will use it better. I would be able to open my doors and let in new borrowers again."

While the government would doubtless point out that it subsidises Scottish CUs to the tune of £1.3 million, Professor Yunus argues that more organisations with similar goals is not a bad thing.

"In our business there’s no such thing as competition. It’s more about brotherly work of doing it together to solve the problem," he says.

He has also been "given the impression that there is a vacuum", perhaps a reference to the fact that the UK Government identified many more low-income people that could be helped by CUs than is the case. But once again Glasgow’s CU membership is much higher than the average. The city also benefits from other related organisations, such as DSL Business Finance, which makes loans of £5000 to £50,000 available for up to five years to business ventures and social enterprises.

Even if there are question marks about Grameen’s strategy, most observers conclude that it would be churlish to argue that a new £1m fund to lend to poor entrepreneurs is anything but welcome. As Professor Yunus prepares to catch one more international flight, the pressure will be on the incoming chief executive and the Grameen Scotland Foundation to raise the outstanding £2m and establish the concept by the next time he flies into town.


IT has been no mean feat for Forres Credit Union to increase its number of membership over the past few years. Sure, more people have needed to borrow since the economy went haywire, but Forres like most CUs only lends to those who establish their credentials as savers first. It has raised member numbers from around 700 to over 1100 in the five years since it moved into its premises on the town’s high street despite fierce competition from so-called payday loans providers like Wonga and Quick Cash.

"On a loan of £200 for 28 days, Wonga will charge you £62.15," says June Airey, a director at Forres. "That’s an APR of 4214%. Payday Loans will charge you £59.90, which is APR 1909%. Our credit union charges £2.45, an APR of 14.4%. If we could rescue people from these companies, we would be doing a lot of good. But they’re so heavily advertised. It’s pushed down people’s throats."

Liz Campbell at Castlemilk Credit Union calls it "obscene" that the financial regulator allows this kind of lending. She visits schools and talk to children who have never heard of the credit union, but know about the "Provvy woman" from Provident Personal Credit, who knocks on the door, offering expensive loans to their parents.

"They’ll say, ‘That’s my ma’s pal.’ I say, ‘Go home and say she’s not your ma’s pal.’ You would be better sending them to a loan shark. The police tell us about a guy in Toryglen that only charges 25%."

In her other role as a board member of the Scottish League of Credit Unions, Campbell is opposing a drive by the UK Department of Work and Pensions (DWP) to raise the maximum lending rates of CUs from 2% per month to 3% (from 26.9% APR to 42.6%) to make them all viable without government subsidies.

The proposals also include a £51m investment in modernisation and a targeted one million extra customers UK-wide by 2020/21. Campbell, like many in the sector, counter that a number of CUs are already viable without subsidies and that they are being asked to play a greater role because the banks are no longer willing to help people in deprived areas. Many CUs would rather raise their incomes by broadening their appeal to other social strata.

Asked why payday loan companies can charge such high rates, the Office of Fair Trading, which regulates them, said: "There is no cap on the rates that businesses can charge. However the government has commissioned some research into whether to change this in future."