The Caring Banker

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His father was a successful goldsmith. His mother helped the poor who came asking for help at their doorstep. He chose to follow the example of both parents, becoming one of the world’s most successful and well-known social entrepreneurs. Next time someone questions whether social entrepreneurship really is capable of improving people’s living standards in the long-term, ask them if they know about Muhammad Yunus, founder of Grameen Bank, and Nobel Peace Prize Laureate for 2006.

In 1974, economist Muhammad Yunus took students on a field trip to a poor Bangladeshi village. After interviewing the locals, they realised that one of the primary causes of rural hardship was predatory lending, or, to put it more bluntly, usury. The rural poor did not have easy access to credit. But because they desperately needed credit, they were forced to accept onerous terms, such as extremely high interest rates, in order to obtain it. This deprived them of a significant part of their meagre earnings, thereby trapping them in a vicious cycle of poverty. Needless to say, this is not a peculiarity of the Bangladeshi rural economy. Historically, predatory lending has been a principal cause of rural poverty across the world. Solving the issue of rural populations’ access to credit, therefore, is not just an act of compassion, catering to individual people’s needs in the short term; it can lay the foundations for potentially major transformations of the rural economy, especially in developing countries where credit is least available in the countryside.

Yunus’ solution was to provide Bangladeshi rural households with credit on gentle terms. He initiated a microcredit project, which in 1983 evolved into Grameen Bank. Significantly, Grameen Bank does not demand collateral and it applies a declining balance method to its loans’ interest[1]. The bank also extends credit specifically to rural people living in poverty and prioritises lending money to women over men – more than nine out of ten Grameen Bank borrowers are female – because they are more likely to make investments that are beneficial in the long-run, such as education, and by so doing it boosts their social position.

The concept of microcredit has met with resistance. Scepticism is not unreasonable: since by definition the borrowers are individuals with lower creditworthiness, and since the absence of collateral makes repayment less urgent, how can microcredit ensure loan repayment to generate profits necessary to continue lending? The importance of Grameen Bank’s example is that its impressive loan repayment rate, approximately 97%, demonstrates that microcredit can be implemented. The repayment rate is perhaps partly explained by the fact that borrowers own 94% of the Bank’s shares, making them directly interested in its viability, as well as by the use of declining balance for interest rates.

This social project has turned out to be a very successful enterprise. Since being founded in 1983, it only ran losses in three fiscal years – one of them being, naturally, the year of its creation. Furthermore, it has expanded dramatically: in October 2011, it counted 8,349 million borrowers. Through the creation of a set of criteria by which to judge the poverty level of its borrowers, Grameen Bank can track whether their borrowers’ position with respect to these criteria has improved, allowing it to remain accountable and critically measure its social impact. Ultimately, not only has the enterprise flourished, but it now serves as an inspiration for similar projects across the world.

When asked whether he thought entrepreneurs would switch from focusing on profit to social impact, Yunus urged them to do so: “We’ve used our creative power to focus on making money — and we’ve done it like it’s the only game in town. It’s not. There’s a more exciting game in town.” Indeed. As the example of Grameen illustrates, we can use the experience of the money-making game to help create enterprises which contribute to solving major social issues. Bridges for Enterprise, after all, is about realising that you can play more than one game.

[1] Quantitative and qualitative information for this article is taken from, where one can also find detailed reports on the bank’s finances.

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