Cooking the Books 2: Poor Woman’s banker

This year’s Nobel Peace Prize has been awarded to Muhammad Yunus, an economics lecturer and banker from Bangladesh. The spread of “micro-banking”, which he thought up and put into practice, was judged to have contributed to world peace.

Leaving aside whether he should have got the Economics rather than the Peace prize, what is micro-banking? Actually, it is not all that different from ordinary banking in that it is still based on a bank lending out money that has been previously deposited with it. The difference lies in who the money is lent to. The Grameen bank, which Yunus set up in 1976, lends to poor self-employed people.

The established banks in Bangladesh had shunned such people because, being so poor, they had nothing to offer as collateral for any loan and so were not considered credit-worthy. In order to start up or keep themselves in activity, poor self-employed people had to resort to local money-lenders who charged usurious rates of interest. A typical example would be the woman in the story about how bank got set up:

“In the village of Jobra, Dr Yunus met a woman who made bamboo stools. Because she had no assets and was unable to borrow from conventional sources, she had to resort to the money lenders. For each stool, she borrowed the equivalent of 15p to buy the raw bamboo. After repaying at extortionate rates of interest she made barely 1p on each stool. This woman was hard-working and talented but was being held back by a lack of access to finance. Inspired by her story, Dr Yunus started a series of experiments and lent tiny sums of his own money to villagers. They used the money to set up small businesses such as basket weaving and raising chickens. He found that his borrowers — mainly women — repaid in full and on time” (Times, 1 September).

What Yunus had shown was that the poor self-employed can be credit-worthy. Banks based on his principles lend out very small sums for a year which have to be repaid, with interest (at just above the ordinary banks’ rate), from current sales. While a means of freeing the self-employed in countries like Bangla Desh from the clutches of the money-lenders, micro-banking is not a solution to global poverty. Not only because not everybody in such countries could become a basket weaver or a chicken farmer or a maker of bamboo stools, but because those the bank lends to remain poor and dependant on the vagaries of the market.

Nor is there anything anti-capitalist about the scheme. The Times described Yunus in an editorial (14 October) as “the Adam Smith of the Poor” and their correspondent in Dhaka reported:

“Professor Yunus insisted that he was not against the free market, but that he wanted the market to be free for everyone. ‘I am a free-market guy and even the poor should be part of the free market’, he said. ‘Two thirds of the population of the world are not able to participate, so it is not free’”.

The way the Grameen bank works also confirms the Marxian view that banks cannot create credit out of nothing. Like other banks it can only lend what has been deposited with it. If certain banking theories were correct — that if you deposit £1 in a bank, it can then lend out £9 rather than only 90p — then Professor Yunus would have been able to help the poor self-employed of Bangladesh by a mere stroke of the pen. But if he had tried to run his bank on this theory it would have rapidly gone bankrupt, and the only prize he would have got would have been a booby prize for either stupidity or naivety.