Borrowing Yunus' Banking Model to Aid Social Growth in Africa

08 November 2013



Nobel Peace Prize winner Muhammad Yunus who is also the owner of Grameen Bank has enabled the poorest of the poorest in Bangladesh to have access to finance through his micro-credit initiative. His initiative allows anyone to qualify for loans, which average about U.S. $200 (R1 994).

With 80% of Africans unbanked, we want to see if his model would be able to fit our African countries, and if so what opportunities does this have to lower down the number and provide some sort of financial inclusion to the poor in Africa.

Quick facts about Bangladesh

With a population of more than 160 million people, Bangladesh is the world's eighth most populated country, it is located in South Asia and has a parliamentary republic with an elected parliament called Jatiyo Sangshad. Bangladesh's real GDP is expected to slow to 5.7% in 2013/2014, a decline from 6% from the previous term. Consumption will continue to be supported by the growth in Agriculture.

Investment into the country is expected to quicken following the transition to a new government, it is also likely to be boosted by the government's efforts to attract foreign direct investment from India, China and Russia.

Link it to an African country with similar GDP per capita

For us to better understand if this initiative will be worthwhile, let us select countries with a similar GDP per capita to that of Bangladesh so to better understand if the model was to be implemented, which country will serve best as an entry point.

Per capita GDP is sometimes used as an indicator of standard of living as well, with higher per capita GDP being interpreted as having a higher standard of living.

According to the World Bank Bangladesh's GDP in 2012 was recorded at $747.34 (R7 451) Countries in Africa with similar Per capita GDP are: Benin ($752), Burkina Faso ($634) and Zimbabwe ($788).

A look at Grameen Bank Model of financial distribution

Grameen Bank micro credit initiative grants small loans to poor people who have no collateral and who do not qualify for conventional bank loans.

The whole initiative started when Yunus lent the equivalent of $26 to a group of 42 workers from his own pocket, with that 62 cents per person, they bought materials they needed for a day's work, which includes weaving chairs or making pots. At the end of their first day as independent business owners, they sold their work and soon paid back the loan.

How it works is, the bank requires its borrowers to organize themselves into groups of five, all are cut off if one borrower defaults. They meet every week to make loan payments at commercial interest rates and critique one another's business plans. They also pledge to boil their water, keep their families small and carry out other good health practices. People who repay small and loans on time can take more.

The Model: loan approval criteria

  • The women who take out a loan have to pledge on 16 decisions they will follow for the period of the loan and so to continuously improve their lives."

    The 16 Decisions that women have to make before they are considered for borrowing

  • Every year Grameen Bank staff evaluates these points and check whether the socio-economic situation of its members is improving. The bank evaluates poverty levels of the borrowers using 10 indicators which in turn helps the bank to also track the progress and impacts their loans are having to their members. The 10 tracking points include:
    1. The family lives in a house worth at least Tk. 25,000 (twenty five thousand) or a house with a tin roof, and each member of the family is able to sleep on a bed instead of on the floor.
    2. Family members drink pure water of tube-wells, boiled water or water purified by using alum, arsenic-free, purifying tablets or pitcher filters.
    3. All children in the family over six years of age are all going to school or finished primary school.
    4. Minimum weekly loan instalment of the borrower is Tk. 200 or more.
    5. Family uses sanitary latrine.
    6. Family members have adequate clothing for everyday use, warm clothing for winter, such as shawls, sweaters, blankets, etc, and mosquito-nets to protect themselves from mosquitoes.
    7. Family has sources of additional income, such as vegetable garden, fruit-bearing trees, etc, so that they are able to fall back on these sources of income when they need additional money.
    8. The borrower maintains an average annual balance of Tk. 5,000 in her savings accounts.
    9. Family experiences no difficulty in having three square meals a day throughout the year, i.e. no member of the family goes hungry any time of the year.
    10. Family can take care of their health. If any member of the family falls ill, the family can afford to take all necessary steps to seek adequate healthcare.
    11. "

Africa's financial distribution: a look at the banked Vs the unbanked

Now that we have seen how the micro credit system is working in Bangladesh we need to compare how African governments and financial institutions are working into giving equal financial access to the poor

In Africa, around 24% of adults had saved money in a formal account in the 2011, while 44% had used a community-based method of savings. 2% had originated a new loan from a formal financial institution, but 44% had borrowed from family and friends. Of all adults, 1% had a credit card and 1% had a mortgage.

"This graphs shows the number of banked people in some of the leading African countries in terms of the banking sector"

Reports show that 80% of Africans are unbanked, The unbanked remain so due to geographical inaccessibility, lack of infrastructure, high cost of banking services and lack of financial understanding

Until recently, commercial banks across the continent hadn't bothered to reach out to impoverished Africans in rural areas because they saw little profit potential. Instead, they focused on wealthier clients with larger transactions, which had a better chance of surpassing the cost of the bank's infrastructure and staff.

"This graphs shows the percentage of penetration through technological advancements in the banking sector" News from the United Nations show that 6 billion people have cellphones and there are more people with cellphones than there are toilets, this just shows how important mobile banking is in driving growth in the African banking sector.

So what the government and private sector are doing is that they are teaming with each other to better give financial access to the poor, and target those who earn less than $10 a day (about R90).

The biggest challenge that faces the poor is financial literacy which protrudes banking to be a complex issue, financial institutions however face geographical challenges in which people have to walk long distances to gain access to a financial institution, and this not only discourages clients to open a bank account but is bad for business.

However, telecommunication technology has proved an effective way of enabling banks to overcome these issues over recent years. Some providers allow users to transfer money and even pay bills or buy groceries with their phones.

According to research conducted by the World Bank, in Sub-Saharan Africa this type of banking has expanded to over 16% of the market, which is not much but in Africa's disadvantaged context one would say it is making significant growth.

"If you can get commercial banks operating in poor areas you get a financial deepening of those areas and development" -William Shaw-

Last remarks

It is clear that our African countries are more dependent on technology to better service their clients. Half of Africa's one billion population has a mobile phone which then makes it easy for financial institution to enable their customers to send and receive money.

Yunus' model would be a good start in impoverished countries because it sounds more like social entrepreneurship than a quick way to make money from the poor, if the major concentration of this micro credit initiative by Grameen Bank is to improve the lives of the people through lending, then Africa would be the best next thing to accommodate this thoughtful social entrepreneurship.

Mashudu Mulaudzi

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