CASES
CASE 6
MICROFINANCE: GOING GLOBAL . . . AND GOING PUBLIC?*
In the world of development, if one mixes the poor and nonpoor
in a program, the nonpoor will always drive out the poor, and the
less poor will drive out the more poor, unless protective measures
are instituted right at the beginning.
—Dr. Muhammad Yunus, founder of Grameen Bank1
More than 2.5 billion people in the world earn less than
$2.50 a day. None of the developmental economics theories
have helped change this situation. Less than $2.50 a day
means that these unfortunate people have been living with-
out clean water, sanitation, sufficient food to eat, or a
proper place to sleep. In Southeast Asia alone, more than
500 million people live under these circumstances. In the
past, almost every effort to help the very poor has been
either a complete failure or at best partially successful. As
Dr. Yunus argues, in every one of these instances, the poor
will push the very poor out!
In 1972, Dr. Muhammad Yunus, a young economics
professor trained at Vanderbilt, returned home to Bangladesh
to take a position at Chittagong University. Upon his ar-
rival, he was struck by the stark contrast between the devel-
opmental economics he taught in the classroom and the
abject poverty of the villages surrounding the university.
Dr. Yunus witnessed more suffering of the poor when, in
The Grameen Project would soon follow—it officially be-
came a bank under the law in 1983. The poor borrowers
own 95 percent of the bank, and the rest is owned by the
Bangladeshi government. Loans are financed through de-
posits only, and there are 8.35 million borrowers, of which
97 percent are women. There are over 2,500 branches serv–
ing around 81,000 villages in Bangladesh with a staff of
more than 22,000 people. Since its inception, the bank has
dispersed more than $10 billion, with a cumulative loan re–
covery rate of 97.38 percent. The Grameen Bank has been
profitable every year since 1976 except three years and pays
returns on deposits up to 100 percent to its members.2 In
2006, Dr. Yunus and the Grameen Bank shared the Nobel
Peace Prize for the concept and methodology of microfi–
nance, also known as micro-credit or microloans.3
What Is Microfinance?
Microfinance involves a small loan (US$20–$750) with a
high rate of interest (0 to 200 percent), typically provided
to poor or destitute entrepreneurs without collateral.4
A traditional loan has two basic components captured by
interest rates: (1) risk of future payment, and (2) present
value (given the time value of money). Risk of future pay–
ments is particularly high when dealing with the poor,
who are unlikely to have familiarity with credit. To reduce
