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Small miracles

By awarding this year?s Nobel Peace prize to Bangladesh?s Grameen Bank, the Nobel committee has recognised the celebrated microfinance institution?s central belief: that an idea ? even a very simple one ? backed by a desire to succeed, is a bankable proposition.

india Updated: Oct 18, 2006 00:12 IST

At first glance, it might be difficult to imagine a connection between the Nobel Peace Prize committee and Silicon Valley venture capitalists. Yet, the two are linked. By awarding this year’s Nobel Peace prize to Bangladesh’s Grameen Bank, the Nobel committee has recognised the celebrated microfinance institution’s central belief: that an idea — even a very simple one — backed by a desire to succeed, is a bankable proposition. That is exactly what venture capitalists do — take a financial risk on the viability of an idea, with no collateral to back it other than the desire of the borrower to make the idea work. In 1976, when Muhammad Yunus lent $ 27 from his pocket to a group of women making bamboo chairs, it marked the beginning of a revolution in the way lenders would look at the poor. Grameen is, with reason, the world’s most celebrated and the most widely imitated financial intermediary dealing with the poor. Over 95 per cent of its loans have been returned; an eight-year study of its borrowers showed that 48 per cent managed to escape the clutches of poverty.

Today, there are more than 10,000 institutions lending small sums to the poor. Some ‘loans’ are as low as Rs 100, the biggest seldom exceed a few thousand. However, even this is merely touching the edges of the problem. In India alone, the demand for microcredit is estimated at around Rs 50,000 crore. The UN estimates that global demand for micro-loans is over $ 300 billion. The reality is that less than 5 per cent of this is being met.

A major reason for this is the perceived risk in lending to those who have nothing to offer by way of collateral. The risk is real. Worldwide, less than a tenth of microcredit institutions are making a profit. Many have high default rates. However, those who have managed to evolve appropriate models have been very successful. Another myth that has been exploded is that a subsidy element is intrinsic to the microfinance model. Not true. Many micro-loans charge as much as 4 per cent per month as interest, yet are able to sustain and build upon their corpus. So, not surprisingly, Dubai, which is busy reinventing itself as a global financial centre, is preparing to host the next world conference on microfinance.