Nobel Laureate Muhammad Yunus: Changing the System, One Social Business at a Time

September 21, 2009 – Nobel Peace Prize laureate Muhammad Yunus is proof that ideas can start small and go on to change the world.

Starting with a $27 loan to 42 Bangladeshi villagers in 1976, Yunus founded a bank that now makes more than $1 billion a year in "microloans" to 8 million borrowers.

Further, Yunus' concept of collateral-free microloans has become a global movement that has dispersed more than $20 billion to nearly 100 million households in more than 50 countries, said Gowher Rizvi, vice provost for international programs at the University of Virginia, as he introduced his longtime friend Yunus on Sunday to a crowd of more than 1,000 in University Hall.

The magnitude of microfinance's impact is staggering, Rizvi said. Millions of the poorest people in the world, many of whom earn less than $1 a day, have used microloans to start household ventures as simple as buying one chicken and selling the eggs. Microloans also pay for schooling that allows children to become engineers, doctors and other professionals, a huge leap in one generation from the circumstances of their parents.

"Availability of affordable and reliable credit offers the best hope of breaking the vicious circle of economic, social and demographic structure that ultimately cause poverty," said Rizvi in his introduction of "one of the most transformative human beings on our earth," drawing a standing ovation welcome from the crowd.

Yunus, who was recently awarded the Presidential Medal of Freedom, America's highest civilian honor, recounted the birth and epic growth of the simple concept of microloans.

Shortly after Bangladesh became an independent country in 1971, Yunus left his job as a professor of economics in the United States to help rebuild his homeland. When a famine struck, Yunus witnessed people dying and felt "disgusted and tortured inside" that all his academic learning and economic theories could do nothing to help, he recounted.

When he visited struggling villages to help in whatever small ways he could, he soon observed how many Bangladeshis were suffering at the hands of loan sharks. His initial $27 loan allowed the 42 Bangladeshi villagers to pay off their loan sharks.

After observing the huge positive impact of his first few small-dollar loans, he asked banks to help him multiply these collateral-free loans. Bankers' conventional wisdom held that the poor were not creditworthy, and should not be given loans. Yunus personally signed as a guarantor of every tiny loan to villagers, and the loans were repaid successfully. Still, the banks declined to adopt and promote this new type of loan, so Yunus founded Grameen Bank in 1976, to make his own microloans.

Grameen Bank has grown to become one of the largest in the world, lending more than $1 billion a year to 8 million borrowers, with a 97 percent payback rate. In the process, Yunus upended many of the tenets of modern banking. Whereas typical banks tend to lend to the rich, mostly men, concentrated in urban centers, drawing on the deposits of wealthy investors, Grameen loans to the poor, mostly women, often in rural areas, with 60 percent of their deposits coming from borrowers (who must open a Grameen account as part of getting a loan.) Instead of making customers travel to a bank branch to do business, Grameen's 28,000 staff come to the doorsteps of its customers.

All humans have an entrepreneurial spirit, Yunus noted, but that spirit is stifled when people are born into a society that doesn't let every individual have an opportunity to explore his or her potential.

"Poverty is not created by poor people. Poverty is created by the system," he said.

To demonstrate this claim, Yunus created a special program of loans to beggars, who were encouraged to carry along something to sell, like candy, while begging. Those they approached had a choice to buy something, donate or do both. Today more than 112,000 beggars have received these loans, and more than 16,000 of them are no longer begging. The rest are only part-time beggars, exercising their entrepreneurial spirit as they determine which houses are best for begging and which are best for selling, he said to a laugh. "So even a beggar, given an opportunity, can turn himself or herself into something else: a self-respecting businessperson."

Detractors have been skeptical that the microloans model could work in wealthy developed nations like the United States, Yunus said. So Grameen has opened a branch in Queens, New York; its roughly 1,000 borrowers have a repayment rate of 99.3 percent.

But expanding microloan offerings in the U.S. and many other countries is hobbled by old banking laws that technically prohibit this type of small-dollar lending and community banking.

Mainstream banks continue to resist the microloans model, Yunus said. The recent financial crisis is an opportunity to remake the international banking system, so that it will serve the two-thirds of the world's population who have traditionally been denied access to the formal banking system. Returning to the old banking system would be a huge missed opportunity, Yunus said, but there is still time to reform the system.

Yunus has also pioneered the concept of social entrepreneurship, or social business, a not-for-profit business focused on doing a social good, such as ending the serious malnutrition suffered by 50 percent of Bangladeshi children.

To do so, Grameen Bank partnered with Dannon to produce low-cost yogurt fortified with a special blend of nutrients and vitamins lacking in the diets of the malnourished. When a child consumes two cups of the yogurt a week for eight to nine months, he or she gains the missing micronutrients required for healthy development, Yunus said. The "profits" from this program are reinvested to reach more and more children each year.

Similar Grameen joint-venture social businesses are making low-cost mosquito nets impregnated with insecticide to prevent the spread of mosquito-borne illnesses like malaria, and shoes that will sell for $1 a pair, to be unveiled at the July 2010 World Cup soccer finals.

Social business enables people to use their creativity to solve problems and express their selfless side, Yunus said. Just like his own experience creating micro-lending, the solutions can start small, and then be replicated around the world.

"We can change the world," Yunus said, to another standing ovation.