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| When a little money goes a long way | | |
Pallavi Aiyar
Grameen Bank founder and Nobel Peace Prize winner Mohammad Yunus believes microcredit could be the solution for the problems of China's farmers.
PHOTO: AFP
SHOWING THE WAY: Nobel Peace Prize winner Muhammad Yunus addresses the opening ceremony of the Grameen International Conference on Microcredit in Beijing on October 22.
THE CONCEPT of microcredit or lending small amounts of money to groups that are excluded by the conventional banking system can help China in its quest to build a harmonious society, according to Grameen Bank founder and winner of the 2006 Nobel Peace Prize, Muhammad Yunus.
China's breakneck economic growth has led to a sharp income gap between rural and urban areas transforming one of the world's most equal, albeit poor societies, into one with a gini-coefficient (a commonly used statistical measure of income inequality) worse even than that of India.
While China's urban middle class who benefit from easy bank loans are busy buying up homes and cars causing the country's policy makers to devise ways to cool down the red-hot economy, millions of farmers in the countryside have virtually no access to credit.
At a time when economic reforms have taken away the medical and education subsidies that used to be the norm, this asymmetry is one more factor straining the fabric of Chinese society.
Professor Yunus believes microcredit could provide one solution for China's challenges.
Speaking to foreign correspondents in Beijing, where he held discussions with high-ranking Chinese officials, he revealed that China's central bank had invited the Grameen Bank to start up operations in the country. However, he did not go into details.
Since the Grameen Bank was established in 1983 some 50 million households have benefited from microcredit in Bangladesh and India alone. By contrast in China, where the rural population stands at a weighty 700 million, only some 100,000 people have borrowed from microcredit institutions.
"Microcredit in China remains a foreign-funded activity limited to a few NGOs. No local funds are available to microcredit institutions," Professor Yunus said. Although China has licensed seven private microcredit companies to operate in five different provinces, they are only allowed to provide loans and cannot accept deposits. Policy and legal restrictions have taken the teeth out of microfinance, said Professor Yunus. He believes this situation can be redressed given political will.
Explaining the difference between conventional banks and microcredit, the Nobel laureate said, "In conventional banks the more you have, the more you can get, whereas in microcredit the less you have, the more priority you get." His pioneering Grameen Bank requires no collateral at all from borrowers. "The idea is to turn conventional banking on its head, so we don't go into a borrower's past at all. We run no credit checks and absolutely no one is excluded. Even those with a criminal record are welcomed," he explained.
System based on trust
Professor Yunus credits the Grameen bank's amazing recovery rate of 98 per cent to the fact that the entire system is based on trust. "We put our trust in the borrowers; in people that the rest of society has written off and in return they want to honour that trust."
According to Professor Yunus, the only path to a better life for the rural poor in China today, is to migrate to the country's coastal boom towns in search of work at the factories that churn out the bulk of the world's consumer goods. "But with microcredit these people would have another choice in life; that of staying at home and being self-employed," he enthused. "You don't need any special skills to do this. If you can make a basket, we can give you the money to buy materials to make a hundred baskets and suddenly you have a viable business."
China's floating population of migrant workers is currently estimated at some 200 million.
But while Professor Yunus is excited at the prospect of increased access to microcredit for China's poor, Chinese banking continues to be dominated by large, inefficiently managed state-owned banks, beset with non-performing loans.
In China it remains extremely difficult for private enterprises to get access to credit. Bank loans still go overwhelmingly to state corporations and nearly three-fourths of the private sector has to depend on "shadow banks" for credit.
This Friday, China's biggest bank, the Industrial & Commercial Bank of China (ICBC), is expected to raise $29 billion in the world's biggest ever float, when it lists around 15 per cent of its shares. However, 80 per cent of the ICBC's loans go to the corporate sector, which is almost totally dominated by state-owned companies, although 40 per cent of these are losing money.
While in Beijing, Professor Yunus spoke at a variety of venues recounting the uplifting story of "how micro-credit lifted millions from poverty." China would do well to listen. It has found other remarkable and laudable ways to lift millions from poverty, but so far credit is not among them.
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