Ideas Matter
F0RBES
November 15, 1999

The For-Profit Antipoverty Agency
by Mark Skousen

This summer's spectacle of World Bank officials lobbying Congress for more foreign aid money was an embarrassment, or should have been. In the past half-century the bank has poured a staggering $450 billion in loans, grants and other aid into the Third World, with not very much to show for the money except some grandiose infrastructure projects. Even these bureaucrats concede that most of the money they have lent out has bypassed the poor.

Who should fill the vacuum? Can the private sector reduce poverty?

It can, and Exhibit A is the Grameen Bank, the brainchild of Muhammed Yunus, formerly an economics professor at the Chittagong University in Bangladesh. Yunus showed the World Bank how to fight poverty-at a profit.

The Grameen Bank (www.grameen.com) started in 1983 by lending amounts ranging from just $30 to $200 directly to poor people in Bangladesh. Applicants didn't have to be able to read or write; no collateral or credit check was required.

The bank's strategy was to lend money to entrepreneurs (or would-be entrepreneurs) who needed only a few dollars to buy supplies and tools. Borrowers might make bamboo chairs, sell goats' milk or operate rickshaws.

By avoiding the usurious interest rates of local moneylenders-often 20% a month-many of these villagers finally broke out of poverty. Their small businesses grew, and thousands of borrowers now own land, a home (often using a $300 Grameen house loan) and even a cell phone (through Grameen Telecom).

By now, the Grameen Bank has made millions of these tiny loans, totaling $2.5 billion. Note that Grameen is a for-profit, private-sector bank that charges interest of 20% per year. Amazingly, Grameen's loss rate is about 2%, largely because borrowers are bound together in small, local groups. If anyone in the group defaults, no one else may borrow more. That's a powerful incentive.

You could call this social collateral. The strategy has been used by other microlenders in the Third World, and in a way it is reminiscent of what went on in small building-and-loan societies generations ago in the U.S., in which borrowers and savers all knew one another. Successful Grameen borrowers are not starving, and neither are their children. Most of the Grameen Bank's 1,140 branches are profitable, albeit marginally. At the end of last year Grameen had $450 million in assets; for the year it managed to earn only $200,000. The bank is mostly owned by its 2.4 million borrowers, with each allowed to own only one share of stock. Yunus and other administrators are salaried employees.

Yunus' success has inspired hundreds of other microlending operations worldwide-including at the World Bank, where $3.1 billion has been spent on microlending organizations since 1990. Ex-Wall Streeter and current World Bank President James D. Wolfensohn, to his credit, has moved the bank heavily into such partnerships with the private sector.

The Grameen Bank is powerful proof that the private sector can perform most of the World Bank's functions. There is a renaissance occurring in private charity. Credit innovative organizations like Habitat for Humanity (and its best-known hammer-wielder, Jimmy Carter), which can catch the imagination of the public; and credit the huge fortunes that have been created by the current bull market.

With the Bill and Melinda Gates Foundation, for example, Bill Gates has finally shoveled some of his money out into the world. Many more bull market moguls will be giving money away. The next 50 years will see tens of trillions of dollars in wealth pass from one generation to the next, and a fair amount of this will go to charities.

The World Bank is scheduled to release a big report on world poverty next September. It should not overlook a most important lesson: The World Bank is a puny force in fighting poverty compared with the private sector. It should limit itself to encouraging developing nations to provide the infrastructure (private property rights, sound money policy, limited government) necessary for private markets and independent charities to flourish.