Dialogue Chain. Episode 9.
Ksenia Yudaeva, First Deputy Governor, Bank of Russia, and Muhammad Yunus, Nobel Peace Prize Laureate of 2006, founder of the Grameen Bank.
Yunus: I’m delighted to get a chance to talk to you. You know, I’ve been struggling with the banking system for a long time raising some issues: that the banking system doesn’t extend to the bulk of the population of the world, I see. But when I come to Russia, I see something else. We talk about microcredit – a very popular subject in Russia. What I see is that all is mixed up: payday lenders are called microcredit, consumer loans are called microcredit, loans for small businesses are called microcredit. I’m totally confused because, from my background, where I come from, to me, microcredit means small loans, tiny loans for poor women to start something she can do to earn income, for income-generating activity. So, consumer loans are not in the picture. And we are trying to protect these women from the loan sharks.
So, is there a kind of definition for Russia what microcredit is, what it is not? Because it’s very important.
Yudaeva: Well, you know, we also have two types of companies. Actually, a small number of companies, usually they are government-sponsored, they provide credit to small businesses. So, I guess this is something similar to what you have in mind. On the other hand, there’s also not that big in comparison to banking institutions but still a significant market of microfinancial companies that provide consumer credits of different forms. They are usually not collateralized, usually have high interest rates.
I think there’s a very different issue: why microcredit to people not only to smooth their consumption but to change their lifestyles, let’s call it this way…why this one is not taking off. Well, you know, I actually read your book [A World of Tree Zeros] and, well, you call it social credit. I think that what you are doing is not only giving people money. We often think that the main thing, which people or companies lack in order to change their lives is money. I don’t think it’s exactly right. Money may be one of the elements, which they need. But they may need skills. They may need some business ideas. Right? Poor people, they may be psychologically ready to become entrepreneurs but they, probably, lack proper social networks, proper training, proper understanding of what it means to be an entrepreneur and so on. And my understanding is that your companies (maybe they don’t even understand that they do that) but they actually provide these services to people in addition to microcredit. And I think that this is quite important for this kind of business to have a positive effect on people’s lives rather than convert itself into the kind of microfinance we have in Russia now.
Yunus: From our side, we always felt everybody has the entrepreneurial capacities and simply he or she never got an opportunity to use it. So, once she is allowed, she will discover her path. And then, doing this for many many years in the past, for 42 years now, we have 9 million borrowers, right, in Grameen bank alone, there’re many other microcredit programs in Bangladesh. Probably, all together they will be double the size: 18 million borrowers. Mostly women, 97% are women. These are illiterate women, village women. In the beginning, they are very nervous. But we create a system: five women get together, get to encourage each other and so on. We don’t train anybody as such but we give a format so that they can talk, share their ideas and so on. But it works: people pay back nearly 100%. So, we are convinced that people are entrepreneurs. It’s simply the question of giving them the opportunity to do that. Sometimes I even call it…financial resources are just like economic oxygen: if you do not give oxygen, people collapse.
Yudaeva: I agree with you that people may have an entrepreneurial spirit. And I can also agree that in some remote areas in Bangladesh, particularly women who in the social ladder, take some lower position than men, probably, they just do not have access. And so, you may have lots of women who can easily enter entrepreneurship just if you only give them some small amount of money and so on.
Well, you know, in Russia we saw this about 30 years ago. When the Soviet Union collapsed, actually we didn’t have any microcredit industries. But at that time this new type of business flourished when people were going abroad (maybe even to Bangladesh) definitely to China, to Poland, to some other neighboring countries, buying goods, bringing them to Russia, and selling them. It was called in Russian ‘chelnoki’. And believe me, most of chelnokis were women. So, women are capable of doing this. And actually, at the time, and probably it’s still true, many of these small entrepreneurs and small business people in Russia were women. Because they easily get involved in this activity. So, this is the first generation of entrepreneurs who created these businesses we already have, and we probably need to dig deeper into other forms of businesses. And my point is that for that people may need a little bit more skills and suggestions on how the economy… how formal economy works, what they need to do to become entrepreneurs.
So, it’s not just money. It’s a little bit more of advice and connection to the system. And then, you know, when I’ve read your book, I realized that you often have some platforms, where you not only provide people with money, but you sort of provide them with business ideas.
Yunus: We don’t give any business ideas, we always encourage them to learn from each other. We tell them that ‘Look, we are bankers. We only know how to give money. We don’t know how to run a business. If we knew how to run a business, we would be using our money to run our own business. Why should we come to you?’ So, to make them kind of understand what the logic is. To give you another example, which shall clarify this point, we run Grameen America in the United States. We’ve been doing this for the last 10 years. Now, we have 25 branches in the United States. Right now, we have 120,000 borrowers, all women. A start-up loan is 1,000 dollars, within that you have to start. And gradually, as you pay back, you get higher loans and so on. And over the last 10 years, the repayment rate has remained nearly 99.5% and above. And there’s no collateral, no guarantee, nothing. Again, there’s no business idea. We don’t have American business ideas. So, we just tell them what business is. For example, dog-walking is a business in New York City. Bangladesh wouldn’t even think of it in a hundred years – that dog-walking could be a business. But it’s a business. And there’re many other businesses. Commonly, people, women are familiar with making cakes, pastry and so on, handicrafts, making home cleaning, hairdressing and all those kinds of things. So, it’s that…they have these ideas. Simply, they never had the money.
And that comes as the next point that I raise. I said, under the conventional banking law you cannot reach the poor people because this is designed for the purpose of corporations and big businesses, and so on and so forth.
Yudaeva: First of all, I do not fully agree with you that banks now do not reach poor people. And maybe some 20 years ago it was not exactly like this… or 50 years ago. But now, technologies make credit more accessible to people. This is the first thing. The second thing is that when several years ago we introduced this law on microfinance. This was our idea. We thought that companies of the type that you are talking about will fill in this niche. But we’ve got something else, right. We’ve got all those other lenders who provide consumer credit entering this niche. So, well, maybe I’m wrong, but I would look at it as something closer to charity rather than the business.
Yunus: We never had any aspect of charity in it. It’s very much the business, it covers costs and so on. Grameen bank is owned by the borrowers. The borrowers themselves are the owners, they sit in the Board, they make the decisions. And they have dividends every year. They get 10%, 15%, 20% dividend from the business they run. So, no element of charity is involved in that. So, in order to reach poor people, you need a different kind of banking. I said, ‘You can create a separate law to create a bank for the poor.’ Like, Grameen bank is a bank for the poor. It had a separate law. It was not created under the banking law. So, we exclusively work only with poor people.
Yudaeva: No, no. I understand. I think that your experience is very interesting. I think that of course, we need to think about how replicable it is. Right?
Yudaeva: How many followers you have in other countries is an important issue. And one more important issue is trust. Because you see that in Bangladesh you rely a lot on trust among all those people. And well, in America you, probably, rely on the fact that America is a very entrepreneurial country.
Yunus: That’s also based on trust. There’s nothing else. We don’t even know them. There are no villages, all in the city.
Yudaeva: Yes. So, I think that we need to think about how to build trust in society. It’s an important component of this type of business idea.
Yunus: Well, thank you. Thank you very much for this conversation. We were very happy to have this conversation. But now we have to continue this discussion. And you’ll be meeting somebody to continue this conversation. Whom do you like to talk to?
Yudaeva: Well, I would like to speak with Steve Cecchetti and discuss with him his insights about how central banks should communicate not only with investors and financial market people but more broadly, with different audiences.
Yunus: Good luck. I hope you’ll enjoy your conversation.
Yudaeva: Well, I also hope so. Thank you very much.
Yunus: Thanks a lot.