Dr. Muhammad Yunus founded Grameen Bank in 1983 to provide microloans to poor citizens in Bangladesh, allowing many to become small business owners and lift themselves out of poverty. The model of group lending with joint liability was highly successful with repayment rates over 90%. This microcredit approach has been replicated worldwide and earned Dr. Yunus and Grameen Bank the 2006 Nobel Peace Prize. Dr. Yunus also developed the concept of social business, using business principles to solve social problems in a self-sustaining way. He has authored several books and received numerous honors for his pioneering work reducing poverty through access to credit and entrepreneurship opportunities.

1. Dr. Muhammad Yunus: Banker to The
Poor and Father of Social Business
By
Faizan Qaiyum
Senior Economics Seminar
Professor Peter Simon
November 17th
2015

2. Grameen Bank and its founder Dr. Muhammad Yunus, a Bangladeshi economist, won the
Nobel Peace Prize in 2006 for the contribution of microcredit and for taking an effective measure
to significantly reduce poverty in Bangladesh. Under his guidance, the bank started by providing
small loans to the poor citizens, freeing them from the clutches of poverty and allowing them to
become entrepreneurs. The Nobel Prize was handed out to Dr. Yunus and Grameen Bank
especially “for their efforts to create economic and social development from below.” Currently
microcredit is an effective tool to eliminate poverty. It is instrumented in both the developing and
developed countries. It is recognized as “an important liberating force” and an “ever more
important instrument in the struggle against poverty.” Thus Dr. Yunus is a true inspiration to the
world. Yunus was always an active personality, even in his youth. He participated in Boy Scouts
and was always looking for ways to help those less privileged.
Yunus first attended the Bangladeshi secondary school Chittagong Collegiate School,
then Chittagong College and eventually Dhaka University. He earned an undergraduate degree in
economics at Chittagong College in 1960, and a master's degree from Dhaka University a year
later. To prove his academic excellence, Dr. Yunus travelled to U.S.A. and attended Vanderbilt
University as a Fulbright scholar. He taught economics at Middle Tennessee State University
from 1969 to 1972. On returning to Bangladesh, he took a position teaching economics at
Chittagong University, and was also invited to be the head of the economics department there.
He currently holds 53 honorary degrees, serves on the board of many national and international
organizations. He is the author of two world bestsellers – ‘Banker to the Poor’ (1997) and
‘Creating a World Without Poverty: How Social Business Can Transform Our Lives’ (2007), and
also the author of ‘Social Business and the Future of Capitalism’ (2008).
He was awarded the Congressional Gold Medal and the Presidential Medal of Freedom,
the highest US civilian award from the U.S. Congress and President Barack Obama respectively;
as well as the highest civilian award in Bangladesh. He was also presented the Golden Biatec
Award; the highest award bestowed by Slovakia's Informal Economic Forum Economic Club,
for individuals who exhibit economic, social, scientific, educational and cultural
accomplishments in the Slovak Republic.

3. Bangladesh is known as one of the world’s poorest places with a population close to 168
million. Microcredit, which is officially introduced by Dr. Yunus, is a useful method in battling
it, where small amounts of money are loaned out to a group of people or an individual. It is
surprising to see only a 4% default rate on microloans, which is much lower than most
conventional banks in Bangladesh. Most of the borrowers were surprisingly women, which
demonstrating a move toward women empowerment in a conservative country like Bangladesh.
Microcredit first started with a simple $27 loan to 42 stool makers and slowly the loan
volume expanded to more than 5.5 million borrowers (Grameen Bank members) with greater
than $5.2 billion in dispersed loans. Microcredit provides grew due to the act of providing small
loans to borrowers, usually $100 or less, who who are typically ignored by commercial banks.
Borrowers have a special form of credit, on what Dr. Yunus calls “Grameencredit,” which is not
based on any collateral, or legally enforcing contracts. Rather, it is based on ‘trust.’ Therefore,
Grameen Bank charges below-market rates to promote social equity. It is magnificent of Dr.
Yunus to have shown a dynamic vision and way in which the system is self-sustaining.
Grameen Bank is an ideal example to distinguish between microcredit and microfinance.
After Dr. Yunus obtained a PhD in economics in 1969 and then teaching in the U.S. for a few
years, he returned to Bangladesh in 1972. Bangladesh gained independence from Pakistan in
1971. Right after that Bangladesh had immense flooding for two years. In 1974, when Dr.
Yunus saw abject poverty (Yunus, 2003) in his country due to devastating famine. Being a
professor of economics at the time, he became disillusioned with economics: “Nothing in the
economic theories I taught reflected the life around me. How could I go on telling my student
make believe stories in the name of economics?” Having realized that, Dr. Yunus went ahead to
a nearby village of Jobra to understand what causes their poverty. Yunus was quick to realize
that it was due to limited access and lack of resources. Yunus’ experience of having lent $27 of
his own money to 42 women who were manufacturing bamboo stools. That is where
“microfinance” concept was originated.
Dr. Yunus settled on a working model after a series of trials and errors. By 1983, under a
special charter from the Bangladesh government, he founded the Grameen bank as a formal and
independent financial institution. The word ‘gram’ means village and ‘grameen’ means “of the

4. village.” The name thus resonates with the Grameen Bank spirit and vision. The goal of
Grameen Bank is to lend money to the poor, chiefly women. Since its commencement, Grameen
Bank experienced high growth rates and has now more than 5.5 million members, 95 percent of
whom are women.
Usually lending to poor villagers involves a significant credit risk because the poor are
not believed to be creditworthy, which conventionally means that there is little trust that they will
put their borrowed funds to their best possible use. As a result, most conventional banks denied
funds to the poor. Grameen Bank therefore, has challenged the conventional model, and has been
applauded on lending to the poor. The model has succeeded in two ways: First, it has shown that
the poor borrowers gets access to credit and that access to credit can lift off poverty and is hence
an effective tool. Second, institutions don’t suffer critical losses from lending to the poor. Also
it’s because of the innovation of group lending that Grameen Bank was successful, where as
other microfinance banks failed. It occurred because of microloans without requiring collateral
from the poor.
The group lending, according to Grameen Bank, must be a group of five borrowers. Upon
agreeing to the Bank rules, the first two members of the group receive a loan. If the first two
repays their loans successfully, then after four to six weeks the last person is offered a loan. A
long as all the group members the promise of future credit is extended. If any of the members of
the group default on their loans, then all the members are denied the privilege of access to future
credit. Moreover, eight groups of Grameen borrowers are arranged into centers and the
repayment is collected during public meetings. Since this displays transparency, any borrower
who defaults is visible to the whole village, which demonstrates a sense of embarrassment and
shame that works quite well in morally binding them to repayment. In the villages of
Bangladesh, it is a strong disincentive to default on your loans due to the societal pressure.
Initial loans to the poor borrowers is usually less than $100, and require weekly
repayment that amount to a rate of 10 percent per annum. The weekly repayments allow
borrowers and lender an advantage of discovering their problems early on. Hence, group lending,
or joint liability contract are the most renowned leading innovation by the Grameen Bank. The

5. concept of economies of scale is one of the motivators, and Dr. Yunus later on saw the benefits
of expanding group lending. Through a joint contract liability, the poor members within the
groups can lessen the problems that an outside lender normally faces. The outside lenders –
traditionally banks and government sponsored agencies face ‘agency costs.’ Because of moral
hazard, they cannot ensure the ensure the borrowed money will be put to its most productive use.
Also they are not able to verify failure or success of the proposed business (due to costly state
verification/auditing), and cannot enforce repayment. Peers within the group can help decrease
these costs, especially in a situation where the promise of future credit depends on the timely
repayment from all the members in the group. Group lending thus transfers these agency costs
fro m the bank to the group of borrowers, who eventually provide the same services more
efficiently.
However, the more serious agency problems faced by lenders is ‘adverse selection’-
determining the potential credit risk of the borrower. Thus market failure occurs because safe
borrowers subsidize risky borrowers. Since banks cannot distinguish a safe borrower from a
risky one, it has to charge the same interest rate to all borrowers. The rate depends on the blend
of safe and risky borrowers in the population. When the proportion of risky borrowers is large,
the subsidy required (for the lender to break even on all borrowers) is really high that the lender
has to charge the borrowers an unfairly high rate. If the rates are significantly high, safe
borrowers are unlikely to apply for a loan, thereby adversely affecting the structure of the
borrower pool. In some cases, it could lead to market failure allowing for only the risky
borrowers remaining in the market.
The theories of economics help show how group lending lessen adverse selection. Under
joint liability contracts, borrowers choose their own groups, in which they trust or are willing to
accept the risk together. As a result, due to a join liability clause, safe customers will more likely
pair with the safe customers, leaving the risky ones to form groups amongst themselves (peer
selection). This “assortative matching” mitigates the adverse selection problems due to the fact
that it should be the risky borrowers who now have to bail out the other risky borrowers in the
same group, while the safe borrowers will have a lesser burden to subsidize their group. So all
borrowers can now be charged at a lower rate, deceasing the likely occurrence of a market

6. failure. Because of this successful model, the whole world is now readily accepting and
replicating the idea of joint group liability (especially among microfinance institutions [MFIs]).
This is taking place in Chile, China, Bolivia, India, Ethiopia, Honduras, Malaysia, Mali, the
Philippines, Tanzania, Sri Lanka, Thailand, Vietnam and the United States. Currently, there is
the microfinance information market exchange (MIX) listing for 973 MFIs in 105 different
countries proving the success of microcredit.
Dr. Yunus also contributed in developing the ‘social business’ model and made it the
norm rather than an exception in developing countries. The entrepreneurship discovery, is a form
of business which operates on a social welfare motive, and is proven to be self-sustaining. He
further proves how social business can help people while generating a profit. The model also
focuses immensely on environmental responsibility and worker welfare. It all started after Dr.
Yunus and the famous French food company Danone. They struck a deal and built a yogurt
factory in Dhaka, Bangladesh. It opened in November 2007. They had the vision that “the yogurt
would be fortified to curb malnutrition and priced (7 cents a cup) to be affordable. The revenue
be reinvested, with Danone only taking out its cost of capital. The factory, will expand to 50
locations, and rely on Grameen microfunding in order to buy cows for its milk. In the front end,
Grameen microvendors are selling the yogurt door to door, and are employing 15 to 20 women
per factory, providing income providing income for 1,600 people within a twenty-mile radius.
Biodegradable cups made rom cornstarch, solar panels for electricity, and rainwater collection
vats make the enterprise environmentally friendly.”
It is believed, according to Anne W. Howard, contributor to the ‘Chronicle of
Philanthropy,’ that social businesses “can solve problems that capitalism, government, and non
profit groups cannot.” She also mentioned that Yunus’ social business operates like a “profit
maximizing” business by charging for goods and services. She cites (in Yunus’ words),
“However, its goal is not to provide the largest profit but to create social benefits for those whose
lives it touches.”

7. It is inspiring to have seen Yunus’ model succeed in Bangladeshi and throughout the
world. Overall, Yunus always tries to make sure the globe still benefits from social
entrepreneurship. He made the vision of eradicating poverty a very achievable goal. This in other
words will empower a lot of people, promote world peace and bring globalization closer than
ever. It is already making the amalgamation of cultures and beliefs possible. Lastly his vision of
social business will make sure technology is constantly innovating and that education towards
everybody is feasible and more relevant. Problems such as income equality and class structure
will vanish quickly due to the possibilities of social business and microcredit. Dr. Yunus will
always be admired and well-respected for his generosity and courage to prove the conventional
stigmas and negativity as wrong. Due to his nobility, future generations will be motivated to
replicate his success and make it more of a global and well-respected phenomenon.
The paper on Dr. Yunus was intriguing to write about due to the fact that his approach
provides an interesting and overwhelmingly empowering perspective on reducing global inability
of entrepreneurship and poverty. I look forward to hearing and seeing more success from such a
noble, famous and inspiring icon of the world.

8. Reference –
Bio.com. A&E Networks Television. Web.
Dr. Muhammad Yunus. Banker to the Poor (1997): Web.
Dr. Muhammad Yunus. Creating a World Without Poverty: How Social Business Can Transform
Our Lives (2007). Web.
"Muhammad Yunus Is Grameen Founder." Grameen Bank Bank For Small Business RSS. Web.
"Muhammad Yunus." Nelson Mandela Foundation. Web.