Some of the major misconceptions about microfinance — small loans of under $100 that enable Third World residents to become entrepreneurs — can be summed up by what happened roughly a decade ago, when the pioneering Grameen Bank decided to help female villagers in Bangladesh enter the mobile phone business.


Alex Counts — CEO of the related Grameen Foundation and keynote speaker at the recent Wharton Social Impact Conference 2007 — said the idea met with the same concerns that have dogged the steady growth of microfinance ever since the concept emerged in the 1970s. “I remember hearing that … this was going to be a disaster,” noted Counts, an associate of Muhammad Yunus, founder of the Grameen Bank and co-winner of the 2006 Nobel Peace Prize. Critics said that when poor rural women hear a voice on the phone for the first time, “they are going to think that there is a ghost in the phone, and they are going to throw it away.” If the women managed to get past that hurdle, the critics said, they wouldn’t be able to understand the technology that modern cell phones use.



Critics also predicted the women would never earn money quickly enough to repay a loan to purchase the cell phones, which cost between $200 and $300. But, according to Counts, when Yunus returned to the village a year later, the first woman he spoke to said it took her about 10 minutes to master the device. “She said, ‘Dr. Yunus, to ask me that question, you must have a very complicated phone!'”


Another woman in the same village had already memorized the country code for every nation on the planet. The Grameen program has since launched 220,000 phone businesses in Bangladesh and is expanding to Rwanda, Uganda, the Philippines and elsewhere.


The story illustrates the types of criticism leveled at advocates of microfinance, despite the Nobel Prize and Grameen’s 30-year record of aiding millions of poor people, primarily in Bangladesh. But according to Counts, the nay-saying has not stopped Grameen — and a growing number of similar banks devoted to microfinance in more than 23 Third World nations — from taking this revolutionary concept to a wider audience.


In fact, Counts, whose non-profit Washington, D.C.-based group supports the Grameen Bank, outlined what could be called Microfinance 2.0 — a new generation of more accurate tools that can be used to overhaul the loan making system and apply the infrastructure of microfinance to other social woes.


Counts seemed particularly excited about the new frontier for microfinance, noting that the Grameen Bank and other microfinance organizations already have an infrastructure of offices, a brand name, and a trained staff that has built up relationships, as well as trust, with poor people. “Relationships are important because the poor are used to being lectured to or yelled at,” Counts said. “They are not used to people delivering hard cash to their doorsteps in the amount they need and in the timeframe they need. That creates a trusting relationship that can lead to many other business and social ventures.”


As an example, he cited the story of Grameen Energy, an offshoot of the bank that was started in the late 1990s with the lofty ideal of bringing solar energy as a source of power to isolated villages that are not on the main grid. The venture — which began with modest goals and with considerable obstacles, including tight demand for available solar panels — is now delivering electricity to some 90,000 homes, well ahead of expectations, while already taking in more money than its expenses. “We had close relationships with three million people when we started. That allows us to jumpstart a lot of things,” Counts noted.


$27 to 42 Families


The story of Grameen Bank is now the stuff of legend, and it is closely intertwined with the history of the idea of microfinance itself. Muhammad Yunus is a Bangladeshi who earned a doctorate in economics from Vanderbilt University in the United States and who came up with the idea after a devastating flood in his homeland in 1974; he loaned some $27 to 42 families to help them sell small items to make it through the crisis, and two years later started the Grameen Bank.


The bank targets women from the poorest households. Today, with branches in more than 75,000 villages, or more than 90% of all the localities in Bangladesh, it has about $500 million in outstanding loans to its seven million borrowers. Together, the bank and Yunus received the Nobel Peace Prize last year, because the prize committee noted that their campaign to support society’s poorest had boosted democracy and human rights as well.


The mission of the Grameen Foundation, which was created in 1997, is primarily to take the microfinance model that has been so successful in Bangladesh and spread it to other nations. After just 10 years, working with a network of microfinance providers and financial supporters, the foundation serves three million people in 22 different countries.


Counts is a 1988 Cornell graduate who went to Bangladesh as a Fulbright scholar and has headed the Grameen Foundation since its inception. The Foundation started with $6,000 that Yunus had won for an earlier award. Counts has also taken on the role of chief evangelist for the microfinance model. His job, he said, involves wooing multi-millionaires and even billionaires, but “we’re trying to promote thousands upon thousands of multi-hundredaires,” he said, “and it’s the most satisfying thing you can ever imagine. For me, those are the stock options.”


Counts’ role also makes him the chief defender of microfinance, which had come in for some criticism even before the Nobel Prize. Most notably, a 2001 article in the Wall Street Journal claimed that Grameen Bank used unconventional accounting methods to ensure a high loan repayment rate and that, in reality, about one in five of the bank’s loans were delinquent. “You’ll hear that microfinance does not work with the poorest, that there are no macro effects that have ever been measured and that women often give any money they get to their husbands,” said Counts, ticking off criticisms that are frequently lodged against microfinance in general and Grameen in particular.


Some of the issues facing microfinance institutions were also discussed during a second conference at Wharton, this one organized by Penn’s undergraduate microfinance club around the theme “Microfinance: Poverty’s Macro Solution.” A keynote speaker was Mary Ellen Iskenderian, president of Women’s World Banking, an organization that supports a global network of more than 50 microfinance institutions and banks in 43 countries throughout Africa, Asia, Eastern Europe, Latin America and the Middle East. In an interview with the Philadelphia Inquirer before the conference, Iskenderian noted that the major challenges facing microfinance include the need to “reduce operational costs and reach more rural populations,” especially in Africa, and also the goal of instituting better “credit-reporting systems.” 


In addition, Iskenderian expressed concern over the role of commercial banks in microfinance now that these banks have seen that lending to the poor can, indeed, be profitable. While welcoming and acknowledging the resources they can bring to microfinance, she also noted that “the product [commercial banks] are offering may not be microfinance, but loans for consumer purchases, like buying a television. The overindebtedness of this low-income population,” she said, “would be a terrible tragedy.”


Borrowers — and Voters


In a brief interview after his presentation at the Social Impact Conference, Counts said while the cost of microfinance often remains too high for many of the poor, “it’s not so high that we should stop providing it, because it’s the best we can offer. But we need to really hurry up. If we’re going to be politically sustainable with the regulators and the populist politicians, we’re going to need to bring the costs down and wring more inefficiencies out of the system.”


Five years ago, the Yunus-led organization launched a program called Grameen 2, which aimed to improve the performance of the bank and its affiliates even as the program greatly expanded its reach. Counts said that “Grameen totally took apart its lending methodology and put it back together again and re-invented itself,” while roughly tripling its loan portfolio.    



Another key feature of Grameen’s re-invention, Counts added, is greater accountability through a program of social-performance management. The Grameen Foundation has developed a tool it calls the Progress Out of Poverty index, in which loan recipients can rate their progress in a series of simple, yet carefully developed, questions. The index should help the microfinance movement reach its goal of both accountability and transparency, he said.


One particular reform Counts described is a program to offer assistance to smaller banks that are willing to give poor people four- to five-year loans in the local currency. The goal is to encourage more involvement by established local financial institutions. But the greatest potential advance, he said, involves expanding the core principles of microfinance to other anti-poverty programs.


He described a Grameen program, still in its early stages, that has a remarkable goal: To help some 80,000 Bangladeshi beggars — the poorest of the poor — begin to escape from poverty with the help of loans as small as $14. The concept, Counts explained, is to “graduate” these beggars into the more traditional microfinance program. In just 18 months approximately two thousand people have made that leap, he noted.


But even beyond these economic gains, Counts spoke of the vast potential for social change that was also cited by the Nobel committee. Economic development and empowering people in Third World nations can arguably reduce the long-term threat of terrorism.


He cited what happened in 1996, when Bangladesh nearly erupted into a civil war. Ultimately, a caretaker government — including Yunus — was named until an election could be held, and Counts said that Yunus decided to craft a program to encourage every loan recipient to cast a ballot. The result was a high voter turnout among men but even higher among women — an astounding 75% — and also a defeat for an Islamic fundamentalist party that went from 18 seats in the parliament down to just two.


“We’re leveraging a network of millions of women who are changing the fabric of society through the microfinance channel,” Counts said. “It’s a huge opportunity, and we are at the tip of the iceberg outside of Bangladesh.”