Prof. Muhammad Yunus - Managing Risk and Defaults in Microfinance
Summary
TLDRThe video script discusses the challenges of microfinance, particularly the issue of borrowers defaulting on loans. The speaker emphasizes the inherent risks of lending to the poor and the unpredictability of their lives. The Grameen Bank's approach is highlighted, which includes no punishment for non-payment, understanding the reasons behind defaults, and supporting borrowers to restart. The bank also follows banking principles by making provisions for outstanding loans, ensuring transparency and accountability.
Takeaways
- 💡 Microfinance is inherently risky, especially for the poor, whose lives are more susceptible to unpredictable events that can disrupt their ability to repay loans.
- 🤝 Grameen Bank does not punish borrowers for non-repayment, emphasizing a supportive approach where the community helps those in need rather than penalizing them.
- 🏠 In cases of default, the bank does not take collateral such as houses, and instead focuses on understanding the reasons behind the inability to repay and offering assistance.
- 👥 The bank trains borrowers to support each other in times of non-repayment, treating each other as friends and helping to find solutions rather than resorting to punishment.
- 📝 Grameen Bank avoids using the term 'defaulter' due to its negative connotation, recognizing that borrowers may simply have missed payments due to unforeseen circumstances.
- 🔄 If a borrower is unable to repay due to a disaster or other significant event, Grameen Bank encourages them to start over with a fresh loan, converting the previous loan into a long-term one with manageable payments.
- 💼 The bank maintains transparency and accountability by following banking principles, including making provisions for loans that are at risk of not being repaid.
- 📈 Grameen Bank extends loan periods and makes provisions for outstanding loans to ensure they are not hiding losses and are fulfilling their fiduciary responsibilities.
- 🏆 The bank's approach to microfinance is to uplift the morale of borrowers and encourage them to continue striving despite setbacks, offering them the opportunity to take out new loans for the same purpose as before.
- 👍 Grameen Bank's practices aim to ensure that borrowers are treated fairly and with understanding, focusing on their intentions and ability to repay rather than strictly enforcing loan terms.
- 🌐 The script highlights the importance of empathy and community support in microfinance, showing that the success of such programs depends on the relationships and mutual assistance among borrowers.
Q & A
What is the main concern regarding microfinance when borrowers are unable to repay their loans?
-The main concern is that in some cases, when borrowers default on their loans, they may lose their assets or property as collateral, which can leave them worse off than before they took the loan.
How does Grameen Bank approach borrowers who are unable to repay their loans?
-Grameen Bank does not punish borrowers for non-repayment. Instead, they encourage a supportive response from the borrower's group, treating the situation as a friend helping a friend in need.
What is the policy of Grameen Bank regarding punishment for loan defaulters?
-Grameen Bank has a policy of not punishing borrowers for any reason, including non-repayment of loans. They do not impose higher interest rates or deny future loans based on past defaults.
How does Grameen Bank handle situations where a borrower is unable to pay back a loan due to unforeseen circumstances?
-Grameen Bank advises the borrower's group to act as friends and support the borrower, understanding that there is likely a sad story behind the non-payment, and to help the borrower find a way to overcome their difficulties.
What is the approach of Grameen Bank when a borrower's business fails or they experience a disaster?
-Grameen Bank focuses on boosting the borrower's morale and encouraging them to start over. They offer a fresh loan for the borrower to restart their venture and convert the previous loan into a long-term loan with minimal payments.
How does Grameen Bank deal with borrowers who have missed installments over the years?
-Grameen Bank understands that life events can cause interruptions in repayment. They allow borrowers to continue making payments on a new loan while making small, manageable payments on the old loan.
What is the term used by the banking system for borrowers who have missed payments?
-The term used by the banking system is 'defaulter', which Grameen Bank uses reluctantly, as they believe it does not accurately reflect the intentions of their borrowers.
How does Grameen Bank manage the accounting for loans that are in default according to banking formulas?
-Grameen Bank follows banking principles by making provisions against outstanding loans. They set aside 50% of the outstanding amount as an expense, acknowledging the risk of non-recovery while still expecting repayment.
What is the Grameen Bank's stance on extending the time period for loan repayment?
-Grameen Bank is not hesitant to extend the time period for loan repayment. They are transparent about this practice and ensure that all banking roles are properly accounted for.
How does Grameen Bank ensure that they are not hiding financial information or failing to meet fiduciary responsibilities?
-By extending loans and making proper provisions, Grameen Bank ensures that they are transparent and accountable in their financial practices, fulfilling their fiduciary responsibilities.
What is the underlying philosophy of Grameen Bank's approach to microfinance?
-The underlying philosophy is to work with and support the poor, understanding the inherent risks in their lives, and providing a compassionate and understanding approach to loan repayment.
Outlines
🤔 Challenges of Microfinance and Loan Repayment
The speaker discusses the challenges faced by microfinance institutions when borrowers are unable to repay their loans. The criticism of microfinance is highlighted, where in some cases, defaulters may lose their homes or possessions as collateral. The speaker emphasizes the uncertainty of life for the poor and the various risks they face, such as political instability, natural disasters, or theft. The Grameen Bank's approach is introduced, which includes no punishment for non-payment and a focus on understanding and supporting the borrower's situation rather than penalizing them.
📚 Grameen Bank's Policies on Non-Repayment and Provisions
This paragraph delves into the specific practices of the Grameen Bank regarding loan non-repayment. The bank's policy is to avoid labeling borrowers as 'defaulters' and to instead understand the reasons behind their inability to repay. If a borrower misses payments, the bank encourages group members to support her like friends, not punish her. The bank also explains its approach to extending loan terms and making provisions for outstanding loans to ensure full accounting responsibility while maintaining transparency and adherence to banking principles.
Mindmap
Keywords
💡Microfinance
💡Default
💡Collateral
💡Risk
💡Punishment
💡Borrower
💡Group dynamics
💡Morale
💡Loan renewal
💡Accounting principles
💡Provision
Highlights
Microfinance faces criticism over what happens when borrowers cannot repay loans.
Grameen Bank's approach to borrowers who default on loans is to not punish them in any way.
The bank emphasizes understanding the reasons behind a borrower's inability to repay, rather than imposing penalties.
Borrowers are trained to support each other in times of repayment difficulties, reflecting the bank's community-based approach.
Grameen Bank's policy is to provide moral support and encourage borrowers to start over after a disaster or business mishap.
If a borrower is unable to repay due to unforeseen circumstances, Grameen Bank offers a fresh loan to help them recover.
The previous loan is converted into a long-term loan to alleviate the burden on the borrower.
Grameen Bank's definition of a 'defaulter' differs from traditional banking, viewing it as a temporary setback rather than a permanent label.
The bank makes provisions against outstanding loans to comply with banking principles, even when they expect repayment.
Grameen Bank extends loan periods and renews loans to support borrowers, while maintaining full accounting and fiduciary responsibilities.
The transcript discusses the challenges of microfinance in serving the poor, who face higher risks due to the uncertainties of their lives.
The importance of not punishing borrowers for loan defaults is highlighted as a key principle of Grameen Bank.
Borrowers are encouraged to help each other in times of crisis, fostering a supportive community within the bank's framework.
Grameen Bank's approach to handling defaults involves understanding the individual's situation and offering support rather than punishment.
The bank's strategy includes providing new loans to borrowers who have suffered losses, allowing them to rebuild their businesses.
Grameen Bank's innovative approach to microfinance focuses on the human aspect, treating borrowers with empathy and understanding.
The transcript emphasizes the need for compassion and flexibility in microfinance, especially when dealing with vulnerable populations.
Grameen Bank's practices aim to ensure that borrowers are not worse off after interacting with the bank, even in cases of default.
Transcripts
[Music]
um so one of the questions that a lot of
people have had about micro finance and
I guess one of the criticisms that has
come up is what happens when somebody
cannot pay back their loan uh and in
some instances the people who default
their you know house is taken from them
things are taken as collateral and in
some cases then they're worse off than
they were before so what I wonder is how
what does the G gine Bank do these cases
and how do you think uh micro credit
should uh find its best practice in this
regard
sure uh first thing to remember that we
work with the poor
people and any business forget about the
poor people any
business deals with
risk business and risk go together so
you don't think you give the money and
the money will come back nice and cozy
it's not like that and for poor people
there are more
risk but their life is so uncertain one
tiny little hit everything falls apart
no matter how much devoted how much
committed you are everything falls apart
because something
happened either in political Arena
either in weather or something a flood a
cyclone whatever a theft a bur a fire
whatever T she's back on the ground
nothing there so that's the the people
that we deal with to say that we the
system works without any consideration
of the risk it will be system which will
disappear right
away one of the first decision we made
when we started coming back we'll
never punish a borrower for any reason
even if she doesn't pay back so that's
one concrete thing we never punish
punishment in the in the financial world
you give uh higher interest because you
fail to pay you deny the loan next time
because you failed to pay all those kind
of so we don't have those punishments
integrated we train our borrowers that
if a woman fails to pay back how would
the group behave to her in the beginning
when they're just joining they're
enthusiastic to make sure everything is
nice and proper they said no no we'll
make we'll punish her we said in come in
Bank there is punishment you can't do
that or we'll make we'll bring pressure
on her to pay back the money so we have
to explain that's not how drine bank
group
works if somebody cannot
pay and you are her
friends you have to react as a
friend and your first question that will
be coming to your mind oh my God she's
in
trouble we have to go and help her for
every case of non repayment even one
installment installment means weekly
installment even if she's not paying one
installment there's a sad story behind
it find out the story first don't
get angry or reactive just because she
couldn't pay maybe her husband took the
money and ran
away it's possible she he found the
money and ran away with the money so as
a good friend your responsibility is to
go and catch her friend catch her
husband not get angry with her but she's
helpless
person and if you cannot find her
husband ask your husbands all four of
your husbands to go and catch him
because they are buddies they're
friends and they will find
out and bring him back with money or
without money because in the meantime he
may have just wasted the money but bring
him back anyway because otherwise family
is in trouble
so that's one mechanism for them
ultimately what
happens what do we do we said okay it's
a there's a fire you everything
destroyed there's a flood everything is
gone there's business mishap you lost
everything that's not the end of the
world our job is to push her morale so
that she feels not let down because she
is totally
devastated with with this experience we
said oh the world doesn't end with one
flood or one disaster we have to keep on
fighting with that so let's start all
over again what would you T like to take
the money for now this time tell us what
what what you want she may repeat the
same thing she took a loan to buy a cow
she said I want to buy another cow okay
we give you a fresh loan what happens to
the other loan previous loan previous
loan will be turned into a long-term
loan so that the weight of that loan is
not heavy so you pay the second loan as
a regular loan and pay a tiny little bit
what you can afford just a tiny bit
which will go to the first loan and you
continue you're as good as anybody else
as long as your intentions are clear you
have no problem you go and do that so
this is how we do that and somebody said
I I'll pay the loan back in one year
said time is one year suppose and she
has been paying all the installment
regularly but since she missed about
five installments or over the years some
problem with the family or the children
or something always happens so she
couldn't pay back the entire money in
the 50 second week that's the
period Then in your terminology of the
bank she's a
defaulter we hated this word defaulter
but the banking system says you have to
use the word default so we use it but we
know that she's not a real defter in the
minds of the bankers they have meaning
somebody who is not paying she's pay
Simply she missed some installment in
the next 5 weeks she will pay back the
entire money but just because you cross
the line according to the banking
formula you are a defaulter so we put
them in a defaulted list the moment you
put in the defaulted list another
responsibility comes for as a banker you
have to make provision against
outstanding loans so whatever loan is
now out understanding you have to make
50% provision against it meaning this
you take as an expense because this
money half chance that this money will
come back so you do that but we know for
sure that this money is coming back and
they do but we follow the same banking
principes so that there is no way that
people say aha you're hiding things many
people accuse us that we
um extend the time period of the uh blon
I said yes we do we we're not ashamed of
that we are not hesitant about that but
at the same time we do the provision so
you cannot say that we don't take the
full accounting
responsibilities fiduciary
responsibility for that because we take
this by extension by renewal of the loan
we make proper provision so that all the
banking roles are done so this is how we
deal with that kind of thing
[Music]
yeah
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