Prof. Muhammad Yunus - Managing Risk and Defaults in Microfinance

Summary

The 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

00:00

🤔 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.

05:03

📚 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.

Keywords

💡Microfinance

Microfinance refers to financial services provided to low-income individuals or those who lack access to traditional banking and financial services. In the video, it is the central theme, discussing the challenges and practices related to providing loans to the poor and the consequences of non-repayment.

💡Default

Defaulting on a loan means failing to repay the borrowed amount according to the agreed terms. The video script discusses the implications of defaulting in microfinance, where the consequences for the poor can be severe, and the bank's approach to handling defaults.

💡Collateral

Collateral is an asset or property that a borrower offers to secure a loan. In the context of the video, it highlights the harsh reality that when someone cannot repay a loan, their house or possessions might be taken as collateral, worsening their situation.

💡Risk

Risk in the financial context is the possibility of an investment losing value. The video emphasizes that microfinance inherently involves higher risk due to the uncertain lives of the poor, who are more susceptible to external shocks.

💡Punishment

In the financial world, punishment for non-payment can include higher interest rates or loan denials. The video explains that the Grameen Bank does not impose such punitive measures, instead focusing on understanding and supporting borrowers who face difficulties.

💡Borrower

A borrower is a person who has taken out a loan. The video script frequently refers to borrowers, particularly the challenges they face in repaying loans and the bank's approach to supporting them.

💡Group dynamics

The script mentions the importance of group behavior towards a borrower who cannot repay a loan. It suggests that group members should act as friends and support each other, reflecting the collective responsibility and social aspect of microfinance.

💡Morale

Morale refers to the confidence, enthusiasm, or spirits of a person or group. The video discusses the importance of maintaining the morale of borrowers who face setbacks, encouraging them to start over after a disaster or loss.

💡Loan renewal

Loan renewal is the process of extending the terms of a loan. The video explains that in cases where borrowers face difficulties, the bank may offer a fresh loan and convert the previous loan into a long-term one, easing the repayment burden.

💡Accounting principles

Accounting principles are the guidelines and rules used in the recording and reporting of financial transactions. The video mentions that despite the bank's lenient approach to borrowers, it still follows accounting principles, such as making provisions for defaulted loans.

💡Provision

A provision in banking is an amount set aside to cover potential losses, such as from loans that may not be repaid. The video script explains that the bank makes provisions for outstanding loans to adhere to fiduciary responsibilities, even when it expects the money to be repaid.

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