Monday, October 16, 2006

Yunus and Usury

Last week Bangladesh economist Muhammed Yunus was awarded the Nobel Peace Prize for pioneered the idea of "micro-credit" -- giving small loans to help poor people start a business. He shared the prize with the Grameen Bank he created for the purpose. Some 100 million people have been helped by these efforts.

Reaction among conservative commentators has been generally positive... as one Cornerite put it, "I am glad the Grameen Bank won; they have done real work rather than just posturing. And, unlike Jimmy Carter, Muhammad Yunus has empowered democrats rather than dictators." Sounds good to me.

Then I came across this post, which points out that the Yunus' bank give these small loans at a twenty percent interest rate! The blogger notes, "I can't believe we live in an age where we are rewarding a man with a $1.4 million peace prize for usury. If he wants to help the poor give them loans with no interest or maybe up to 5%, but 20%?" and continues, "People can argue his banks have helped millions of people. Fine, that's great, I'm glad there are borrowers in India who can manage small amounts of credit. But it is a slippery slope and when it comes to usury, something the Church has always spoke against, things tend to head downhill fast."

This is compelling to me... how is a 20% interest rate not guilty of the sin of usury?

Thoughts?

(HT: C-L-S)

3 comments:

Dan said...

Chris I had a great argument all laid out and ready to defend Grameen until I actually clicked on the link and noticed the claim that 99% of the loans are repaid. I have a very, very, hard time believing that kind of success for thousands of UNSECURED loans. Here in the states I believe that rate would be substantially lower. But, if that number (99% payback) is true due to some kind of cultural/moral/honor code – type pressure that these people feel to pay back debt then I would have to agree this is usury. The bank is accepting zero risk, so why the high rate? And is there a way I can buy stock in Grameen?

Mike said...

>>how is a 20% interest rate not guilty of the sin of usury?

The inflation rate in Bangladesh is 5%-6%. Grameen Bank, as I understand, has very large administrative costs because it employs a large number of field workers and is heavily involved in social programs (e.g. education, drinking water, electricity). On top of that, it aims to make profit for growth. Also, 90% of Grameen Bank is owned by the borrowers themselves. So they are not exactly getting cheated out of money. The rest is owned by the Govt. Yunus himself receives a very modest salary, lives in a two bedroom apartment and does not even own a car.

I am not an expert of course, and my understanding could be wrong. Below is a link to what I think is a fair evaluation of Grameen bank that mentions the good and the bad.
http://www2.gsb.columbia.edu/journals/files/chazen/Grameen_Bank_v04.pdf

Anonymous said...

The biggest difference with the Grameen Bank is that payments are taken off the principal, not the interest.

You see, when we take out a loan to buy a car or a house, we might pay 5% or 7% interest, but our payments always go against the interest before any is applied to the principal. This means that, at least at the beginning of a 30-year mortgage, our payments might be 90% interest, 10% principal, thus slowing down repayment significantly.

Grameen Bank's loans are different. Payments to its loans are applied to the principal first, then the interest, so that despite the high interest rate, the person given credit actually pays *less* than he would pay with a lower, American interest rate, especially since the loans are smaller and (I imagine) more easily paid off.

So no, it's not usury. If it is usury, then so is your mortgage :)

Jeremy