Friday, October 20, 2006

Grameen Banking for the world's poor, and conventional banking

Professor Muhummad Yunnus has just won the Nobel Peace Prize for his work since 1976 in setting up the Grameen Bank ( gives micro-loans to the poorest in over 100 countries. Many of those helped are illiterate, homeless and landless. The loans are guaranteed by fellow members of a small local group needing loans and failures are very low. Interest is charged at commercial rates. Yunnus is quoted by Nick Meo in The Times (14th October 2006) as saying that two thirds of the world's population are outside the so-called free market and his bank is helping them to join in.

The Grameen scheme differs from conventional banking in that the money coming in is by way of donations and contributions, from individuals, foundations and governments. The Free Lunch explains how conventional banking works: deposits are multiplied into loans such that for every £1000 deposited, as much as £20,000 is lent out. The depositer is paid interest on the £1000 (say 4%) but the bank charges maybe 8%, or more, on the full £20,000, which is 40 times what they pay to the depositers. Banks can only do this because society is stable and financial conditions are calm so that we don't all rush to the bank to get our money back. Good government, hard working citizens and law abiding populations produce this profitable scenario which banks exploit. As a merchant banker Russell Taylor in his inside view of banking Going for Broke writes on page 1 : 'Banks are the only businesses that we permit to borrow more than twenty times their net worth.' (Simon and Schuster. 1993)
The crucial point is that just as it is the whole society which has produced the conditions for credit to work so well, so it should be society that gains from the profit so produced and not banks. The Free Lunch suggests that beyond what banks would need to run their normal business of receiving deposits and handling loans, the profit from this amazing credit creation should be split up and divided between all citizens in regular payments.

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