How effective are micro-loans on a business? What effect did Yunus’s loan to Sophia Khartoum have on her stool-making business? I advice you read on.

Professor Muhammad Yunus was inspired during the Bangladesh famine of 1974 to provide a small loan of US$27 to a group of 42 families as start-up money so that they could make items for sale, without the burdens of high interest under predatory lending.

The economist professor understood that making such loans accessible to a larger population could help grow businesses and reduce the widespread rural poverty in Bangladesh. So he developed the principles of the Grameen Bank from his research and experience.

Grameen Bank is Bengali for “Rural” or “Village” Bank. Professor Yunus started to expand microcredit as a research project together with the Rural Economics Project at Bangladesh’s University of Chittagong to test his method for providing credit and banking services to the rural poor.

From this modest beginning, Professor Yunus grew this bank which today employs 14,000 staff and works in 35,000 villages of Bangladesh. Last year, it offered US$380 million in 3.62 million loans. According to reports, it is expected to lend more than half a billion dollars to clients this year.

Average loan size is a little over $ 100. From the inception of the bank in 1983, Grameen has given out nearly 16 million of these small loans, and enjoys an unparalleled customer loyalty.

Who is Sophia Khartoum?

Sophia Khartoum, a 22 years old skilled furniture-maker in the tiny village of Jobra in Bangladesh, worked 7 long days a week to earn a below par living. She looked twice her age, and with all the hard work still lived in abject poverty. She constructed and sold stools and chairs out of bamboo. Since she could barely afford money for raw materials, she had to take credit from a loan shark in order to purchase them.

Aside from the interest rate being exorbitant, the arrangement was also that Sophia would sell her products to the loan shark for an extremely low price, and then use almost all of the proceeds of these sales to pay back the loan and interest. Although she laboured 7 days a week, Sophia’s situation was such that she would never be able to rise out of poverty.

What Effect Did Yunus’s Loan to Sophia Khartoum Have on Her Stool-Making Business?

Professor Yunus calculated that effectively Sophia was paying interest at the rate of 10% a day, more than 3,000% a year. He couldn’t believe the fact that a woman with such skill, who worked so hard, produced such beautiful bamboo furniture and created wealth at such high rate was earning so little.

So Yunus and a student went through the village and came up with a list including Khartoum and 41 other names of poor people who were in need of tiny loans. The total working capital required by all of them to earn a reasonable living was only $30.

In Yunus’s view, the poor are severely hampered by a lack of access to credit and capital. Without this critical access—which is taken for granted by people in the developed world—the poor cannot grow their businesses or get ahead, so they remain stuck in poverty.

For Sophia Khartoum, she had the skills and worked very hard, but her daily earnings amounted to the equivalent of only two U.S. cents. Yunus found there was a simple reason for her poverty: she did not have working capital. So Professor Yunus offer her a loan of 50 taka (a few dollars).

With this loan, it took Sophia only a few months to establish her own little self-employment and increase her income seven folds and repay the loan. Yunus’s loan had an enormous effect on Khartoum’s business: she was able to increase the daily profit of her stool-making business from two cents a day to $1.25 a day.


Experience has shown that it takes an utter destitute six to ten successive loans (one year each) – and a lot of hard work – to cross the poverty line. At Grameen bank, the first loan is often as little as US$ 50. Average loan size is a little over US$ 100.

In the process, the borrower builds a secure self-employment, often employing the whole family. Today, using the model drawn up by Professor Yunus, 54% of Grameen borrowers have thus crossed the poverty line and another 27% are very close to it. For those who do not perform as well, poor housing in rain soaked Bangladesh and chronic ill-health are identified as the major reasons.