Micro Finance

Bangladesh Grameen Bank – Pioneer in Microfinance

Bangladesh Grameen Bank – Pioneer in Microfinance “Micro-credit is something which is not going to disappear... because this is a need of the people, whatever name you give it, you have to have those financial facilities coming to them because it is totally unfair... to deny half the population of the world financial services.” Dr. Muhammad Yunus, Founder – Bangladesh Grameen Bank, in March 2002 . "Grameen's repayment rates have never been as good as they've claimed, because Grameen has been so well-known, nobody has wanted to risk undermining the reputation of the idea." - Jonathan J. Morduch, Associate Professor of Economics, New York University in 2001 . "Micro finance has tremendous potential as an instrument for poverty reduction." - Shahid Khandker, Senior Economist, World Bank, in 1999 [1]

[2]

Bangladesh Grameen Bank – Pioneer in Microfinance Yet another monsoon season was approaching; but Joshuna Begum (Begum) unlike her neighbours was not worried about her house getting damaged during the monsoon. Her house now had a tin roof, mud walls and wooden windows, a luxury in rural Bangladesh. Earlier, Begum's house had a straw roof and bamboo walls, which used to get damaged in the monsoon season, forcing the whole family to live in the kitchen. She got her hut repaired with a loan from the Bangladesh Grameen Bank (Grameen Bank)[4] . Begum wasn't the only one; there were thousands of people in rural Bangladesh who had improved their living conditions with the help of the microfinance programs of Grameen Bank, a pioneer in microfinance (Refer Exhibit I for more about microfinance). Grameen Bank helped thousands of poor Bangladeshi women to improve their lives by extending loans to them to start. their own enterprises. By 2003, it was reported that between 33-48% of Grameen Bank borrowers had moved above the poverty line[5] . By 2003, with 1,170 branches across Bangladesh, Grameen Bank was seen as a role model for microfinance all over the world. The Grameen Bank model was replicated across the world -- not only in developing countries like India, Pakistan, and Vietnam, but even in developed countries such as Australia and the USA, where similar schemes were set up to improve the lives of the urban poor (Refer Exhibit II). However, the Grameen Bank also attracted criticism from the media and economists all over world. Analysts pointed out that there was no proper monitoring of how the loans were utilized; it was reported that the loans availed of by women were used largely for consumption rather than for investment purposes. Analysts also pointed out that the accounting methods used by Grameen Bank were not in accordance with industry standards, and that the bank did not provide full details about its financial position and loan repayments position.

Bangladesh Grameen Bank – Pioneer in Microfinance  BACKGROUND NOTE

In the mid-1970s, Professor Muhammad Yunus (Yunus), then Head of the Rural Economics Program at the University of Chittagong, observed that banks did not extend their credit schemes to the rural poor as they were not considered creditworthy. In this situation, the rural poor were forced to approach moneylenders who charged exorbitant rates of interest. In 1976, Yunus launched The Grameen Bank Project, on an experimental basis to study the framework of banking services for the rural poor. The objectives of the Grameen Bank Project were: • • • •

Providing banking services to the rural poor Eliminating exploitation of the rural poor by moneylenders Facilitating self-employment projects for unemployed rural people Making women self-reliant by providing them opportunities through Grameen Bank • To reverse the vicious cycle of – low income, low saving & low investment, into a new cycle of “low income, credit, investment, more income, more credit, more investment, more income.”

BACKGROUND NOTE Contd... To start with, Yunus took loans from commercial banks and extended the money to 42 needy women in Jobra village in Chittagong district (Refer Exhibit III). The project spread to surrounding villages between 1976 and 1979. However, bankers were skeptical about the project and argued that it was initially successful because Yunus implemented it around the university campus where he had a good reputation. In order to convince bankers about the project's longterm viability, Yunus took two years leave from the university and started working in the Tangail district. The Bangladesh Central Bank provided financial support for the Tangail project and Yunus was appointed as the Project Director.

BACKGROUND NOTE Contd... The project was started in 1979. With the successful implementation of the Grameen Bank project in the Tangail district, it was extended to other districts in the country. By 1980, Grameen Bank had disbursed $1.10 million as loans to the rural poor. In 1983, Grameen Bank was given the status of an independent bank by a special ordinance of the Bangladesh Government. Initially, government contributed around 60% of the bank's capital and bank members held the remaining 40%. However, by 2003, government held only 7% and members held a 93% stake in the bank.

BACKGROUND NOTE Contd... Initially, Grameen Bank raised funds through bonds issued to the commercial banks and it also borrowed from Central Bank at subsidized interest rates. Grameen Bank also got funds from international agencies like the World Bank and the Ford Foundation[6] . Foreign governments also provided funds for the Grameen Bank at subsidized rates. In the late 1980s, Grameen Bank diversified into a number of different fields. It started leasing unutilized and underutilized fishing ponds and irrigation pumps. At the same time, it also started training and extending support to people from other developing countries to replicate the Grameen Bank model in their countries.

BACKGROUND NOTE Contd... When it was successful in leasing fishing ponds to the poor, Grameen Bank started expanding its non-banking activities. The Grameen Fisheries Foundation and the Grameen Krishi[7] Foundation were formed to oversee the leasing of fisheries and irrigation pumps. In 1989, the Grameen Trust was formed to provide training and support to people from other countries to start micro finance programs. By the mid-1990s, Grameen Bank had expanded its activities to areas such as venture capital, textile industry and Internet Service Provider (ISP). All the non-banking ventures of Grameen bank were grouped under the Grameen Family (Refer Table I).

TABLE IGRAMEEN FAMILY

FOUNDATION Grameen Trust

DESCRIPTION  Grameen Trust was formed in 1989. It provided training to organizations for replicating Grameen Bank model in other countries. Grameen Fund  Grameen Fund was formed in 1994 to provide capital for the new ventures. Grameen  Grameen Bank's IT department was hived off into Communications Grameen Communications in 1994. In 1997, it entered the ISP market. Grameen  This was formed in 1996 to provide renewable energy in Shakti/Energy the rural areas. Grameen  This was established in 1997 to provide education to Shiksha/Education bank's members and their children. It also extended scholarships to the children for pursuing higher education. Grameen Telecom  Grameen Telecom was formed to provide telephone services to the rural areas. It provided GSM cellular mobile phone services to 100 million rural people in and around 68,000 villages. Grameen Knitwear  A 100% export-oriented composite knitwear factory with Limited knitting, dyeing, finishing and garments production facilities and majority of its finished products were being By 2002, Grameen exported Bank had 2.4 million borrowers (95% of them to Europe. were women) and its activities were spread across 41,000Internet villages Grameen Cybernet  This became operational in 1996 and it provided with 2002, itservice, had disbursed Ltd. over 1,100 branches. service. It By alsoAugust offered customer technical support web page millions consulting.and the loan repayment cumulative loans ofand $3708.22

THE GRAMEEN BANK MODEL  The Grameen Bank model was one of the most widely researched microfinance

models all over world. The Bank had four tiers, the lowest level being branch office and the highest level being the head office (Refer Figure I). The branch office supervised all the ground activities of the bank such as organizing target groups, supervising the credit process and sanctioning loans to members. For every 15-22 villages, a branch was set up with a manager and staff. An area office supervised around 10-15 branch offices. Program officers assisted the area office to supervise the utilization of loans and their recovery. All area offices were under the purview of a Zonal Office. Each zonal office supervised around 10-13 area offices and all zonal offices reported to the head office situated in Dhaka. Grameen Bank operated on the principles of mutual trust, supervision, accountability and member participation. Unlike commercial banks, which granted credit on the basis of collateral security, Grameen Bank did not demand any security for extending credit. The interest charged by Grameen Bank was higher than that charged by commercial banks, but lower than the interest charged by moneylenders. The difference between the interest earned by the Grameen Bank and interests paid by it on the loans taken from commercial banks was used to cover the operational costs of the Bank.

THE GRAMEEN BANK MODEL Contd...  Grameen Bank adopted an innovative Group Lending Technique for extending loans to

the rural poor. Under this technique in the first stage, around six to eight groups were formed. Each group consisted of 5 women who became members of the Grameen Bank. All the members were given training for a week, which included introducing them to the rules of the bank and the bank's social contract. It was mandatory for the members to abide by the social contract known as Sixteen Decisions for getting loans from Grameen Bank (Refer Exhibit IV). These sixteen decisions helped in increasing awareness about social issues among the rural poor.  Every group had to pass an oral examination, which tested the members'understanding of the bank's rules and decisions. After the group cleared the oral examination, two financially weak members were chosen for loans. After choosing members for loans, each group had to submit proposals for loans to the branch. All the groups discussed the loan proposals in the branch's weekly meetings and approved loans were sanctioned in sequence.  The loan amount usually ranged between 1000 to 3000 Taka[8] , which had to be repaid in

50 weekly installments spread over one year. Initially, a 16% interest rate was charged on the declining balance; in 1992, the interest rate was increased to 20%. In addition to paying interest, every member of the group was bound to contribute 5% of the loan amount to the group fund. The group fund was utilized during emergencies. In addition to this, in order to mobilize savings among the poor, each member had to save 1 Taka every week and buy non-saleable Grameen Bank shares.

THE GRAMEEN BANK MODEL Contd...  In 1984, apart from offering loans for entrepreneurial ventures,

Grameen Bank also started extending housing loans to its members. Unlike the traditional methods followed by banks and financial institutions, Grameen Bank did not demand any collateral against the housing loans. Initially, Grameen Bank offered housing loans of upto US $312.5 (around 15,000 Taka) in its Moderate Housing category. Later on the amount was increased to US $520.83 (around 25,000 Taka). In 1987, Grameen Bank introduced a new housing loan – Basic Housing Loan up to US $145.83 (around 7,000 Taka), which became very popular. In 1989, another type of housing loan, the Pre-Basic Housing Loan, was introduced in the northern part of the country (Refer Exhibit III). Grameen Bank also provided loans for buying land for constructing a house. Grameen Bank charged 8% interest per annum on housing loans and repayment was in weekly installments spread over 10 years.

A SUCCESSFUL MODEL  When Grameen Bank started, many felt that it would soon fail; but on the contrary the bank

expanded its operations very rapidly. From 15,000 borrowers in 1980, the membership increased to 100,000 in 1984; by 1991 it had 910,842 members, and by 2002, the number increased to 2.3 million. From a figure of US $498 in 1976, the bank's total disbursements increased to US $170.39 million in August 2002 (Refer Table II).  The loan repayment rate was reported to be 95%. The high repayment rate was probably a result of peer group pressure, and the Grameen Bank's rule – that for availing of fresh loans, earlier loans had to be repaid. Another important factor that led to high repayments of loans was social pressure. When a member failed to repay the installments, other members went to her home and demanded the installments. Creditors'knocking at the door for loan repayments was considered disgraceful among Bangladeshis. It is believed that the above factors led to the success of Grameen Bank which also succeeded in improving the lives of its members.  Many research studies indicate that Grameen Bank bought positive changes in the lives of thousands of rural Bangladeshis. The landless poor benefited the most from the Grameen Bank movement. The landless poor, who earlier worked as agricultural laborers, acquired land for their own farming activities after becoming Grameen Bank members. According to a World Bank study conducted in 1994, Grameen Bank had improved the position of women in rural Bangladesh. Women members of Grameen Bank were more confident and socially aware than their nonGrameen Bank counterparts. Grameen Bank members even took active part in politics. In the 1997 local elections, more than 2,000 Grameen Bank women members were elected to local civic bodies. Grameen Bank also encouraged the rural poor to get educated. It provided educational loans to its members to enable their children to go to school and college. According to reports, the rate of school-going girls among Grameen Bank member families was 57% higher than that in non-member families.

GROWTH OF BANGLADESH GRAMEEN BANK OVER THE YEARS

(in $ millions except for 1976) PARTICULARS

 197  1983  1988 6*

Yearly Loan Disbursed ·         General  498 ·         Housing  0 Total Disbursement  498 Cumulative Disbursement  498 Cumulative Amount Repaid  166 Balance of Group Fund  0 Savings Balance of Members Savings  0 No. of Houses built  0 Coverage Members Groups Centers No. of Villages Covered Employees No. Zonal Offices No. of of Branches No. 15 of Area   Offices 15

 10  1   1  1  1  -

 1993  1998

 2002**

 2.29  0  2.29  8.19  6.08  0.51

 43.71  5.41  49.12  136.11  100.76  6.46

 260.24  393.9  42.09  20.64  302.33  414.54  848.56  2652.2  618.84  2255.64  40.83  92.74

 170.36  1.09  171.45  3708.22  3376.98  0

 0  0

 0  44556

 0  0  25819  491012 4

 152.4  549911

 58320  11667  2443  1249  824  86  1  0

 490363  98073  19663  10552  7093  501 5  61

 1814916  372298  57649  33667  11459  1040  110

 2368347  2366488  486870  500639  66712  70057  39045  41015  12850  11752  9    1137  1175 12  121  123 in dollars

 

** August 2002 Source: www.grameen-info.org

TESTING TIMES  The Grameen Bank faced a difficult situation in 1997 when Bangladesh experienced the worst-ever

floods in the country's history. Around 75% of the country was submerged for around two-and-ahalf months. In addition to the huge loss of human lives and livestock, there was a large amount of crop damage, and damage to housing and infrastructure. The floods affected around 1.2 million Grameen Bank members. Grameen Bank declared around 24,000 centers as disaster-stricken centers and suspended all banking activities in those centers. Even weekly loan repayment was suspended and employees were allowed to utilize group collective savings.  In addition to the above relaxations, Grameen Bank also offered various kinds of loans to members to restart their normal lives. Most of the loans dispersed by Grameen Bank were General, Seasonal [9] and housing loans. In the post-flood period, Grameen Bank relaxed the terms of repayment for borrowers (Refer Exhibit V). Grameen Bank stopped collection of installment payments for a period, resuming collection from January 1999.  However all these resulted in loan overdues for the bank. Critics were quick to comment that Grameen Bank's performance was not as good as claimed by bank officials. In 2001, a Wall Street Journal (WSJ) article reported that that around 19% of bank's loans were overdue by one year. It was also reported that by 1997, 4.6% of bank's loans were overdue by around 2 years, and around 0.7% were overdue by more than a couple of years. Grameen Bank's profits also declined in the post-flood period. Profits were down by around 85% during 1999-2000 and it recorded the highest operating costs of all the banks in Bangladesh. The Tangail district (which was taken as a model for Grameen Bank's success) was one of the worst regions with 32.1% of the loans from the district turning into bad debts.

TESTING TIMES Continued…  Yunus refuted the allegations by WSJ that the bank had serious repayment

problems, saying that WSJ had missed out on some facts. According to Yunus, the repayment problem had cropped up when new loans were disbursed in 1998, without the old loans being repaid. Yunus said that the Bank had converted the old loans into long-term loans; new loans were treated as current loans, and members were asked to repay their current loans first. But in the account books, the old loans were not shown as long-term loans for easier monitoring. It was reported in WSJ article that with some members defaulting on weekly installments, Grameen Bank faced a problem of increasing loan overdues. In order to improve the loan repayment situation, a new flexible system (Grameen Generalized System) was announced in September 2000. The new system focused on the Basic Loan, along with housing loans and higher education loans. A Basic loan was extended to members for starting entrepreneurial ventures. Unlike the earlier system, where all loans were for a one-year duration, in the new system, the bank and the borrower decided the duration of loan on a mutual basis. The duration of basic loans could range between 3 months and 3 years. Every member had to go through a six-month loan quality checkpoint. If a member failed to pay installments for a six-month period, then the loan was classified as a ‘default', and the total loan amount was treated as overdue with 100% provision being made.

TESTING TIMES Contd...  Grameen Bank also came up with a flexible loan option for borrowers who had

failed to pay the installments of a basic loan and whose loans were classified as defaults. Under this option, a member was given a chance to reschedule his or her loan and set a new repayment plan. Under flexible loans, members could reduce the installment amount and increase loan repayment timeframe. It also had a 50% provision for the outstanding loan amount. If members failed to pay installments as per their repayment schedule, then a 100% provision was made for the loan and it was treated as overdue loan. Thus, under this system, members were given a chance to renegotiate the installments of an overdue loan and get it converted into a flexible loan.  Along with loan repayment problems, Grameen Bank was also criticized for its accounting practices. It was alleged that Grameen Bank did not follow standard accounting practices when reporting its accounts. While the Consultative Group to Assist the Poorest (CGAP)[10] rules required refinanced loans to be shown separately, Grameen Bank did not do so and just mentioned that refinanced loans constituted around one-fifth of its total loans. According to microfinance industry standards, a microfinance institution had to report the total amount of loans with payment overdue for more than 90 days.

TESTING TIMES Contd...  However, Grameen Bank's overdue rate was not known as it reported only loans which

were one or two years overdue as overdue loans, thus violating the CGAP 90-day rule. Grameen Bank defended its position, stating that its main objective was to bring the rural poor out of poverty, and in order to achieve this objective it had to create new practices and avoid conventional banking procedures. The bank said that it created new systems to balance its financial and human obligations. It also refuted charges that it concealed information. Bank sources pointed out that Grameen Bank had came out with monthly statements with all the information about its operations such as disbursement, repayment and number of borrowers, right from February 1980. They also pointed out that the bank published an annual report every year, containing information about the bank's operations and its financial position. They added that the bank got its accounts audited by two of the top auditors in Bangladesh. Another point of criticism was that the Bank did not monitor the utilization of loans or the ventures into which members were investing. They pointed out that in some villages members took loans for starting businesses, but utilized those loans for consumption. Whatever the criticisms, Grameen Bank has inspired microfinance movements in many other countries and its model has been replicated across the globe. According to a World Bank study, Grameen Bank was successful in improving the financial position and standard of living of the rural poor. Grameen Bank helped Bangladeshi women to improve their living conditions by providing them with opportunities to earn. The report also pointed out that Grameen Bank's sixteen decisions improved the social status of women in Bangladesh. Grameen Bank ushered in a new revolution of microfinance worldwide, providing a ray of hope to millions of poverty-stricken people all over the world, and particularly in the developing countries.

QUESTIONS FOR DISCUSSION: 1. According to analysts, Grameen Bank was successful

because of its unique working model. Analyze the working model of Grameen Bank and discuss how it differs from the traditional commercial banking model?

2. Many analysts criticized Grameen Bank for its style of

functioning. Analyze the drawbacks of the Grameen Bank model. 3. Microfinance has tremendous potential as an instrument for poverty reduction. Explain the role played by Grameen Bank in reducing poverty in Bangladesh. Do you suggest that the Grameen Bank model for poverty alleviation be emulated in other developing countries? Explain with reasons.

EXHIBIT I ABOUT MICROFINANCE  Microfinance refers to providing loans and finance to poor people for self-

employment. Generally, small amounts are disbursed as loans, and the timeframe for repayment of loans is longer compared to commercial banks. Together with providing financial services, many microfinance institutions work for social development in the areas in which they operate. For instance, Grameen Bank's sixteen decisions were intended to bring in social development in Bangladeshi villages. Microfinance institutions generally have the following characteristics: • Providing small loans for the working capital requirements of the rural poor. • Minimal appraisal of borrowers and investments as compared to commercial banks. • No collateral demanded; however, these institutions impose compulsory savings and group guarantees. • Based on the loan repayment history of the members, microfinance institutions extend larger loans to the members repeatedly. Though microfinance institutions provide the necessary monetary support and try to increase social awareness among their members, their activities do not include providing training for basic skills required for doing business. They do not extend any marketing facilities nor undertake activities to improve the literacy rate and health conditions of members.

EXHIBIT II WORLDWIDE REPLICATION OF GRAMEEN BANK* COUNTRY Brazil Indonesia USA India

 PROJECT NAME  Banco do Nordeste  Dagang Bali Bank  People's Fund  People's Institute for Development and Training (PIDT), The Activists for Social Alternatives (ASA)

Pakistan

 KASHF Foundation, TARAQEE

Malaysia Philippines Uganda

 Yayasan Usaha Maju (YUM)  Ahon Sa Hirap, Inc.  Micro-Credit Development Trust (MCDT)

Vietnam

 Capital Aid Fund to Employment of the Poor.

Senegal Samoa

 Horizon Vets.  South Pacific Business Development Foundation* This list is not exhaustive

* This list is not exhaustive Source: www.grameen-info.org

EXHIBIT IV SIXTEEN DECISIONS OF GRAMEEN BANK  We respect the four principles of the Grameen Bank - discipline, unity, courage and work - and we               

apply them to all our lives. We wish to give our families good living standards. We will not live in dilapidated houses. We repair them and work to build new ones. We cultivate vegetables the whole year round and sell the surplus. During the season for planting, we pick out as many seedlings as possible. We intend to have small families. We shall reduce our expenses to a minimum. We take care of our health. We educate our children and see that they can earn enough money to finance their training. We see to it that our children and homes are clean. We build latrines and use them. We only drink water drawn from a well. If not, we boil the water or we use alum. We will not accept a marriage dowry for our son and we do not give one to our daughter at her marriage. Our centre is against this practice. We cause harm to no one and we will not tolerate that anyone should do us harm. To increase our income, we make important investments in common. We are always ready to help each other. When someone is in difficulty, we all give a helping hand If we learn that discipline is not respected in a centre, we go along to help and restore order. We are introducing physical culture in all centres. We take part in all social events.

EXHIBIT V RELAXATIONS ANNOUNCED BY GRAMEEN BANK IN 1998

 Grameen Bank extended new loans to the

members who had 5 – 10 installments due.  It also extended new loans to borrowers who had repaid around half of the loans, and the repayment schedule was extended for a year.  It also decided to extend seasonal loans to the members who had paid 16 installments of the total 50 installments.  It also extended a supplementary loan of 5,000 Taka to its existing housing loan members for repairing their houses.  It also extended around 2,500 Taka to the people who had not received housing loans earlier.  It extended new housing loans to members whose houses were completely damaged.

Bangladesh Grameen Bank – Pioneer in Microfinance 1. Poverty Reduction Strategy: the Grameen Bank Experience, www.gdrc.org, February 1994. 2. Bornstein David, The Barefoot Bank with Cheek, www.theatlantic.com, December 1995. 3. The Other Government In Bangladesh, The Economist, July 23, 1998 4. Pepall Jennifer, Bangladeshi Women and the Grameen Bank, www.idrc.ca, August 4, 1998. 5. New Study Confirms Benefits Of Bangladesh's Microcredit Programs, www.worldbank.org, January 14, 1999. 6. Milner Kate, Fighting poverty in Bangladesh, www.news.bbc.co.uk, March 17, 2000. 7. Pearl Daniel & Philips M. Michael, Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag, The Wall Street Journal, November 27, 2001. 8. Muhammad Yunus, Grameen Bank, Micro-Credit and the Wall Street Journal, www.grameeninfo.org, December 2001. 9. Grameen Bank in 'strongest position ever', www.news.bbc.co.uk, March 12, 2002. 10. Microcredit in Bangladesh: Mr. Elahi's Ray of Sunshine, The Economist, May 9, 2002. 11. Microcredit' rebuilding houses, lives in Bangladesh, Asian Economic News, June 3, 2002. 12. Muhammad Yunus, Grameen Bank II - Designed to Open New Possibilities, www.grameeninfo.org, October 2002. 13. Pathania M. Jyoti, Bangladesh's Micro Credit: Millennium's Recipe For Poverty Alleviation, www.saag.org, February 24, 2003. 14. Gopalakrishnan Anirudh, Micro Finance Route To Poverty Alleviation, Indian Management, May 2003. 15. www.worldbank.org 16. www.grameen-info.org 17. www.microfinancegateway.com