Micro Finance

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.

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...

TABLE I GRAMEEN FAMILY FOUNDATION

DESCRIPTION

Grameen Trust

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 Grameen

Communications

Communications in 1994. In 1997, it entered the ISP market.

Grameen Shakti/Energy

This was formed in 1996 to provide renewable energy in the rural areas.

Grameen Shiksha/Education

This was established in 1997 to provide education to 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 Limited

A 100% export-oriented composite knitwear factory with Knitwearknitting, dyeing, finishing and garments production facilities and majority of its finished products were being exported to Europe.

Grameen Ltd.

This became operational in 1996 and it provided Internet Cybernet service. It also offered customer service, technical support and web page consulting.

By 2002, Grameen Bank had 2.4 million borrowers (95% of them were women) and its activities were spread across 41,000 villages with over 1,100 branches. By August 2002, it had disbursed cumulative loans of $3708.22 millions and the loan repayment rate was reported to be around 95%.

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 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. 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.

Bangladesh Grameen Bank – Pioneer in Microfinance <
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 nonmember families

A SUCCESSFUL MODEL Contd...

TABLE II GROWTH OF BANGLADESH GRAMEEN BANK OVER THE YEARS (in $ millions except for 1976) PARTICULARS

1976* 1983 1988

1993

1998

2002**

Yearly Loan Disbursed ·

General

498

2.29

43.71

260.24

393.9

170.36

·

Housing

0

0

5.41

42.09

20.64

1.09

Total Disbursement

498

2.29

49.12

302.33

414.54

171.45

Cumulative Disbursement

498

8.19

136.11 848.56

2652.2

3708.22

Cumulative Repaid

166

6.08

100.76 618.84

2255.64 3376.98

0

0.51

6.46

40.83

92.74

0

0

0

0

0

0

152.4

0

0

44556

258194

491012

549911

Members

10

58320 490363 1814916 2368347 2366488

Groups

1

11667 98073

372298

486870

500639

Centers

-

2443

19663

57649

66712

70057

No. of Villages Covered

1

1249

10552

33667

39045

41015

Employees

1

824

7093

11459

12850

11752

No. of Branches

1

86

501

1040

1137

1175

No. of Area Offices

-

0

61

110

121

123

No. of Zonal Offices

1

5

9

12

15

15

Balance Savings

of

Balance Savings

Amount Group

of

Fund

Members

No. of Houses built Coverage

* 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.

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 selfemployment. 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. Adapted from World Bank reports and various newspaper articles.

Bangladesh Grameen Bank – Pioneer in Microfinance <
EXHIBIT II WORLDWIDE REPLICATION OF GRAMEEN BANK* COUNTRY PROJECT NAME Brazil

Banco do Nordeste

Indonesia

Dagang Bali Bank

USA

People’s Fund

India

People's Institute for Development and Training (PIDT), The Activists for Social Alternatives (ASA)

Pakistan

KASHF Foundation, TARAQEE

Malaysia

Yayasan Usaha Maju (YUM)

Philippines Ahon Sa Hirap, Inc. Uganda

Micro-Credit Development Trust (MCDT)

Vietnam

Capital Aid Fund to Employment of the Poor.

Senegal

Horizon Vets.

Samoa

South Pacific Business Development Foundation * This list is not exhaustive

Bangladesh Grameen Bank – Pioneer in Microfinance <
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. Source: www.grameen-info.org

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. Source: www.grameen-info.org

ADDITIONAL READINGS & REFERENCES:

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, 6.

1999. 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, 9.

Grameen

December Bank

in

'strongest

position

ever',

2001. 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