Introduction to Grameen Bank
Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and creating a banking system based on mutual trust, accountability, participation and creativity. GB provides cred t to the poorest of the poor in rural Bangladesh without any collateral. At GB, credit is a cost-effective weapon to fight poverty. It serves as a catalyst in the overall development of the poor socio-economic conditions kept outside the banking orbit on the ground that they are poor and hence not bankable. Professor Muhammad Yunus, the founder of "Grameen Bank" and its Managing Director, reasoned that if the financial resources can be made available to the poor people on terms and conditions that are appropriate and reasonable, "these millions of small people with their millions of small pursuits can add up to create the biggest development wonder."
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As of October 2011, it has 8.349 million borrowers, 97 percent of women. With 2,565 branches, GB provides services in 81,379 villages, covering more than 9 percent of the total villages in Bangladesh. Grameen Bank's positive impact on its poor and formerly poor borrowers has been documented in many independent studies carried out by external agencies, including the World Bank, the International Food Research Policy Institute (IFPRI) and the Bangladesh Institute of Devdecentralisedies (BIDS).
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History of Grameen Bank
Muhammad Yunus earned a doctorate in economics from Vanderbilt University in the United States. He was inspired during the Bangladesh famine of 1974 to ma e a small loan of USBank's 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. Yunus believed that making such loans available to a larger population could stimulate businesses and reduce the widespread rural poverty in Bangladesh.
Yunus developed the principles of the Grameen Bank (literally, "and of the Villages" in Bengali) from his research and experience. He began to expand microcredit as a research project and the Rural Economics Project at the Bangladesh's University of Chittagong to test his method for providing credit and banking services to the rural poor. In 1976, the village of Jobra and other villages near the University of Chittagong became the first area eligible for service from Grameen Bank. Proving success, the Bank project, with support from Bangladesh Bank, was extended in 1979 to the Tangail District (to the north of the capital, Dhaka). The Bank's success continued, and its services were extended to other districts of Bangladesh.
On October 2, 1983, the project was authorised and established as an independent bank by a Bangladeshi government ordinance. Bankers Ron Grzywinski and Mary Houghton of ShoreBank, a community development bank in Chicago, helped Yunus with the official incorporation of the Bank under a grant from the Ford Foundation. The Bank's repayment rate suffered from the economic disruption following the 1998 flood in Bangladesh, but it recovered in the subsequent years. By the beginning ng of 2005, the Bank had loaned over USD 4.7 billion, and by the end of 2008, USD 7.6 bill to the poor.
The Bank continues to expand across the nation. By 2006, Grameen Bank branches numbered over 2,100. Its success has inspired similar projects in more than 40 countries worldwide, including a World Bank initiative to finance Grameen-type schemes.
The Bank has gained its funding from different sources, and the main contributors have shifted over time. In the initial years, donor agencies provided the bulk of capital at low rates" By the mid-1990s, the Bank started to get most of its funding from the Central Bank of Bangladesh. More recently, Grameen "has started bond sales as a source of finance. The bonds are implicitly subsidised, as they are guaranteed by the Bangladesh Government, and they are still sold above the bank rate. In 2013, the Bangladesh parliament passed the 'Grameen Bank Act', which replaced the Grameen Bank Ordinance, 198authorisinging the government to make rules for any aspect of the running of the Bank.
The Bank is also engaged in social business and entrepreneurship fields. In 2009, the Grameen Creative Lab collaborated with the Yunus Centre to create the Global Social Business Summit. The meeting has become the primary platform for social businesses worldwide to foster discussions, actions and collaborations to develop practical solutions to the most pressing problems plaguing the world.
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Mission and Objectives o Grameen Bank
"By providing comprehensive financial services, empowering the poor to realise their potential and break out of the vicious cycle of poverty."
§ Extend banking facilities to poor men and women;
§ Eliminate the exploitation of the poor by money lenders;
§ Create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh;
§ Bring the disadvantaged, mostly the women from the poorest households, within the fold of an organisational format that they can understand and manage by themselves; and
§ Reverse the age-old vicious circle of "low income, low saving & low investment" into a virtuous circle of "low income, injection of credit, investment, more income, more savings, more investment, more income".
Methodology/Credit Delivery System of Grameen Bank
Grameen Bank Credit Delivery means taking credit to the very poor in their villages using the essential elements of the Grameen credit delivery system. Grameen Bank's credit delivery system has the following features:
1. There is an exclusive focus on the poorest of the poor.
2. Borrowers are organised into small homogeneous groups.
3. Special loan conditionalities are particularly suitable for the poor.
4. Simultaneous undertaking of a social development agenda addressing the basic needs of the clientele.
5. Design and development of organisation and management systems capable of delivering programme resources to targeted clientele.
6. Expansion of loan portfolio to meet diverse development needs of the poor.
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Principles of Grameen Bank
There are
two principles of Grameen Bank, such as the Bank going to the poor a d Loan without Collateral to the poor.
The Bank goes to the Poor.
Basically, Grameen Bank exclusively focuses on the poorest of the poor. They set the priority assigned to women to ensure/meet the diverse socio-economic development needs of the poor. They clearly establish the eligibility criteria for selecting targeted clientele and adopt practical measures to screen out those who do not meet them. They investigate the client's problems or complexity and then set priority to Grameen credit and make borrowers organised into small homogeneous groups. The emphasis from the outset is to organisationally strengthen the Grameen clientele to acquire the capacity to plan and implement micro-level development decisions. The centres are functionally linked to the Grameen Bank, whose field workers have weekly centre meetings.
They make the design and development of organisation and management systems capable of delivering programme resources to targeted clientele. The system has evolved gradually through a structured learning process that involves trials, errors and continuous adjustments. A significant requirement to operationalise the strategy is the special training needed to develop highly motivated staff. The decision-making and operational authority are gradually decentralised, and administrative functions are delegated at the zonal levels downwards.
Instead of the poor coming to the bank, Grameen Bank carries its services to the comfort zones of their doorsteps. It explains why the Bank’s members consist primarily of women who usually shy away from the glare of a conventional bank with branches located away from the poor life. All banking transactions except loan disbursements are done in the meetings of the borrowers at the village level centres organised by the Bank’s centre manager.
The mode of operation of Grameen Bank is as follows. A bank branch is set up with a branch manager and several centre managers and covers an area of about 15 to 22 villages. The manager and the workers start by visiting villages to familiarise themselves with the local milieu in which they will be operating, identify the prospective clientele, and explain the purpose, functions, and mode of operation of the bank to the local population. Groups of five prospective borrowers are formed; only two are eligible for and receive a loan in the first stage. The group is observed for a month to see if the members conform to the bank's rules. Only if the first two borrowers begin to repay the principal plus interest over six weeks do the other group members become eligible for a loan. Because of these restrictions, there is substantial group pressure to keep individual records clear. In this sense, the collective responsibility of the group serves as the collateral on loan.
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Loan without Collateral
Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and creating a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to the poorest of the poor in rural Bangladesh without any collateral. At GB, credit is a cost-effective weapon to fight poverty. It serves as a catalyst in the overall development of the poor socio-economic conditions who have been kept outside the banking orbit because they are poor and hence not bankable. Professor Muhammad Yunus, the founder of “Grameen Bank,” reasoned that if financial resources can be made available to the poor people on terms and conditions that are appropriate and reasonable, “these millions of small people with their millions of small pursuits can add up to create the biggest development wonder.”
As of December 2015, it has 8.81 million borrowers, 97 percent of women. With 2,568 branches, GB provides services in 81,392 villages, covering more than 97 percent of the total villages in Bangladesh.
The Bank does not work for profit alone, as demonstrated by the zero or subsidised interest rates for the disadvantaged segments of the people. Nevertheless, the Bank continues to achieve significant operating and net profits growth. During the year, the Bank earned a profit of BDT 24 million and declared a 30% cash dividend for the year. The bank has also created a Dividend Equalization Fund to cushion against adverse situations weighing down on the bank’s profit due to natural or manmade calamities. It ensures a fair degree of stability in the rates of dividends payable to the shareholders over the years. It serves as an incentive for the shareholders to sustain their enthusiasm to carry GB’s goals to empower the poor. Payment of attractive dividends inspires shareholders to relentlessly work toward supporting the momentum that has been a hallmark of GB’s performance year after year. What is more significant is that the Bank’s borrowers are its shareholders and the government.
The underlying premise of Grameen is that, to emerge from poverty and remove themselves from the clutches of usurers and middlemen, landless peasants need access to credit, without which they cannot be expected to launch their own enterprises, however small these may be. In defiance of the traditional rural banking postulate whereby “no collateral (in this case, land) means no credit”, the Grameen Bank experiment set out to prove – successfully – that lending to the poor is not an impossible proposition; on the contrary, it allows landless peasants to purchase their own tools, equipment, or other necessary means of production and embark on income-generating ventures which will enable them to escape from the vicious cycle of “low income, low savings, low investment, low income”. In other words, the banker’s confidence rests upon the will and capacity of the borrowers to succeed in their undertakings.
As Grameen Bank provides loans to their clientele without any collateral, especially the poor, disadvantaged groups, downtrodden groups, remaining vulnerable situations and Loans are small, but sufficient to finance the micro-enterprises undertaken by borrowers: rice-husking, machine repairing, purchase of rickshaws, buying of milk cows, goats, cloth, pottery etc. The interest rate on all loans is 16 percent. The repayment rate on loans is currently – 95 per cent – due to group pressure and self-interest, as well as the motivation of borrowers.
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Conditions to collateral-free loan
The collateral-free loan system focuses on some conditionalities:
1. Loans are given without any collateral
2. Loans repayable in weekly instalments spread
over a year
3. Eligibility for a subsequent loan depends upon
repayment of the first loan
4. Individual, self-chosen, quick
income-generating activities that employ the skills that borrowers already
posses
5. Close supervision of credit by the group as
well as the bank staff
6. Stress on credit discipline and peer support
solidarity.
7. Special safeguards through savings minimises
the risks that the poor confront
8. Transparency in all bank transactions, most of
which take place at centre meetings.
9 Major Programmes of Grameen Bank
Service at the Door Steps of the poor
Instead of the poor coming to the Bank, Grameen Bank carries its services to the comfort zones of their doorsteps. It explains why the Bank's members consist primarily of women who usually shy away from the glare of a conventional bank with branches located away from where the poor live. All banking transactions except loan disbursements are done in the meetings of the borrowers at the village level centres organised by the Bank's centre manager.
Housing for the poor
A shelter over the head, food and clothing are the three most essential needs of mankinRealisinging the importance of the shelter, GB introduced a housing loan programme in 1984 to enable its borrowers to build a modest shelter over their heads. The ownership of a house infuses people with a sense of pride, security and self-respect that, in turn, provides a stepping stone to achieving economic prosperity and improved social status. The ceiling for a housing loan is BDT 25,000 for constructing a simple tin-roof house. The average size of the loan is BDT 13,065 (USD 169) per borrower. The interest rate is 8 per cent per annum, repayable over five years. In 2015, housing loans amounting to BDT 5.59 million (USD 0.07 million) were provided to build 363 houses. It brings the total number of homes built with the housing loans to 697,152 since inception.
Scholarships for the children of Grameen members
Grameen Bank offers scholarships to the children of Grameen members to ease their financial constraints for payment of school dues the purchase of books and stationery. At least 50% of the scholarship money must go to the girls and the remaining 50% to both boys and girls based on overall performance. About 26,000 children at various levels of school education were awarded scholarships during the year under review. It brings the aggregate number of students since the programme's inception to 266,805 up to December 2015, involving an amount of BDT 445.28 million (USD 5.65 million).
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Higher Education Loans
Grameen Bank did not want to leave the children of the members in the lurch after finishing their school level studies. So it introduced the Higher Education Loan programme in 1997 to open opportunities for talented children of its borrowers to pursue higher education in medicine, engineering, agriculture and other higher education programmes at the graduate (with honours) and postgraduate levels. The loans are intended to cover all expenses incurred by the students from the beginning to the end of the study period. The loans cover admission fees, course fees, stationery, food and accommodation and other related expenses. By the end of the year under review, 53,357 students pursuing courses in disciplines were provided loans.
Nursing Education loans for the female children of Grameen Bank borrowers
To assist the children of Grameen Bank borrowers in securing jobs at home and abroad, it lends money for study in a 3-year Diploma in Nursing and Midwifery course in the international standard Grameen Caledonian College of Nursing. 294 students have enrolled for this course. 175 students have already successfully completed the course. Of them 114 have secured jobs in different hospitals and clinics, 6 have gone for higher training at Glasgow Caledonian University, Scotland. In contrast, 31 students have enrolled in B.Sc. level courses in nursing in Bangladesh.
Micro-enterprise Loans
Grameen Bank has steered many poor to cross over the poverty line. The Bank continues to stand by them to help them reach even higher echelons of prosperity. The Bank provides larger loans, called micro-enterprise loans, to these fast-moving members. There is no restriction on the loan size. So far, 7,221,574 members have availed of micro-enterprise loans. BDT 249.59 billion (USD 3,363.11 million) has been disbursed under this category of loans. Average loan size is BDT 34,563 (USD 439). The maximum size of a single loan taken so far is BDT 4.0 million (USD 51,606) for fish feed, poultry feed, fish cultivation and fish business. The other major activities financed are grocery shops, pharmacies, dairy farms, auto-rickshaw for transportation and stone businesses for construction. This programme has initiated a silent revolution in rural Bangladesh by encouraging leadership, entrepreneurial qualities, and self-employment opportunities.
Village Phones
Grameen Bank provided loans to 1,630,351 borrowers up to 2015 to buy mobile phones and offer telecommunication services in nearly half of the villages of Bangladesh. It is also generating revenue for GrameenPhone, the largest telephone company in the country. Village phones use 2.22 per cent of the air-time of the company, while their number is only 1.89 per cent of the total telephone subscribers of the company.
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Beggars as Members
Beggars are the hardest to reach under the conventional poverty alleviation programme. To capture this elusive group, Grameen Bank contrived Grameen Bank Annual report 2015, page 1 0 an innovative scheme in 2002 called Struggling Members Programme. Over 109,000 beggars have joined the programme. The total amount disbursed stands today at BDT 176.14 million. BDT 149.20 million (85% of the amount disbursed) has already been repaid. GB is happy to note that 16,905 beggars have left begging and are making a living as door-to-door salespersons. Among them, 9,029 beggars have joined Grameen Bank groups as mainstream borrowers.
The Grameen Generalized System
This system was introduced in 2000 to overcome the financial constraints of the borrowers to tide over the bad days that seriously impair their capacity to repay their bank loans. The system is simple and customer-friendly, providing leeway to the member to remain in the Bank's mainstream rather than opting out of the Bank. The Grameen has four essential windows for lending money--basic loan, housing loan, higher education loan and struggling members (beggars) loan programme. A basic loan is converted into a flexible or rescheduled loan if the borrower finds it difficult to pay the weekly instalments. A flexible loan reduces the instalment size to a tolerable level. At the end of 2015, nearly 7 per cent of the borrowers were on flexible loans. A flexible loan is not an independent loan. It is only a temporary detour from the primary loan. The borrower tries their best to return to the basic loan. If a borrower fails to repay the primary loan and is unwilling to go into a flexible loan, s/he is reckoned as a defaulter. In that event, 100 per cent provision is made against their outstanding dues. If a Flexible loan is not paid back in two years, it is considered overdue; it is entirely written off after three years. The recovery rate of Basic Loans is close to one hundred per cent.
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What is Micro-credit?
Micro-credit is a small loan given to the poor to develop their living standards. This small amount of loan can help people to come out of the cycle of poverty by generating income. Defining micro-credit, it is a - “Financial service where small amounts of money (usually around $50- $150) are loaned to poor people for use as a capital to start or expand small businesses”. It is amazing how does a little amount of money gives strength to the poor to start a business and helping to break out of the vicious cycle of poverty. This small amount of loan or financial support to the needy people helps to encourage the setting up of free businesses. In another way, it is a financial innovation system that comes from the Grameen banking system or procedure that is based on trust and collateral-free and opposite to the conventional banking system. In order to get a loan, people go to the traditional bank, but Grameen Bank approaches rootless or landless people’s doorsteps. Incredibly, any bank can allocate or sanction loans to rootless or vulnerable people without a guarantee. This loan giving approach placed Grameen Bank in a unique position in micro-finance and approaches beyond the boundaries.
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Application of Microcredit
Grameen Bank is founded on the principle that loans are better than charity to interrupt poverty: they offer people the opportunity to take initiatives in business or agriculture, which provide earnings and enable them to pay off their debt.
The bank is founded on the belief that people have endless potential, and unleashing their creativity and initiative helps them end poverty. Grameen has offered credit to classes of people formerly underserved: the poor, women, illiterate, and unemployed people. Access to credit is based on reasonable terms, such as the group lending system and weekly-instalment payments, with reasonably long terms of loans, enabling the poor to build on their existing skills to earn better income in each cycle of loans.
Grameen's objective has been to promote financial independence among the poor. Yunus encourages all borrowers to become savers so that their local capital can be converted into new loans to others. Since 1995, Grameen has funded 90 percent of its loans with interest income and deposits collected, aligning the interests of its new borrowers and depositor-shareholders. Grameen converts deposits made in villages into loans for the needier in the villages (Yunus and Jolis 1998).
It targets the poorest of the poor, with a particular emphasis on women, who receive 95 percent of the bank’s loans. Women traditionally had less access to financial alternatives than ordinary credit lines and incomes. They were seen to have an inequitable share of power in household decision making. Yunus and others have found that lending to women generates considerable secondary effects, including empowerment of a marginalized segment of society (Yunus and Jolis 1998), who share betterment of income with their children, unlike many men. Yunus claims that in 2004, women still have difficulty getting loans; they comprise less than 1 percent of borrowers from commercial banks (Yunus 2004). The interest rates charged by microfinance institutes including Grameen Bank is high compared to that of traditional banks; Grameen's interest (reducing balance basis) on its main credit product is about 20%.
Grameen has diversified the types of loans it makes. It supports hand-powered wells and loans to support the enterprises of Grameen members' immediate relatives. It has been found that seasonal agricultural loans and lease-to-own agreements for equipment and livestock help the poor establish better agriculture. The bank has set a new goal: to make each of its branch locations free of poverty, as defined by benchmarks such as having adequate food and access to clean water and latrines.
Grameen Bank is best known for its system of solidarity lending. The Bank also incorporates a set of values embodied in Bangladesh by the Sixteen Decisions. At every branch of Grameen Bank, the borrowers recite these Decisions and vow to follow them. As a result of the Sixteen Decisions, Grameen borrowers have been encouraged to adopt positive social habits. One such habit includes educating children by sending them to school. Since the Grameen Bank embraced the Sixteen Decisions, almost all Grameen borrowers have their school-age children enrolled in regular classes. This in turn helps bring about social change and educate the next generation.
Solidarity lending is a cornerstone of microcredit, and the system is now used in more than 43 countries. Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its members. Repayment responsibility rests solely on the individual borrower. The group and the centre oversee that everyone behaves responsibly and none gets into a repayment problem. No formal joint liability exists, i.e. group members are not obliged to pay on behalf of a defaulting member. But, in practice, the group members often contribute the defaulted amount with an intention to collect the money from the defaulted member at a later time. Such behaviour is encouraged because Grameen does not extend further credit to a group in which a member defaults.
No legal instrument (no written contract) is made between Grameen Bank and its borrowers; the system works based on trust. To supplement the lending, Grameen Bank requires the borrowing members to save very small amounts regularly in a number of funds, designated for emergencies, the group, etc. These savings help serve as insurance against contingencies.
In a country in which few women may take out loans from large commercial banks, Grameen has focused on women borrowers; 97% of its members are women. While a World Bank study has concluded that women's access to microcredit empowers them through greater access to resources and control over decision making, some other economists argue that the relationship between microcredit and women's empowerment is less straightforward.
In other areas, Grameen has had very high payback rates—over 98 percent. However, according to the Wall Street Journal, in 2001 a fifth of the bank's loans were more than a year overdue. Grameen says that more than half of its borrowers in Bangladesh (close to 50 million) have risen out of acute poverty thanks to their loans, as measured by such standards as having all children of school age in school, all household members eating three meals a day, a sanitary toilet, a rainproof house, clean drinking water, and the ability to repay a 300 taka-a-week (around 4 USD) loan.
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Criticism of Micro-credit Programme
Some analysts have suggested that microcredit can bring communities into debt from which they cannot escape. Researchers have noted instances when microloans from the Grameen Bank were linked to exploitation and pressures on poor families to sell their belongings, leading in extreme cases to humiliation and ultimately suicide.
The Mises Institute's Jeffrey Tucker suggests that microcredit banks depend on subsidies in order to operate, thus acting as another example of welfare. Yunus believes that he is working against the subsidized economy, giving borrowers the opportunity to create businesses. Some of Tucker's criticism is based on his interpretation of Grameen's "16 decisions," seen as indoctrination, without considering what they mean in the context of poor, illiterate peasants.
Maulana Ibrahim, an imam in Bangladesh, spoke out against the Grameen Bank in 1993 for fostering "un-Islamic ways." He alleged that the lenders' pledge required women to say they would not obey their husbands and would not live in poverty anymore.
The Norwegian documentary, Caught in Micro Debt, said that Grameen evaded taxes. The Spanish documentary, Microcredit, also suggested this. The accusation is based on the unauthorised transfer of approximately US$100 million, donated by The Norwegian Agency for Development Cooperation (NORAD), from one Grameen entity to another in 1996, before the expiry of the Grameen Bank's tax exemption.
Yunus denies that this is tax evasion:
“There is no question of tax evasion here. The Government has provided organizations with opportunities; we have made use of these opportunities with aim of benefitting our shareholders who are the rural poor women of Bangladesh.”
David Roodman and Jonathan Morduch question the statistical validity of studies of microcredit's effects on poverty, noting the complexity of the situations involved. Yoolim Lee and Ruth David discuss how microfinance and the Grameen model in South India have in recent years been distorted by venture capitalism and profit-makers. In some cases, poor rural families have suffered debt spirals, harassment by microfinance debt collectors, and in some cases suicide.