Grameen Bank of Bangladesh PDF

Making Microfinance Work for the Poor: The Grameen Bank of Bangladesh One of the major obstacles facing the poor and those not far above the poverty line is access to credit (see Chapter 15). The Grameen Bank of Bangladesh is an excellent illustration of how credit can be provided to the p...

Making Microfinance Work for the Poor: The Grameen Bank of Bangladesh One of the major obstacles facing the poor and those not far above the poverty line is access to credit (see Chapter 15). The Grameen Bank of Bangladesh is an excellent illustration of how credit can be provided to the poor while minimising the risk that resources will be wasted. Microfinance institutions (MFIs) targeting the poor, such as the Grameen Bank, have expanded rapidly throughout the developing world since the 1980s. But nowhere has this expansion been more striking than in Bangladesh, which has been trans-forming itself from a symbol of famine to a symbol of hope, due in part to the success of its MFIs. Professor Muhammad Yunus conceived of the Grameen Bank in the mid-1970s when he was a Chittagong University economics professor. Yunus had become convinced from his research that the lack of access to credit on the part of the poor was one of the key constraints on their economic progress—a conclusion that has been supported by later studies from around the developing world. Yunus wanted to demonstrate that it was possible to lend to the poor without collateral. To determine the best system for doing so, he created the Grameen Bank as an “action and research project.” Today the Grameen Bank is a chartered financial institution with over 8.25 million borrowers among the poor and formerly poor. Yunus said in an interview that “all human beings are born entrepreneurs. Some get the opportunity to find this out, but some never get this opportunity. A small loan can be a ticket to exploration of personal ability. All human beings have a skill—the survival skill. The fact that they are alive proves this. Just sup- port this skill and see how they will choose to use it.” Yunus began the operation in 1976 after convincing the Bangladeshi agricultural development bank to provide initial loan money—the first loans guar-anteed personally by Yunus. A series of expansions convinced the government of the Grameen Bank’s value, and the Grameen Bank was formally chartered as a financial institution in 1983. Today, a public-cooperative bank 94% owned by its borrowers, the Grameen Bank continues to grow rap-idly and now has over 2,400 branch offices throughout the country. It works in about 78,000 villages. Today, the Grameen Bank finances all its outstanding loans from borrowers’ deposits. The branch office, covering 15 to 20 villages, is the basic organisational unit and is responsible for its profits and losses. Each branch has a number of village or neighbourhood centres, com-prised of about 8 solidarity groups. Each solidarity group has 5 members, so there are about 40 borrowers in each centre. The 5-person group size was not decided arbitrarily but on the basis of experimentation. Initially, loans were awarded directly to individuals, but this required too much staff time to control the use and repayment of the loan. After the idea of mutual responsibility was developed, groups of 10 or more were tried at first, but this proved too large for intimate and informal peer-to-peer monitoring to be effective. Groups of 5 proved in practice to work best. Since 1998, the Grameen Bank has been placing greater emphasis on individual liability. Since its founding, the Grameen Bank has enabled several million poor Bangladeshis to start or upgrade their own small businesses. Ninety-seven percent of the borrowers are women. Borrowers are generally limited to those who own less than half an acre, and this seems to hold for 96% of borrowers. Representatives of the Grameen Bank’s branches often go door to door in the villages they cover to inform people, who are often illiterate and very reticent about dealing with banks, about the Grameen Bank’s services. Before opening a branch, the new branch manager is assigned to prepare a socioeconomic report covering the economy, geography, demographics, transportation and communications infrastructure, and politics of the area. Among other things, this ensures that the branch manager becomes familiar with the region and its potential borrowers before the branch begins operations. The Grameen Bank (Grameen means “rural” in Bengali) is incorporated as a publicly supported credit union, with borrowers owning 94% of the bank’s stock and the government owning the remainder. Once borrowers reach a certain borrowing level, they are entitled to purchase one share of Grameen Bank stock. The bank sets its own policy with strong borrower input, independent of government control. The Grameen Bank’s total annualised interest rate on its basic working-capital loans has been kept at 20% (on a declining basis). The current interest rate is 8% on home loans and 5% on student loans. A special recent programme provides zero-interest loans for beggars. To qualify for uncollateralised loans, potential borrowers form five-member groups. Each member must undergo a two-week training session before any member can secure a loan, and the training sessions are followed up with weekly group meetings with a bank officer. Many microfinance providers rely on what could be called the “collateral of peer pressure.” However, under Grameen Bank II, the redesigned and more flexible payment system introduced in 1998, borrowers in the solidarity groups do not have to co-sign or jointly guarantee each other’s loans. Observers have nevertheless reported that strong social pressure is placed on members to repay. Members know the character of other group members and generally join groups with members who they believe are likely to repay their loans. In its early period, peer oversight contributed to the Grameen Bank’s high repayment rate, reported to be 98%. Although the exact repayment rate has been a matter of some controversy in the literature, there is no doubt that repayment has been far higher than the national average for bank loans to much wealthier borrowers. There are also additional financial incentives to repay loans in a timely manner. Each individual borrower can increase by 10% the amount she can borrow each year if she has repaid loans in a timely manner. For the group, if there is 100% attendance at meetings and all loans are repaid, each borrower can increase her borrowing by an additional 5%, thus raising her borrowing ceiling at a rate of 15% per year. An additional increment is provided when there is a perfect record from each of the eight or so borrowing groups in a centre. The desire of many borrowers to take advantage of these higher borrowing ceilings presumably does lead to some peer pressure for all to repay in a timely manner. A member who is unable to repay is allowed to restructure her loan, repaying at a slower rate, with some limited refinancing as needed. This has reduced defaults to essentially zero, according to the Grameen Bank. In addition to peer pressure, most borrowers wish to re-establish their credit and resume their rights to borrow increasing sums, so they work hard to get and keep their loans up to date. The group structure facilitates the formation of cooperative ventures among the participants, per- mitting the undertaking of ventures too large or too risky for poor individuals to shoulder alone. Grameen also works to facilitate the accumulation of savings among its members through savings requirements or incentives for its borrowers to save. Group members are trained in such practical matters as bank procedures, the group savings pro-gramme, the role of the centre chief and the chair-person of the five-member group, and even how to write their signatures. In addition, training has a moral component, stressing the bank’s 16 principles, known as “decisions,” to be adhered to by each member. These decisions were formulated in a national conference of 100 female centre chiefs in 1984. They emphasise mutual assistance and other modern values, including self-discipline and hard work, hygiene, and refusal to participate in back-ward practices such as demanding dowries. Adherence to these principles and attendance at rallies featuring the chanting of the decisions were not for-mal requirements for receiving loans but in the late 1980s and 1990s were said to have become effective, implicit requirements. The 16 decisions cover a wide range of activities. Here are a few: 3. We shall not live in dilapidated houses. We shall repair our houses and work toward constructing new houses as soon as possible. 4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus. 6. We shall plan to keep our families small. 8. We shall always keep our children and the environment clean. 11. We shall not take any dowry in our sons’ weddings, neither shall we give any dowry in our daughters’ weddings. We shall not practice child marriage. 13. For higher income, we shall collectively under-take higher investments.* A major debate in the microfinance community concerns whether microcredit institutions should limit themselves to making loans or also engage in other social development activities. The Grameen Bank, which is technically a type of bank rather than an NGO, is usually grouped among the minimalist institutions, but the 16 decisions show that there is also a much broader social component at the Grameen Bank. Other institutions have sought to actively combine very different activities; BRAC, examined earlier in this case study, is one of the world’s most comprehensive NGOs. As of 2010, the average loan size was $384. Mahmoub Hossain found that 46% of loans went for livestock and poultry raising, 25% for processing and light manufacturing, and 23% for trading and shopkeeping; thus, almost no loans went to finance farm crop activities. Grameen Bank borrowers have had notable success in capital accumulation. Cattle raising is a major activity of borrowers. Hossain found that the number of cattle owned increased by 26% per year. Though the numbers involved are small—going from 61 per 100 borrowers before becoming a Grameen Bank member to 102 per 100 borrowers at the time of the survey—these are impressive improvements for Bangladesh’s poor. The working capital of borrowers tripled on average within 27 months. But completely landless agricultural labourers appear to remain significantly underrepresented in the pool of borrowers: Hossain found that they represent 60% of the Grameen Bank’s target group but only 20% of its actual borrowers—and this includes those who reported hired agricultural labour as a secondary economic activity as well as those who reported it as a primary economic activity. Note that in Bangladesh, most labourers own a small plot of land for their house but too little to form the basis for a viable farm. Some 60% of Bangladeshis are “functionally landless” in this sense. Landless farm labourers are extremely hard to reach for any development programme in any country. They also tend to be the least educated and are probably the least well prepared to move into viable entrepreneurial activities. The Grameen Bank’s emphasis on serving poor women is especially impressive. According to Hossain’s survey, half the women borrowers said they were unemployed at the time they became Grameen Bank members (compared with less than 7% of the men). An impact evaluation carried out by Mark Pitt and Shahidur Khandker concluded that microcredit for women from the Grameen Bank and two other lenders had a larger effect on the behaviour of poor households in Bangladesh than for men. In a representative finding, they concluded that annual house-hold consumption expenditure increases 18 taka for every additional 100 taka borrowed by women from credit programmes, compared with just 11 taka for men. In addition, availability of microcredit also helps households smooth consumption over time so that family members can reduce suffering during lean periods. In other research, Pitt and his collab-orators found that credit for women had a positive effect on children’s health in Bangladesh, but credit for men had no comparable effect. (Related issues were examined in Chapter 8.) Mir Salim presents econometric evidence that both the Grameen Bank and BRAC act in ways not predicted by purely profit-maximising behaviour, but instead tilt in favour of poverty alleviation. Is Grameen subsidised, and how much subsidy makes sense? Some analysts argue that microfinance institutions should not provide loans at subsidised rates so that as many total loans can be made as possible, ploughing back all the profits into new loans. Others argue that the poorest of the poor cannot afford to borrow at unsubsidised rates because they do not yet have access to sufficiently profitable activities. Although the Grameen Bank seems uneasy with the idea that they provide, or pass through, any subsidies, Jonathan Morduch has examined the evidence and has concluded that there have indeed been subsidies. For example, he calculated that total subsidies in 1996, evaluated at the economic opportunity cost of capital, amounted to between $26 million and $30 million. The Grameen Bank insists that no subsidies remain at this time. Over half of the Grameen Bank’s loans are made possible by members’ savings accounts. Costs at the Grameen Bank are quite high by commercial bank standards. They have been estimated at 26.5% of the value of loans and advances. This is some 10% higher than the nominal interest rate charged, meaning that 39% of the costs of lending are subsidised from all sources. Adding in estimated opportunity costs, Hossain has calculated an effective subsidy of 51%. About half of the excess of costs over interest receipts is attributable to the expense of opening new branches, which should be treated as a capital cost. Whether a significant fraction of poor borrowers could pay higher interest rates and remain profitable remains uncertain. Since funds for subsidies are limited, the more the subsidy per loan, the fewer subsidised loans can be made. There may be some combination of reduced operating costs, modest increases in interest rates, and continued subsidy that is optimal for creating the most welfare gains with the available resources. How-ever, a public subsidy of Grameen Bank loans may be justified on the basis of the loans’ effect on absolute poverty alleviation and positive externalities. The Grameen Bank does face some challenges. Bangladesh remains subject to environmental shocks such as severe flooding that will continue to test the resiliency of the Grameen Bank’s borrowers and the Grameen Bank itself. As MFIs expand and new private and quasi-private credit providers enter the market, competition among microcredit providers is growing. Adapting to this new environment will be challenging. In Bolivia, another country where microfinance is highly developed, increases in competition, especially from private consumer credit companies eager to piggyback on MFI membership lists, were widely viewed as at least partly responsible for a financial crisis there. Cultural challenges are also important. Rising women’s incomes, self- esteem, and business clout have caused some backlash in the conservative Islamic culture of rural Bangladesh, in which women are expected to be secluded from social activities. The Grameen Bank and other programmes, such as the non-traditional schools run by BRAC, are seen as a challenge to this traditional status quo over which men have traditionally presided. Schools have been burned, and women have been driven out of their villages or even harmed for challenging traditional cultural norms, including participating in market activities. Yunus has stated that some husbands have viewed the Grameen Bank as a threat to their authority. In some cases, “the husband thought we had insulted him and were destroying his family. We had cases of divorce just because the woman took loans.” A fundamentalist cleric in Dhaka claimed that “we have no objection to improving the lot of women, but the motives of the Grameen Bank and other organisations are completely different. They want to eradicate Islam, and they want to do this through women and children.” The future of the Grameen Bank will depend on a creative response to this difficult environment of economic and cultural change in which many development problems remain. The Grameen Bank has been highly innovative—for example, by bringing cell phones to rural Bangladesh via its phone ladies loan and service programme. This programme played the key facilitating role in the now remarkably high penetration of cell phones throughout rural Bangladesh, even among quite poor people. The Grameen Bank has also proved flexible and responsive to the borrowing needs of its members. For example, the Grameen Bank has established a life insurance programme, as well as a loan insurance programme. The Grameen Bank housing programme finances houses being built or rebuilt—adding iron roofs, cement pillars, and sanitary latrines. The houses generally have mud walls, but these are thick and, properly maintained, can last many years. The houses are substantial in size, with an electric fan overhead and usually other basic appliances in electrified villages. Grameen has also started offering higher education loans for its members. An increasing number of parents are witnessing the first members of their families to ever go to college and graduate in fields such as computer science and accounting. It is a remarkable transformation. In 2006, the Grameen Bank and its founder, Muhammad Yunus, were jointly awarded the Nobel Peace Prize—a well-deserved honour.