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 and it serves as a catalyst in the overall development of socio-economic conditions of the poor who have been kept outside the banking orbit on the grounds that they are poor and hence not bankable. Since the bank does not wish to take any borrower to the court of law in case of non-repayment, it does not require the borrowers to sign any legal instrument. Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. Repayment responsibility solely rests on the individual borrower, while the group and the Grameen Bank center oversee that everyone behaves in a responsible way and none gets into a repayment problem. There is no form of joint liability, i.e. group members are not responsible to pay on behalf of a defaulting member.
Innovation
The Grameen Bank Project was born in the village of Jobra, Bangladesh, in 1976. In 1983 it was transformed into a formal bank under a special law passed for its creation. It is owned by the poor borrowers of the bank who are mostly women. It works exclusively for them. Borrowers of Grameen Bank at present own 94 percent of the total equity of the bank. The remaining 6 percent is owned by the government.
Professor Muhammad Yunus, the founder of "Grameen Bank" and its Managing Director, reasoned that if financial resources were made available to the poor people on terms and conditions that are appropriate and reasonable then, he says, "these millions of small people with their millions of small pursuits can add up to create the biggest development wonder." This elevated purpose led to the invention of "micro-credit" - the process of extension of small loans to entrepreneurs too poor to qualify for traditional bank loans. It has proven to be an effective and popular measure in the ongoing struggle against poverty.
The Grameen Bank is based on the voluntary formation of small groups of five people to provide mutual, morally binding group guarantees in lieu of the collateral required by conventional banks. At first only two members of a group are allowed to apply for a loan. Depending on their performance in repayment the next two borrowers can then apply and, subsequently, the fifth member as well. The assumption is that if individual borrowers are given access to credit, they will be able to identify and engage in viable income-generating activities - simple processing such as paddy husking, lime-making, manufacturing such as pottery, weaving, and garment sewing, storage and marketing and transport services. Women were initially given equal access to the funds and proved not only reliable borrowers but astute entrepreneurs. As a result, they have raised their status, lessened their dependency on their husbands and improved their homes and the nutritional standards of their children. Today over 90 percent of borrowers are women.
Intensive discipline, supervision, and servicing characterize the operations of the Grameen Bank, which are carried out by "bicycle bankers" in branch units with considerable delegated authority. The rigorous selection of borrowers and their projects by these bank workers, the powerful peer pressure exerted on these individuals by the groups, and the repayment scheme based on 50 weekly installments, contribute to operational viability in the rural banking system designed for the poor. Savings have also been encouraged. Under the lending model, there is a provision for 5% of the loans to be credited to a group fund and Tk 5 (5 Taka) is credited every week to the fund.
The success of this approach shows that a number of objections to lending to the poor can be overcome if careful supervision and management are provided. For example, it had earlier been thought that the poor would not be able to find money earning occupations. In fact, Grameen borrowers have successfully done so. It was thought that the poor would not be able to repay; in fact, repayment rates reached 97 percent. It was thought that poor rural women in particular were not bankable; in fact, they accounted for 94 percent of borrowers in early 1992. It was also thought that the poor cannot save; in fact, group savings have proven as successful as group lending. It was thought that rural power structures would make sure that such a bank failed; but the Grameen Bank has been able to expand rapidly. Indeed, from fewer than 15,000 borrowers in 1980, the membership had grown to nearly 100,000 by mid-1984. By the end of 1998, the number of branches in operation was 1,128, with 2.34 million members (2.24 million of them women) in 38,957 villages. There are 66,581 centers of groups, of which 33,126 are women. Group savings have reached 7,853 million taka (approximately USD $162 million), out of which 7,300 million taka (approximately USD $152 million) are saved by women.
It is estimated that the average household income of Grameen Bank members is about 50 percent higher than the target group in the control village, and 25 percent higher than the target group of non-members in Grameen Bank villages. The landless have benefited most, followed by marginal landowners. This has resulted in a sharp reduction in the number of Grameen Bank members living below the poverty line, 20 percent compared to 56 percent for comparable non-Grameen Bank members. There has also been a shift from agricultural wage labor (considered to be socially inferior) to self-employment in petty trading. Such a shift in occupational patterns has an indirect positive effect on the employment and wages of other agricultural waged laborers. What started as an innovative local initiative, "a small bubble of hope", has thus grown to the point where it has made an impact on poverty alleviation at the national level.
Impact
The total number of borrowers at Grameen Bank is 4.76 million and 96 percent of them are women. Grameen Bank has 1,537 branches and works in 54,022 villages with a total staff is 13,947. The total amount of loans disbursed by Grameen Bank, since its inception, is Tk 235.05 billion (US $4.90 billion). Out of this, Tk 211.57 billion (US $4.38 billion) has been repaid. The current amount of outstanding loans stands at TK 23.48 billion (US $369.53 million). During the past 12 months (from July 2004 to June 2005) Grameen Bank disbursed Tk. 31.48 billion (US $513.10 million). The monthly average loan disbursement over the past 12 month was Tk 2.62 billion (US $42.76 million).
Projected disbursement for 2005 was Tk 33.00 billion (US $547 million), i.e. monthly disbursement of Tk 2.75 billion (US $45.58 million). At the end of the year outstanding loans are projected to be at Tk 27.0 billion (US $448 million). The loan recovery rate is currently 98.95 percent. Grameen Bank finances 100 percent of its outstanding loans from its deposits. Over 66 percent of its deposits come from bank’s own borrowers. Deposits amount to 108 percent of the outstanding loans. If Grameen Bank combines both deposits and its own resources then 133 percent of the loans are outstanding.
In 1995, GB decided not to receive any more donor funds. Since then, it has not requested any fresh funds from donors. The last installment of donor funds, which was in the pipeline, was received in 1998. GB does not see any need to take any donor money or even take loans from local or external sources in future. GB's growing amount of deposits will be more than enough to run and expand its credit program and repay its existing loans. Ever since Grameen Bank came into being, it has made a profit every year except in 1983, 1991, and 1992. It has published its audited balance-sheet every year, audited by two internationally reputed audit firms of the country.
Total revenue generated by Grameen Bank in 2004 was Tk 4.69 billion (US $79.00 million). Total expenditure was Tk 4.27 billion (US $71.84 million). Interest payment on deposits of Tk 1.58 billion (US $26.58 million) was the largest component of expenditure (37 percent). Expenditure on salary, allowances, pension benefits amounted to Tk 1.25 billion (US $21.00 million), which was the second largest component of the total expenditure (29 percent). Grameen Bank made a profit of Tk 422 million (US $7.16 million) in 2004. The entire profit was transferred to a Rehabilitation Fund created to cope with disaster situations. This was done in fulfillment of a condition imposed by the government for exempting Grameen Bank from paying corporate income tax.
The Government of Bangladesh has a fixed interest rate for government-run microcredit programs at 11 percent at flat rate. It amounts to about 22 percent at a declining basis. Grameen Bank's interest rate is lower than the government rate. There are four interest rates for loans from Grameen Bank: 20% (declining basis) for income generating loans, 8% for housing loans, 5% for student loans, and 0% (interest-free) loans for Struggling Members (beggars). All interests are simple interest, calculated on a declining balance method. This means, if a borrower takes an income-generating loan of say, Tk 1,000, and pays back the entire amount within a year in weekly instalments, she'll pay a total amount of Tk 1,100, i.e. Tk 1,000 as principal, plus Tk 100 as interest for the year, equivalent to 10% fl
Inspiration
"We believe that poverty does not belong to a civilized human society. It belongs to museums."
The World Inquiry editorial team edited this profile from the original submission of the interviewer or other source. The views expressed do not necessarily represent Case Western Reserve University, the Weatherhead School of Management or the Center for Business as an Agent of World Benefit. More >>
