Grameen Bank, Bangladesh
Articles on Grameen Bank
|Lender With a Mission - Bangladesh's Grameen Bank targets poorest of poor
Those who can, do; those who can't, teach. An old maxim-but one that
does not account for the likes of Muhammad Yunus, a Bangladeshi
profes sor whose achievements are the stuff of lore among
Yunus is the founder of Grameen Bank, a Bangladeshi credit
organisation that has pioneered lending to the rural poor and in the
process stood normal banking con ventions on their head.
The customers of Grameen (whose name means rural in Bengali) are
almost exclusively those who have no collateral to offer against their
loans. Yet defaults are so low its repayment rates would be the envy of
most mainstream lenders. "Compared to Grameen Bank," says Yunus,
"other banks look like charity outfits for the rich."
Two other things are immediately strik ing about Grameen. First, the
vast majority of its customers are women--a fact not unconnected with
the low number of de faults--and, second, its vision extends be yond
mere finance. Grameen is perhaps the only bank in the world that
encourages birth control, sanitation and a clean envi ronment as part of
its lending policy.
As a pioneer in the growing field of "micro-lending," Grameen has
shown that the rural poor --even in a country virtually synonymous
with deprivation--can make productive use of credit. To many, this
approach is a more effective antidote to poverty than traditional
The bank's success since it was set up in 1983 has spawned Grameen-
type institu tions in 30 countries. A group of seven US Congressmen
recently urged President Bill Clinton to make micro-enterprise
develop ment efforts, modelled specifically on Grameen, the
"hallmark" of his foreign-aid programme. Yunus already has the admi
ration of Clinton, who once met Yunus in Washington and deems him
worthy of a Nobel prize.
"I was just blown away," Clinton gushed to an interviewer last year.
"He made enterprise work. He promoted disci pline, not
That, in a nutshell, was the idea. It be gan 17 years ago, when Yunus,
an econom ics professor at Chittagong University, found himself
frustrated at the irrelevance of textbook development theory to the
pov erty all around him. What bedevilled even the diligent poor
around Chittagong, he could see, was the absence of cheap credit.
Aside from loan sharks, they could turn to commercial banks, but they
How, then, to direct credit to those who most need it: the assetless
poor? Yunus' answer was to channel loans through wealthier
intermediaries like himself. While shunning the peasant farmer and the
bamboo-stool maker, the banks happily lend to the more affluent. In
turn, Yunus reasoned, these borrowers could lend to the poor, in
effect assuming risk that banks would not.
The risk, it turned out, was minimal. Experimenting initially on his own,
Yunus acted as guarantor for loans to impover ished village-dwellers,
who responded with a surpris ingly high repayment rate. Encouraged,
but eventually tired of running to the banks, Yunus decided to start
his own. The govern ment initially owned 60% of Grameen and the
bor rowers the rest. Today, its 1.4 million borrowers, each with a
mandatory share (Taka 100, or US$2.50 each), own 88%.
The UN's International Fund for Agricultural Development (IFAD)
provided Grameen with its first loan, of US$3.4 million. It subse
quently received loans from agencies in Norway, Sweden, Canada,
Germany and the US, and is currently negotiating with Swedish and
Norwegian agencies for a five-year, US$38 million loan. All the loans
are given through the Bangladeshi Govern ment. IFAD levies a 1%
service charge; other agencies give their funds as grants to the
government, which then lends the funds to Grameen at 2% annual
Grameen's average loan size is US$75, its maximum except for
housing loans. It charges simple interest at a rate of 20% a year,
compared with compound interest of 13-16% at Bangladesh's
commercial banks. Principal is repaid first, so that a borrower of Taka
2,500 would typically repay Taka 50 a week over 50 weeks. Interest,
calculated weekly on the diminishing principal, is repaid only after the
principal is paid off, making for an effective interest rate of 10 12%,
Grameen sources say.
Home loans are repayable over 10 years at the same weekly rates.
The maximum home loan is Taka 12,000, which will build a tin-roofed
Borrowers are formed into groups of five--the basic unit--and are
indoctri nated in Grameen social values, known as the "sixteen
decisions." Borrowers vow to observe the bank's four basic principles:
discipline, unity, courage and hard work "in all walks of life." They
also pledge to "keep our families small," shun child mar riage and the
"curse" of wedding dowries, "build and use pit-latrines," and "plant as
many seedlings as possible during the plantation seasons."
Grameen is effective partly because it is self-policing. Rather than
bank officials, it is the assetless themselves, meeting weekly, who
approve the loans. Group members are residents of the same village,
perhaps next-door neighbours. It is this fa miliarity that provides
transparency, guar anteeing that the recipients are truly those who
need it most. A bank official attends the meeting, but group members
decide who receives a loan, and they assume re sponsibility for
ensuring its repayment.
A typical case: Sahera Khatun, 25, with a six month-old baby, receives
a loan through Grameen's Gazipur-Sripur branch, about 95
kilometres north of Dhaka. She receives only Taka 2,375 of the Taka
2,500 approved. Taka 125 is deducted as a 5% contribu tion to her
group fund, and a further Taka 1 per week to her own emergency
sav ings fund. The loan is re paid over a year.
Shaheen Ara Begum be came manager of Gazipur Sripur branch in
1990, since when its lending has in creased manyfold. The branch
currently has about 1,900 members and has dis bursed about Taka 16.6
million (about Taka 5.6 million is outstanding). By year's end, Shaheen
expects membership of the branch to reach about 2,100.
A stroll through the village is instruc tive. Amid an otherwise
depressing land scape there stand out some obvious im provements,
brought about since the Grameen branch was established in De
cember 1988. Houses are small but im maculate; families, too, are small
and the children relatively healthy; and confident looking women are
busy at work in vari ous cottage industries.
Grameen Bank's default rate is about 2%, astonishingly low compared
with what Bangladesh's commercial banks suffer: about 70% for
agricultural loans and 90% for industrial loans.
The difference, Yunus says, lies in the psychology of the borrowers.
The rich can evade the consequences of non-payment; the poor
cannot. They value access to credit so highly, and dislike the loan
sharks so much, that they are only too grateful for a once-in-a-lifehme
opportunity to improve themselves.
The real key to Grameen's high repayment rate, however, rests more
with gender than class. By design, 92% f its borrowers nationwide are
women. The bank targets them because it considers them more
reliable than men. Children rder their priorities, making them less
likely to squander funds, and more likely to use them for household r
capital improvements. "If being poor is tough, being a poor woman is
toughest," says Yunus.
Today, Grameen has more than 1,000 branches conducting perations
in about half f Bangladesh's 68,000 villages. It also runs about 18,000
feeder schools preparing children for government primary schools. It
disburses about Taka 750 million in loans each month and has paid-up
capital f Taka 120 million.
Grameen posted modest profits until government-mandated pay rises
for the bank's staff forced losses of Taka 8.3 million in 1991 and 10
million in 1992. It may break even in 1993.
To be sure, the Grameen approach has its detractors. Some say micro-
lending takes place n too small a scale to promote economic growth,
and does little to teach skills. For the poor in Bangladesh, however,
Grameen is delivering in a way that ther banks are not.
Grameen, meanwhile, has become the model for micro-lending
programmes in countries as diverse as Kenya, Ethiopia and Sn Lanka.
Its experience is not unique. In the Philippines, for example, Tagay sa
Pagunlad (Bridge to Progress) has provided credit to the poor since
1982, learning in the process that they can make money go a long way,
"precisely because they have so little f it," in the words f director
Benjamin Montemayor (REVIEW, 11 Mar.).
Elsewhere, Malaysia's Projek Ikhtiar, uses the Grameen approach too,
and has also shown that small loans at affordable terms can greatly
reduce extreme rural poverty.
Back in Bangladesh, Yunus wants to put more emphasis n Grameen's
housing projects, which have won praise abroad. The bank has
helped build more than 153,000 low-cost, tin-roofed houses with built-
in latrines, each costing about US$300. Demand for 10-year loans to
pay for them is rising fast.
Yunus is also working n a Grameen health project, planning up to four
health centres n an experimental basis, each costing Taka 200,000
annually. He plans to charge Taka 5 a week for each Grameen
member, whose family would receive free treatment. Non-members
would pay more. Yunus believes the programme could eventually
become self-financing. The centres could also become crucial to family
planning, helping the government toward its goal f zero population
Grameen's Mirror Image
Grameen owes its noble reputation largely to its own success, but also
to the contrast it presents to Bangladesh's long-beleaguered, ill-
managed commercial banks. Years of mismanagement and a mountain
of bad debts have spurred demands that the government restructure
the sector. In 1990, the new government of Khaleda Zia published a list
of major defaulters who were not to receive further lending, and issued
guidelines for their rehabilitation. But these have had little effect. The
closure in 1991 of the scandal-ridden Bank for Credit & Commerce
International was a further psychological blow.
Management of the central and commercial banks has been weak partly
for historical reasons. Few Bangladeshi officials held senior positions in
the State Bank of Pakistan and in other Pakistani-dominated commercial
banks before Bangladesh emerged as an independent country in
December 1971. The few experienced officials there quickly found
themselves in high positions for which many were unqualified.
This, coupled with the new government's eagerness to nationalise
almost all industries, including banks, and the rise of unbridled militant
trade unionism under state patronage soon created a chaotic situation.
Quick promotions in banks and industry were given on the basis of
political connections, not competence. Union activists eventually held
sway over recruitment and loan approvals. Top bank officials who
attempted to check such highhandedness were physically assaulted.
As a result, bank officials are help less either to act against well-
connected employees, or to pressure state-run firms to repay their
loans. By the time the government adopted the Bank Companies Act in
February 1991, in an attempt to clean up the system, the nonperforming
loans of the nationalised commercial banks (NCBS) equalled a third of
their total loans.
The country's four largest NCBS have total deposits of about Taka 170
billion (US$4.4 billion), of which nearly Taka 60 billion is outstanding to
public-sector enterprises. The largest of these are in the ailing jute
sector, claiming two thirds, or Taka 40 billion. Total deposits of the
private banks--10 local and six foreign--are about Taka 30 billion.
The top four NCBS together have about 3,600 of the country's 5,700
bank branches, nearly half of which are located in rural areas. Most of
these branches are operating at a loss. Under World Bank-initiated
reforms, the government is implementing a programme to rationalise
the rural branches. Ironically, in the 1970s and early 1980s, rural bank
expansion was carried out under advice from foreign consultants eager
to direct credit to the rural masses.
A highly placed government official says NCBS have too many
branches and that their management lacks the expertise and technical
support to handle such large organisations. Many officials promoted
from the ranks simply because of their trade-union affiliations are not
up to the task. He suggests closure of money-losing rural branches by
way of splitting them into smaller, more manageable banking units. With
5,700 branches (plus Grameen's more than 1,000), Bangladesh's bank
network is among the world's most extensive.
Some bankers say things are improving a little. One, who prefers
anonymity, says that except for loans to publicsector corporations, his
operations are "satisfactory." He feels that union militancy is on the
wane, and that managers are gradually restoring authority over
individual bank employees. Loanrecovery rates are rising, although
public debt remains a problem.
With the establishment of a democratically elected government and
readoption of a parliamentary system of government, transparency in
public institutions is gradually improving. Although the government has
not been able completely to restore industrial peace and remove
militant trade unionism, the managers of banks and publicsector
enterprises are being allowed to work independently. Bank
management is under constant pressure from the government to
deliver, which has helped improve the situation somewhat.
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