An Overview of Grameen Bank
1. What is Micro credit?
The word “micro-credit” did not exist before the seventies. Now it has become a buzz?word among the developing practitioners. In the process, the word has been imputed to mean everything to everybody. No one now gets shocked if somebody uses the term “micro-credit” to mean agricultural credit, or rural credit, or cooperative credit, or consumer credit, credit from the savings and loan associations, or from credit unions, or from money lenders. When someone claims micro credit has a thousand year history, or a hundred year history, nobody finds it as an exciting piece of historical information
It seems microcredit is creating a lot of misunderstanding and confusion in the discussion about micro credit. This is very important for arriving at clear conclusions, formulating right policies, designing appropriate institutions and methodologies. ‘Instead of just saying “micro-credit” we should specify which category of micro-credit.
Let me suggest a broad classification of micro-credit
A) Traditional informal micro-credit (such as, moneylender’s credit, pawn shops, loans from friends and relatives, consumer credit in informal market, etc.)
B) Micro-credit based on traditional informal groups (such as, tontin, su su, ROSCA, etc.)
C) Activity?based micro-credit through conventional or specialized banks (such as, agricultural credit, livestock credit, fisheries credit, handloom credit, etc.)
D) Rural credit through specialized banks.
E) Cooperative micro-credit (cooperative credit, credit union, savings and loan associations, savings banks, etc.)
F) Consumer micro-credit.
G) Bank?NGO partnership based micro-credit.
H) Grameen type micro-credit or Grameen-credit.
I) Other types of NGO micro-credit.
J) Other types of non?NGO non?collateralized micro-credit.
This is a very quick attempt at classification of micro-credit just to make a point. The point is ? every time we use the word “micro-credit” we should make it clear which type (or cluster of types) of micro-credit we are talking about. Otherwise well continue to create endless confusion in our discussion. Needless to say that the classification I have suggested is only tentative. We can refine this to allow better understanding and better policy decisions. Classification can also be made in the context of the issue under discussion. I am arguing that we must discontinue using the term “micro-credit” or “microfinance” without identifying its category. .
‘Micro-credit data are compiled and published by different organizations. We find them useful. Then we can prepare another set of important information ? number of poor borrowers, and their gender composition, loan disbursed, loan outstanding, balance of savings, etc. under each of these categories, country wise, region wise, and globally.
These sets of information will tell us which category of micro-credit is serving how many poor borrowers, their gender break?up, their growth during a year or a period, loans disbursed, loans outstanding, savings, etc. The categories which are doing better, more support can go in their direction. The categories which are doing poorly may be helped to improve their performance. For policy?maters this will be enormously helpful. For analysis purpose this will world of difference.
Dr Yunus urge Micro-credit Summit Campaign secretariat to present the information that they already collect on number of clients, number of the poorest among them, number of poorest clients that are women, number of clients that have crossed the poverty line ??broken down for each of the categories of micro-credit. This will help donors to select the categories they would like to support. This sorting out is very important for the donors, as well as the policy-makers.
2. Grameen credit
General features of Grameen-credit are
(a) It promotes credit as a human right.
(b) Its mission is to help the poor families to help themselves to overcome poverty. It is targeted to the poor, particularly poor women.
(c) Most distinctive feature of Grameen-credit is that it is not based on any collateral, or legally enforceable contracts. It is based on “trust”, not on legal procedures and system.
(d) It is offered for creating self?employment for income-generating activities and housing for the poor, as opposed to consumption.
(e) It was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be “not creditworthy”. As a result it rejected the basic methodology of the conventional banking and created its own methodology.
(f) It provides service at the door?step of the poor based on the principle that the people should not go to the bank, bank should go to the people.
(g) In order to obtain loans a borrower must join a group of borrowers.
(h) Loans can be received in a continuous sequence. New loan becomes available to a borrower if her previous loan is repaid.
(i) All loans are to be paid back in installments (weekly, or bi?weekly).
(j) Simultaneously more than one loan can be received by a borrower.
(k) It comes with both obligatory and voluntary savings programmes for the borrowers.
(l) Generally these loans are given through non?profit organizations or through institutions owned primarily by the borrowers. If it is done through for?profit institutions not owned by the borrowers, efforts are made to keep the interest rate at a level which is close to a level commensurate with sustainability of the programme rather than bringing attractive return for the investors. Grameen-credit’s thumb?rule is to keep the interest rate as close to the market rate, prevailing in the commercial banking sector, as possible, without sacrificing sustainability. In fixing the interest rate market interest rate is taken as the reference rate, rather than the moneylenders’ ‘rate. Reaching the poor is its non?negotiable mission. Reaching sustainability is a directional goal. It must reach sustainability as soon as possible, so that it can expand its outreach without fund constraints.
(m) Grameen-credit gives high priority on building social capital. It is promoted through formation of groups and centres, developing leadership quality through annual election of group and centre leaders, electing board members when the institution is owned by the borrowers. To develop a social agenda owned by the borrowers, something similar to the “sixteen decisions”, it undertakes a process of intensive discussion among the borrowers, and encourages them to take these decisions seriously and implement them. It gives special emphasis on the formation of human capital and concern for protecting environment. It monitors children’s education, provides scholarships and student loans for higher education. For formation of human capital it makes efforts to bring technology, like mobile phones, solar power, and promote mechanical power to replace manual power.
Grameen-credit is based on the premise that the poor have skills which remain unutilized or under?utilized. It is definitely not the lack of skills which make poor people poor. Grameen believes that the poverty is not created by the poor; it is created by the institutions and policies which surround them. In order to eliminate poverty all we need to do is to make appropriate changes in the institutions and policies, and/or create new ones. Grameen believes that charity is not an answer to poverty. It only helps poverty to continue. It creates dependency and takes away individual’s initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty.
Grameen brought credit to the poor, women, the illiterate, the people who pleaded that they did not know how to invest money and earn an income. Grameen created a methodology and an institution around the financial needs of the poor, and created access to credit on reasonable term enabling the poor to build on their existing skill to earn a better income in each cycle of loans.
Grameen Bank methodology is almost the reverse of the conventional banking methodology. Conventional banking is based on the principle that the more you have, the more you can get. In other words, if you have little or nothing you get nothing. As a result, more than half the population of the world is deprived of the financial services of the conventional banks. Conventional banking is based on collateral, Grameen system is collateral? free.
Grameen Bank starts with the belief that credit should be accepted as a human right, and builds a system where one who does not possess anything gets the highest priority in getting a loan. Grameen methodology is not based on assessing the material possession of a person, it is based on the potential of a person. Grameen believes that all human beings, including the poorest, are endowed with endless potential.
Conventional banks look at what has already been acquired by a person. Grameen looks at the potential that is waiting to be unleashed in a person.
3. A brief history of Grameen Bank
In rural Bangladesh, where financial markets are dominated by informal lenders, financial services targeted to the landless poor by Grameen Bank and non-governmental organization using a similar methodology collectively disburse more credit than public sector institution. With over three million borrowers, and repayment rates on collateral-free loans are as high as 98 percent, Grameen bank has become a model for group based systems of financial and social intermediation throughout the world. It has achieved operational self-sufficiency, and appears to be moving towards full self-sustainability.
Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and created 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 over all development of socio-economic conditions of the poor who have been 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 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 July, 2004, it has 3.7 million borrowers, 96 percent of whom are women. With 1267 branches, GB provides services in 46,000 villages, covering more than 68 percent of the total villages in Bangladesh.
In 1976, Dr. Muhammad Yunus, professor of Economics Department, Chittagong University, started Grameen Bank in a village Jobra in Chittagong, as an experimental project to combat rural poverty by providing credit to the very poor. Because they lacked access to commercial credit, Dr. Yunus perceived, the poor were being exploited in traditional credit markets; as a result they often caught in spirals of increasing indebtedness, forced sells of assets, and increasing destitution. Among the poor Dr. Yunus recognized that rural women were particularly vulnerable because patriarchal norms restricted their ownership and control over assets, as well as their ability to generate income. A group-based system was developed to reduce transaction costs and address the problems of asymmetric information and lack of collateral.
The Grameen Bank project came into operation with the following objectives:
· 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 household, within the fold of an organization format which they can understand and manage by themselves;
· Reverse the age-old vicious circle of “low income, low savings and low investment” into virtuous circle of “more income more savings and more investment”.
The action research demonstrated its strength in Jobra (a village adjacent to Chittagong University) and some of the neighboring village during 1976-1979. With the sponsorship of the central bank of the country and support of nationalized commercial banks, the project was extended to Tangail district in 1979. With the success in Tangail, the project was extended to several other districts in the country. In 1983 Grameen Bank became established as a specialized financial institution under Government statute regulated by the Central Bank like commercial banks, but with special mandate to provide financial services to the rural poor.
Designed to Open New Possibilities
Grameen Bank has come a long way since it began its journey in the village of Jobra in 1976. During this quarter of a century it has faced many operational and organizational problems, gained a lot of experience through its successes and failures. It incorporated many new features in its methodology to address various crises and problems, or utilize new opportunities; discarded and modified the features which became unnecessary or less effective. There were a number of major natural disasters in Bangladesh during the life span of Grameen Bank. The 1998 flood was the worst of all. Half of the country was under flood-water for ten long weeks. Water flowed over the roof-tops for a prolonged period.
Grameen borrowers, like many other people of Bangladesh, lost most of their possessions including their houses because of the flood. Grameen Bank, which is owned by the borrowers, decided to take up a huge rehabilitation program by issuing fresh loans for restarting income-generating activities and to repair or rebuild their houses. Soon borrowers started to feel the burden of accumulated loans. They found the new installment sizes exceeded their capacity to repay. They gradually started to stay away from weekly centre meetings. Grameen Bank repayment started to show quick decline. We tried to improve the situation, but it did not produce desired result. Impact of the post-flood repayment crisis was compounded by its overlap with a recovery problem from an earlier crisis. In 1995, a large number of our borrowers stayed away from centre meetings and stopped paying loan installments. Husbands of the borrowers, inspired and supported by local politicians, organized this, demanding a change in Grameen Bank rules to allow withdrawal of “group tax” component of “group fund” at the time of leaving the bank. It continued for months. At the end we resolved the problem by creating some opening in our rules, but Grameen’s repayment rate had gone down in the mean time. Many borrowers continued to abstain from repaying their loans even after the matter was resolved.
These external factors reinforced the internal weaknesses in the system. The system consisted of a set of well-defined standardized rules. No departure from these rules was allowed. Once a borrower fell off the track, she found it very difficult to move back on, since the rules which allowed her to return, were not easy for her to fulfill. More and more borrowers fell off the track. Then there was the multiplier effect. If one borrower stopped payments, it encouraged others to follow.
When the repayment situation did not improve as desired, we thought this would be a good opportunity to be bold, and to dare to design a new Grameen methodology, incorporating all the lessons learnt, and the wishes and the desires that we accumulated during the quarter century of Grameen’s operation. We debated about it. But finally we decided in favour of it. We sat down to design it part by part, piece by piece, then pilot-tested the system quietly in a few branches to fine-tune the design; tried again in larger number of branches; reworked it; and in the end, came up with the architecture of a new system that we all liked. All the 12,000 staff participated very actively in designing the product at all the stages of its development. Some were critical in the beginning, but by the time it was ready, everybody loved it. The staff was electrified with enthusiasm – because response from the borrowers was so positive. Borrowers, who did not show up at their centre meetings for years, started showing up to talk about the new system. Soon they were signing up to start all over again and repay the old loans with the accumulated interest. No reduction in the debt was offered. Still they opted to return.
The designing process formally began on April 14, 2000 (Bengali New year’s day). Field-testing began immediately. By the beginning of 2001, the new system, “The Grameen Generalized System” or GGS was ready for launching. We undertook an intensive staff training program for all the 12000 staff. Initially there were signs of reluctance from some staff. There were grumblings, negative jokes, and expressions of frustrations. Some of it we expected, but some we did not. Top management went ahead with understanding and patience. Training continued cycle after cycle. Soon uneasiness about the new system disappeared. Staff became great admirers of the GGS and wanted to put it into immediate implementation in their branches. All the while we were busy designing and debugging the system, our real worry was how to manage the transition from the Grameen Classic System (GCS) to GGS in 41,000 villages without subjecting hundreds of thousands of illiterate borrowers to a big shock, and messing up the accounts in 1175 branches. Transition was very carefully and meticulously choreographed, and put into action by March, 2001. By April, 2002, two years after we began the process, Grameen Bank II has emerged. The transition is now complete. The last branch of Grameen Bank switched over to Grameen II on August 7, 2002, completing the process of transition. The new Grameen Bank II is now a real and functioning institution. This second generation microcredit institution appears to be much better equipped than it was in its earlier version.
In the Grameen Bank II, gone are the general loans, seasonal loans, family loans, and more than a dozen other types of loans; gone is the group fund; gone is the branch-wise, zone-wise loan ceiling; gone is the fixed size weekly installment; gone is the rule to borrow every time for one whole year, even when the borrower needed the loan only for three months; gone is the high-level tension among the staff and the borrowers trying to steer away from a dreadful event of a borrower turning into a “defaulter”, even when she is still repaying; and gone are many other familiar features of Grameen Classic System.
Central assumption underlying GGS still remains the same as it was behind GCS – the firm belief that the poor people always pay back their loans. On some occasions they may take longer time to pay back than it was originally stipulated, but repay they will. There is no reason for a credit institution dedicated to provide financial services to the poor to get uptight because a borrower could not pay back the entire amount of a loan on a date fixed at the beginning of the disbursement of the loan. Many things can go wrong for a poor person during the loan period. After all, the circumstances are beyond the control of the poor people. We see no reason why the sky should fall on anybody’s head because a borrower took longer time to pay back her loan. Since she is paying additional interest for the extra time, where is the problem? We always advocated that microcredit programs should not fall into the logical trap of the conventional banking and start looking at their borrowers as some kind of “time-bombs” who are ticking away and waiting to create big trouble on pre-fixed dates. Please rest assured that the poor people are not going to create any trouble. It is us, the designers of institutions and rules, who keep creating trouble for them. One can benefit enormously by having trust in them, admiring their struggle for and commitment to have decent lives for themselves. It is very easy to appreciate the architecture of GGS if one keeps in mind this central assumption behind the system.
GGS has been built around one prime loan product – called Basic Loan. In addition, there are two other loan products:
1) the housing loan, and
2) the higher education loan which run parallel to the basic loan.
All borrowers start with a basic loan (in Bangla we call it “Shohoj” or “Easy” loan). Most of the borrowers will continue with this basic loan, cycle after cycle, without any difficulty, and meet all their credit needs in the most satisfactory manner. But life does not proceed smoothly for any human being, let alone the poor women. It is likely that some borrowers will run into serious problems, and face difficulties, somewhere along the cycles of loans, in repaying the basic loan according to its repayment schedule. For them GGS has a very convenient arrangement. In GGS, basic loan comes with an exit option. It offers an alternative route to any borrower who needs it, without making her feel guilty about failing to fulfill the requirement of the basic loan. This alternative route is provided through “Flexible Loan”. In Bangla, we call it “Chukti” i.e. “contract” or “Renegotiated” loan, because the bank, the group, and the borrower have to go through a process of renegotiation to arrive at a new tract with a fresh repayment schedule for a borrower entering into the flexible loan.
Flexible loan is simply a rescheduled basic loan, with its own set of separate rules. I have been describing the basic loan as “Grameen micro-credit highway”. As long as the borrower keeps her schedule, she moves forward uninterrupted with ease and comfort on the micro-credit highway. She can pick up speed according to the rules of the highway. If she drives well she can shift to higher and higher gear. In other words, on the Grameen highway, a borrower can routinely upgrade her loan size at each cycle of loan. This is done on the basis of predetermined rules.
She knows ahead of time how much enhancement in loan size is coming, and can plan her activities accordingly. But if a borrower faces engine trouble (business slow-down or failure, sickness, family problems, accidents, thefts, natural disaster, etc.) and cannot keep up with the highway speed, she has to quit the highway and take an exit on to a detour called a “flexible loan” or “flexi-loan”. This detour will allow her a slower speed consistent with her situation. Now she can reduce the installment size that she can afford to pay, by extending the loan period. Taking a detour, however, does not in any way imply that she has changed the objective of her journey. She still proceeds with the same objective, but only through a winding narrow road for a while. Her immediate goal is to overcome her problems and take as short a detour as possible to get back to the highway quickly. A borrower may be lucky and succeed in getting back to the highway (i.e. the basic loan) quickly, or she may have sustained problems and the best she can do is to move from one detour to the next (i.e. moving from one flexi-loan to the next flexi-loan, working out an easier repayment schedule than the previous one), delaying the re-entry into the highway.
One big disincentive for a borrower to take the flexi-loan detour is that the moment she exits from the basic loan highway, her loan ceiling that she has built over years gets wiped out. When she’ll re-enter the highway after completing her detour, her loan ceiling will have to be re-constructed. This will be nearer to her entry-level loan ceiling than the loan ceiling she enjoyed immediately before going into the flexi-loan.
Flexi-loan is not an independent loan. It is only a temporary detour from the basic loan. A borrower will always make efforts to re-enter the basic loan, because under flexi-loan a borrower can only work within a non-expansionary loop – that is, a borrower can borrow, only the same amount or less, cycle after cycle. Given this unattractive feature of flexi-loan, a borrower would be working hard to get back to the highway to enjoy its facilities. Flexi-loan works as a shoe-horn to get a borrower back to the highway. As soon as the initial amount of flexi-loan is repaid fully, the borrower re-enters the highway. She carries with her all the new loans she took while she was on flexi-loan. It normally takes six months to two years to get back to the highway. That’s not a bad deal for a borrower who would otherwise be almost marked for expulsion from the system. Under GGS the borrower continues to remain a valued client all through the process of going in and out of flexi-loan. But there is a cost factor attached to this. Every time a borrower takes the exit from the highway the bank will be required to make 50 per cent provision against the amount of flexi-loan. This is an additional cost to the bank. The bank staff will try to bring this cost to the minimum by designing the basic loan creatively to best fit the borrower’s credit need and cash flow. GGS offers this option. This was not available in GCS. Because of this feature of GGS, if experience tells us that the risk of a flexi-loan becoming overdue is very small, we can reduce the percentage of provisioning. If the percentage of flexi-loan is rather small, say, less than 5 per cent, of the total outstanding loan, even 50 per cent provisioning will not show up as a big item of expenditure, compared to the usual alternative of making provisions in a system without flexi-loan.
If a borrower cannot stay on the highway (i.e. cannot repay the basic loan installments as per schedule), there is now no need for the bank to trigger actions to mobilise the group and the centre pressure on her to avert an immediate danger for the group. By providing exit route for borrowers GGS has changed the situation dramatically. Now both the bank and the borrowers can be free from all tension – no more chasing of the problem-borrowers or defaulters. Nobody needs to look at anyone with suspicion. Group solidarity is used for forward-looking joint-actions for building things for the future, rather than for the unpleasant task of putting unfriendly pressure on a friend.
If a borrower fails to repay the basic loan and is unwilling to go into the flexi-loan, she becomes a willing defaulter. If a borrower takes the flexi-loan option and tries again and again to repay the money, but still does not succeed, she becomes an unwilling defaulter. Any amount of flexi-loan which does not get paid back within two years it becomes overdue, and 100 per cent provision is made for that amount. Amount that does not get paid back in three years, becomes bad debt, and is written off entirely.
Under GGS loans are written off as a part of financial prudence, but the amount is neither forgotten nor forgiven. GGS treats all written-off loans as recoverable loans. My guess is, under GGS, nearly 90 per cent of written-off loans and interest will ultimately be recovered, because the borrowers will pay them back, in their own interest, as and when opportunity arises. Poor people always need money. Their interest is to keep the door to money open. If this door shuts down for any reason, they’ll do their best to reopen it – if that option is available. GGS provides this option.
There are many exciting features in GGS, but I think removing tension from micro-credit and permanently establishing full dignity to the poor borrowers, are the two most important features of them all. Tension-free microcredit is a great gift of GGS. Now both sides in the micro-credit system, the lender and the borrowers, can enjoy micro-credit, rather than having occasional nightmares created by one for the other.
3.2 General features of Grameen Generalized System
i. Custom-made Credit:
GGS has created a methodology which can provide custom-made credit to a poor borrower. GCS is still a powerful methodology which demonstrated its ability to deliver microcredit in all types of countries, economies, and cultures. It has done its job in making microcredit a serious business. GGS takes off from where GCS left off. GCS is a “single-size-fits-all” kind of methodology. This feature gives GCS the simplicity which was most needed for the implementation of an idea which was totally unknown to the world. Now microcredit has matured. The world is ready to afford a methodology which can provide custom-made microcredit to the poor. GGS allows loans of any duration, such as, 3 months, 6 months, 9 months or any number of months and years. In its reduced form it can be as simple as GCS. GCS was designed to be operated mechanically. There is only limited scope in GCS for the exercise of judgment by the foot-soldiers of microcredit. GGS is different. It allows a staff to be creative. He can design his loan product to make it a best fit for his client in terms of duration, timing of the loan, scheduling the installment, etc. The more a staff becomes a creative artist, the better music he can produce. The institution can identify the levels of creativity among its staff. GGS allows space for the growth of the staff. An initial level user of GGS can use it almost as GCS by restricting it to one-year loans only. As the user gathers experience he can widen the number of options offered within GGS. Besides duration, size of weekly installments can be varied. A borrower can pay more each week during peak business season, and pay less during lean period. In an extreme case, each installment can be of different size. In the other extreme, all installments can be exactly equal, like in GCS. An agreed repayment schedule is signed by both the lender and the borrower, before the loan is disbursed. The borrower is obliged to follow the schedule during the loan period. If she fails, she is required to take the detour and move to flexible loan.
When a borrower moves to flexi-loan she gets a second chance to work out another repayment schedule, one that is more do-able than the previous one. Suppose a borrower starts with a basic loan for a duration of one year. During the loan period she develops some problem in paying the installments according the schedule she had committed to. No problem. She moves to flexi-loan and converts the one-year loan into, say, a three year loan, making the installments very small and affordable. Even if she has extended the loan period to three years, she does not have to wait three years to access fresh loans. In both basic and flexi-loans, a borrower can borrow after each segment of six months is completed as per schedule. She can borrow exactly the amount she has paid back during the six months – it is like having a cash credit limit with a bank. In case of flexi-loans, a borrower can borrow, after the first six months, as much as twice the amount that she has paid back, if she fulfils certain stringent conditions. She can borrow exactly same amount she has paid back in each subsequent six months.
ii. Replacement of Group Fund:
One most visible change everybody notices in GGS is the disappearance of Group Fund. Grameen Bank had to keep on defending Group Fund ever since it was created twenty five years back. Now we let it go. There are no more joint accounts. Each borrower will have three obligatory savings accounts – a) Personal savings account, b) Special savings account, and c) Pension deposit account (obligatory only for borrowers borrowing above Tk 8,000).
GGS continues with five percent obligatory savings, deducted from the loan amount, at the time of disbursement. But it is no longer called a “group tax”. New name is “obligatory savings”. Half of this five percent obligatory savings goes to a personal savings accounts, the remaining half goes to a “special savings accounts”. A borrower can withdraw any amount from her personal savings account any time she desires. There is no restriction on her withdrawal. Weekly saving still continues. This goes to personal savings account. Special savings account is non-withdraw able for the first three years. Then withdrawal is allowed generally once in three years keeping a minimum balance of Tk 2,000 or half the amount in the account, whichever is larger. Under special circumstances the entire amount in the special savings account can be withdrawn. Some money from this account will be used to buy shares of Grameen Bank.
iii. Pension Fund: Leading to Financial Self-Reliance
GGS requires all borrowers with loans above Tk 8,000 (US $ 138) to contribute a minimum of Tk 50 (US $ 0.86) each month in a pension deposit account. After ten years a borrower will receive a guaranteed amount which is almost double the amount she has put in during 120 months. This has become an amazingly attractive feature of GGS for the borrowers. Many are coming forward to save more than Tk 50 each month. There are borrowers who are saving Tk 500 per month. While it has become popular with the borrowers, it is generating a huge cash in-flow for the bank. Each month it is now bringing in over Tk 100 million (US $ 1.75 million) as deposits on account of pension savings. Grameen Bank can now rest assured that it will have enough of its own money to expand its lending operation in future. By the same token, branches will now have enough money to carry out their lending programs with their own deposits. All GB branches can look forward to becoming self-financed. While the institution moves towards financial self-reliance, the borrowers also move to financial self-reliance as old age approaches. They can have monthly income at retirement out of the accumulated savings in the Pension Fund. For a poor woman, it is a very comforting news.
iv. Other Savings
The new pension fund has become an important savings instrument. GGS emphasizes on receiving deposits from both borrowers and non-borrowers. A variety of savings products has been incorporated in the system. Total amount of deposits account for 67 per cent of the total outstanding loans of Grameen Bank in July, 2002, after paying back Tk 3.3 billion (US $ 60 million) of its loans to the central bank, local commercial banks and the foreign lenders, which fell due during the past 18 months.
v. Loan Loss Provisioning and Write-off Policy
Grameen Bank has been subjected to sharp criticism for its provisioning and write-off policies under GCS. We always defended ourselves that our policies are more generous than the standard set by the central bank of the country.
Also we find both policies very satisfactory for the financial prudence required in our business.
GGS has made these policies still more generous. “Overdue” is defined in a very sharp manner. If a borrower fails to repay her installment for ten consecutive weeks, or if she fails to repay the total amount she is required to pay within a six month period, and she does not move into flexible loan, she becomes a defaulter. If she becomes a defaulter, 100 per cent provisioning must be made for the underpaid principal and interest. Exactly one year later, the amount must be written off. Writing off will be done on a monthly basis, rather than at the time of annual account closing. If a borrower is on flexible loan, generally the same policy will hold. Fifty per cent provision must be made for the total balance amount of flexible loan and accrued interest on the annual closing date, even if the repayment rate of flexible loan is 100 per cent for the whole bank.
vi. Loan Insurance
Borrowers always worry what will happen to their debt if they die. Will the family members pay off their debt? They believe that if their debt remains underpaid after their death, their soul cannot rest in peace. Inclusion of loan insurance program in GGS has made them very happy. This has become another popular feature of GGS.
The insurance program is very simple. Once a year, on the last day of the year, the borrower is required to put in a small amount of money in a loan insurance savings account. It is calculated on the basis of the outstanding loan and interest of the borrower on that day. She deposits 2.5 per cent of the outstanding amount. If a borrower dies any time during the next year, her entire outstanding amount is paid up by the insurance fund which is created by the interest income of the loan insurance savings account. In addition, her family receives back the amount she saved in the loan insurance savings account. Borrowers find it unbelievably generous. Everybody loves it.
If the outstanding amount remains the same on two successive year-ends, the borrower does not have to put in any extra money in the loan insurance savings account in the second year. Only if the balance is more she has to put in money for the extra amount. Even if the outstanding amount happens to be several times more at the time of her death than what it was on the preceding year-end, under the rules of this program, the entire amount will still be paid off from the insurance fund.
The borrowers have good reasons to be happy.
vii. Loan Ceiling Grows with the Borrower
GCS operated with a loan ceiling for the whole branch. No borrower can take a loan above the ceiling fixed for the branch. On top of it there was a ceiling for the whole zone. Branch ceilings were below or equal to the zone ceiling. GGS has replaced it with a up- gradable able loan ceiling for each borrower. Under GGS there is no ceiling for the zone, and no ceiling for the branch. For basic loan, the ceiling is fixed each time a borrower requests a new loan. It is calculated in two different ways. Higher amount between the two is accepted as the ceiling. Under the first method the ceiling is worked out on the basis of performance (regularity in repayment, attendance in weekly meetings etc) of the borrower, her group, and centre. Under the second method the ceiling is fixed on the basis of the total amount of the savings (excluding personal savings). Ceiling is equivalent to 150% of the total savings. If a borrower has a total saving of Tk 10,000, her loan ceiling will be Tk 15,000. There are many borrowers who have accumulated quite a good amount of saving in their various saving accounts. They can now take large loans too. Under the first method ceiling can go up or down depending on the performance. For example, loan ceiling diminishes by Tk 500 for each day of borrower’s absence in the weekly centre meeting. If the repayment record of the entire centre is perfect, her loan ceiling goes up by a fixed percentage. A borrower can enhance her loan size by increasing her savings, or by making sure she, her group, and the centre do all the right things.
In flexi-loan, a borrower has no opportunity to enhance her loan size. She can borrow only what she has paid back, except after the first six months, when she can borrow twice the amount she has paid back if she fulfills some stringent conditions.
viii. Gold Member!
Then there is the gold membership ! It is a very respectable position to achieve. A borrower who had maintained 100 per cent repayment record (never got off the highway!) for seven consecutive years, is given the status of a gold member. A gold member goes into a faster track of loan enhancement, besides getting special honours and privileges.
ix. Destitute Members
To encourage destitute members to join Grameen Bank and make them feel comfortable within Grameen Bank, GGS relaxes all the basic rules of GB. A destitute person does not have to belong to a group, no saving is necessary, no weekly repayment is necessary, her loan terms are decided by her, in consultation with her mentor. Centres will be encouraged to list destitute families in their respective areas, groups will be encouraged to take destitute members “under their wings” and mentor them to help them overcome their fears and inhibitions, give them required business skill, and help them take up income generating activities. Bringing a destitute woman to a level where she can become a regular member of a group will be considered as a great achievement of a group. Groups and centres that accomplish this, will be given special awards, privileges, and honours. In addition to loans, GB will also offer them “venture capital” to partner with them in their micro ventures.
x. Building Capacity to Stay Out of Poverty
Studies show that Grameen borrowers are steadily moving out of poverty. According to one study, 5 per cent of the borrowers move out of poverty each year (Shahidur R. Khandker, 1998). GGS extends its attention to the children of Grameen families as a part of Grameen strategy to build capacity within families to keep them out of poverty once they have moved out. No slipping back.
Grameen Bank has introduced higher education loans for all students from Grameen families who can enter into the higher educational institutions (medical schools, engineering school, universities, professional schools, etc). Loans are given to the students directly, without going through their parents. Students are made responsible to repay the loans when they start earning.
Scholarships are awarded every year to the school students from Grameen families, on a competitive basis. Half the numbers of scholarships are reserved for girl students. Remaining 50 per cent is open for both boys and girls. Each year Grameen Bank gives out 3,704 scholarships, and makes sure each branch can provide at least one scholarship. Gradually the number of scholarships will be increased as more and more students are available to compete for these scholarships.
4. Grameen Bank the first departure from Conventional Banks.
Conventional banks are owned by the rich, generally men. Grameen Bank is owned by poor women. The differences between Grameen Bank and conventional banks are given bellow
- Overarching objective of the conventional banks is to maximize profit. Grameen Bank’s objective is to bring financial services to the poor, particularly women and the poorest ? to help them fight poverty, stay profitable and financially sound. It is a composite objective, coming out of social and economic visions.
- Conventional banks focus on men, Grameen gives high priority to women. 96 per cent of Grameen Bank’s borrowers are women. Grameen Bank works to raise the status of poor women in their families by giving them ownership of assets. It makes sure that the ownership of the houses built with ?Grameen Bank loans remain with the borrowers, i.e., the women.
- Grameen Bank branches are located in the rural areas, unlike the branches of conventional banks which try to locate themselves as close as possible to the business districts and urban centers’. First principle of Grameen banking is that the clients should not go to the bank, it is the bank which should go to the people instead. Grameen Bank’s 13,492 staff meet 4.48 million borrowers at their door?step in 51,687 villages spread out all over Bangladesh, every week, and deliver bank’s service. Repayment of Grameen loans is also made very easy by splitting the loan amount in tiny weekly installment. Way means a lot of going business this work for the bank, but it is a lot convenient for the borrowers.
· There is no legal instrument between the lender and the borrower in the Grameen methodology. Stipulation that a client will be taken to the court of law to There is no recover the loan, unlike in the conventional system. There is no Provision in the methodology to enforce a contract by any external intervention.
- Conventional banks go into punishment mode when a borrower is taking, more time in repaying the loan than it was agreed upon. They call these borrowers “defaulters. Grameen methodology allows such borrowers to reschedule their loans without making them feel that they have done anything wrong (indeed, they have not done anything wrong.) When a client gets into difficulty, conventional banks get worried about their money, and make all efforts to recover the money, including taking over the collateral. Grameen system, in such cases, works extra hard to assist the borrower in difficulty, and makes all efforts o help her regain her strength and overcome her difficulties.
· In conventional banks charging interest does not stop unless specific exception is made to a particular defaulted loan. Interest charged on a loan can be multiple of the principal, depending on the length of the loan period. In Grameen Bank, under no circumstances’ total interest on a loan can exceed the amount of the loan, no matter how long the loan remains underpaid. No interest is charged after the interest amount equals the principal.
- Conventional banks do not pay attention to what happens to the borrowers’ families as results of taking loans from the banks. Grameen system pays a lot of attention to monitoring the education of the children. Grameen Bank routinely gives them scholarships and student loans), housing, sanitation, access to clean drinking water, and their coping capacity for meeting disasters and emergency situations. Grameen system helps the borrowers to build their own pension funds, and other types of savings.
Interest on conventional bank loans are generally compounded quarterly, while all interests are simple interests in Grameen Bank.
· In case of death of a borrower, Grameen system does not require the family, of the deceased to pay back the loan. There is a built?in insurance programme which pays off the entire outstanding amount with interest. No liability is transferred to the family.
- In Grameen Bank even a beggar gets special attention. A beggar comes under a campaign from Grameen Bank which is designed to persuade him/her to join Grameen programme. The bank explains to her how she can carry some ‘merchandise’ with her4hen she goes out to beg from door to door and earn money, or she can display some merchandise by her side when she is begging in a fixed place. Grameen’s idea is to graduate her to a dignified livelihood rather than continue with begging Such a programme would not be a part of a conventional bank’s work.
· Grameen system encourages the borrowers to adopt some goals in social, educational and health areas. These are knows as “Sixteen Decisions” (no dowry, education for children, sanitary latrine, planting trees, eating vegetables to combat night?blindness among children, arranging clean drinking water, etc.). Conventional banks do not see this as their business.
- In Grameen, we see the poor people as human “bonsai”. If a healthy seed of a giant tree is planted in a flower?pot, the tree that will grow will be a miniature version of the giant tree. It is not because of any fault in the seed, because there is no fault in the seed. It is only because the seed has been denied of the real base to grow on. People are poor because society has denied them the real social and economic base to grow on. They are given only the “flower?pots” to grow on. Grameen’s effort is to move them from the “flower-pot” to the real soil of the society.
· If we can succeed in doing that there will be no human “bonsai” in the world. We’ll have a poverty free world.
Grameen Bank at a Glance
1.0 Owned by the Poor
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 per cent of the total equity of the bank. Remaining 6 percent is owned by the government.
2.0 No Collateral, No Legal Instrument,
No Group?Guarantee or Joint Liability
Grameen Bank does not require any collateral against its micro?loans. Since the bank does not wish to take any borrower to the court of law in case of no repayment, it does not require the borrowers to sign any legal entrustment.
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 centre oversee that everyone behaves in a responsible way and none gets into repayment problem. There is no form of joint liability, i.e. group members are not responsible to pay on behalf of a defaulting member.
3.0 96 per cent Women
Total number of borrowers is 5.44 million, 96 per cent of them are women.
Grameen Bank has 17,000 branches. It works in 58,806 villages. Total staff is 15,116.
|5.0 Over Tk 252 billion Disbursed|
|Total amount of loan disbursed by Grameen Bank, since inception, is Tk 252.27 billion (US$ 5.16 billion). Out of this, Tk 225.31 billion (US$ 4.59 billion) has been repaid. Current amount of outstanding loans stands at TK 26.96 billion (US$ 410.90 million). During the past 12 months (from December 2004 to November 2005) Grameen Bank disbursed Tk. 37.57 billion (US $ 590.76 million). Monthly average loan disbursement over the past 12 month was Tk 3.13 billion (US $ 49.23 million).
Projected disbursement for 2005 is Tk 33.00 billion (US $ 547 million), i.e. monthly disbursement of Tk 2.75 billion (US $ 45.58 million). End of the year outstanding loan is projected to be at Tk 27.0 billion (US $ 448 million).
6.0 Recovery Rate 99 percent
Loan recovery rate is 98.91 per cent.
7.0 100 per cent Loans Financed From Bank’s Deposits
Grameen Bank finances 100 per cent of its outstanding loan from its deposits. Over 66 per cent of its deposits come from bank’s own borrowers. Deposits amount to 104 per cent of the outstanding loans. If we combine both deposits and own resources it becomes 131 per cent of loans outstanding.
8.0 No Donor Money, No Loans
In 1995, GB decided not to receive any more donor funds. Since then, it has not requested any fresh funds from donors. Last installment of donor fund, 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 programme and repay its existing loans.
9.0 Earns Profit
Ever since Grameen Bank came into being, it has made 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. All these reports are available on CD, and some on our web?site: www.grameen.com.
10.0 Revenue and Expenditure
|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 per cent). 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 per cent). Grameen Bank made a profit of Tk 422 million (US $ 7.16 million) in 2004. Entire profit is transferred to a Rehabilitation Fund created to cope with disaster situations. This is done in fulfillment of a condition imposed by the government for exempting Grameen Bank from paying corporate income tax.|
11.0 Low Interest Rates
Government of Bangladesh has fixed interest rate for government?run microcredit programmes at 11 per cent at flat rate. It amounts to about 22 per cent at declining basis. Grameen Bank’s interest rate is lower than 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 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 installments, 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% flat rate.
12.0 Deposit Rates
Grameen Bank offers very attractive rates for deposits. Minimum interest offered is 8.5 per cent. Maximum rate is 12 per cent.
13.0 Beggars As Members
Begging is the last resort for survival for a poor person, unless he/she turns into crime or other forms of illegal activities. Among the beggars there are disabled, blind, and retarded people, as well as old people with ill health. Grameen Bank has taken up a special programme, called Struggling Members Programme, to reach out to the beggars. About 42,000 beggars have already joined the programme. Total amount disbursed stands at Tk. 25.42 million. Of that amount of Tk. 10.54 million has already been paid off.
14.0 Housing For the Poor
Grameen Bank introduced housing loan in 1984. It became a very attractive programme for the borrowers. This programme was awarded Aga Khan International Award for Architecture in 1989. Maximum amount given for housing loan is Tk 15,000 (US $ 249) to be repaid over a period of 5 years in weekly installments. Interest rate is 8 per cent. 625,716 houses have been constructed with the housing loans averaging Tk 13,296 (US $ 203). A total amount of Tk 8.32 billion (US $ 127 million) has been disbursed for housing loans. During the past 12 months (from December 2004 to November 2005) 22,029 houses have been built with housing loans amounting to Tk 204.72 million (US $ 3.25 million).
15.0 Micro?enterprise Loans
|Many borrowers are moving ahead in businesses faster than others for many favourable reasons, such as, proximity to the market, presence of experienced male members in the family, etc. Grameen Bank provides larger loans, called micro-enterprise loans, for these fast moving members. There is no restriction on the loan size. So far 631,139 members took micro-enterprise loans. A total of Tk 13.56 billion (US $ 220.77 million) has been disbursed under this category of loans. Average loan size is Tk 21,492 (US $ 328), maximum loan taken so far is Tk 1.2 million (US $ 19,897). This was used in purchasing a truck which is operated by the husband of the borrower. Power-tiller, irrigation pump, transport vehicle, and river-craft for transportation and fishing are popular items for micro-enterprise loans.|
|Scholarships are given, every year, to the children of Grameen members, with priority on girl children, to encourage them to get better grades in schools. Each year, about 8,500 children, at various levels of school education, receive these scholarships.|
|Students who succeed in reaching the tertiary level of education are given higher education loans, covering tuition, maintenance, and other school expenses. By November 2005, 8,325 students received higher education loans, of them 7,712 students are studying at various universities; 97 are studying in medical schools, 204 are studying to become engineers, 312 are studying in other professional institutions.|
18.0 Grameen Network
Grameen Bank does not own any share of the following companies in the Grameen network. Nor has it given any loan or received any loan from any of these companies. They are all independent companies, registered under Companies Act of Bangladesh, with It obligation to pay all taxes and duties, just like any other company in the country.
1) Grameen Phone Ltd.
2) Grameen Telecom
3) Grameen Communications
4) Grameen Cyber net Ltd.
5) Grameen Software Ltd.
6) Grameen IT Park
7) Grameen Information Highways Ltd.
8) Grameen Star Education Ltd.
9) Grameen Bitek Ltd.
10) Grameen Uddog (Enterprise)
11) Grameen Shamogree (Products);
12) Grameen Knitwear Ltd.
13) Gonoshasthaya Grameen Textile Mills Ltd.
14) Grameen Shikkha,(Fducation)
15) Grameen Capital Management Ltd.
16) Grameen Byabosa Bikash (Business Promotion
17) Grameen Trust
19.0 Grameen Bank?Created Companies
The following, companies in the Grameen network were ‘created by Grameen Bank, as separate legal entities, to spin off some projects’ * within Grameen Bank funded by donors. Donor funds transferred to Grameen Fund were given, as a loan, from Grameen Bank. These companies have the following loan liability to Grameen Bank: Grameen Fund: Tk 373.2 million (US $ 6.38 million) Grameen Krishi Foundation : Tk 19 million (US $ .33 million) Grameen Motsho (Fisher Jes) Foundation : Tk 15 million (US $.26 million) Grameen Bank provided guarantees in favour of the following organizations while they were receiving loans from the government and the financial organizations. These guarantees are still in effect.
Grameen Kalyan (well?being) is a spin off company created by Grameen Bank. Grameen Bank created an internal fund called Social Advancement Fund (SAF) by imputing interest on all the grant money it received from various donors. SAF has been converted into a separate company to carry out its mandate to undertake social advance activities among the Grameen borrowers, such as, education, health, technology
20.0 Loans Paid Off At Death
Under Loan Insurance Programme, in case of death of a borrower, all outstanding loans are paid off from the insurance fund. Insurance fund is created by the interest generated, through a savings account created by an annual deposit of the borrowers. Borrowers are required to put amount equal to 3.0 per cent of the loan outstanding on December 31, in a designated savings account. If her present outstanding amount does not exceed the amount outstanding in the previous year, she does not have to add any more money into this account. If it exceeds, then she pays 3.0 per cent of the