The grameen bank


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The grameen bank

  1. 1. The Grameen Bank (Bengali: ) is a microfinance organization and communitydevelopment bank started in Bangladesh that makes small loans (known as microcredit or"grameencredit"[4]) to the impoverished without requiring collateral. The name Grameen isderived from the word gram which means "rural" or "village" in the Bengali language.[5]The system of this bank is based on the idea that the poor have skills that are under-utilized.A group-based credit approach is applied which utilizes the peer-pressure within the group toensure the borrowers follow through and use caution in conducting their financial affairs withstrict discipline, ensuring repayment eventually and allowing the borrowers to develop goodcredit standing. The bank also accepts deposits, provides other services, and runs severaldevelopment-oriented businesses including fabric, telephone and energy companies. Anotherdistinctive feature of the banks credit program is that the overwhelming majority (98%) of itsborrowers are women.The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad Yunus,a Fulbright scholar at Vanderbilt University and Professor at University of Chittagong,launched a research project to examine the possibility of designing a credit delivery system toprovide banking services targeted to the rural poor. In October 1983, the Grameen BankProject was transformed into an independent bank by government legislation. Theorganization and its founder, Muhammad Yunus, were jointly awarded the Nobel Peace Prizein 2006;[6] the organizations Low-cost Housing Program won a World Habitat Award in1998.Contents[hide] 1 History 2 Application of microcredit o 2.1 Village Phone Program o 2.2 Struggling members program 3 Operational statistics 4 Nobel Peace Prize 5 Related ventures 6 Criticism 7 See also 8 References 9 Further reading 10 External links[edit] HistoryMuhammad Yunus, the banks founder, earned a doctorate in economics from VanderbiltUniversity in the United States. He was inspired during the terrible Bangladesh famine of1974 to make a small loan of US$27.00 to a group of 42 families so that they could createsmall items for sale without the burdens of predatory lending.[7] Yunus believed that making
  2. 2. such loans available to a wide population would have a positive impact on the rampant ruralpoverty in Bangladesh.Nobel Laureate Muhammad Yunus, the banks founderThe Grameen Bank (literally, "Bank of the Villages", in Bangla) is the outgrowth of Yunusideas. The bank began as a research project by Yunus and the Rural Economics Project atBangladeshs University of Chittagong to test his method for providing credit and bankingservices to the rural poor. In 1976, the village of Jobra and other villages surrounding theUniversity of Chittagong became the first areas eligible for service from Grameen Bank.[8]The Bank was immensely successful and the project, with support from the centralBangladesh Bank, was introduced in 1979 to the Tangail District (to the north of the capital,Dhaka).[8] The banks success continued and it soon spread to various other districts ofBangladesh. By a Bangladeshi government ordinance on October 2, 1983, the project wastransformed into an independent bank.[8] Bankers Ron Grzywinski and Mary Houghton ofShoreBank, a community development bank in Chicago, helped Yunus with the officialincorporation of the bank under a grant from the Ford Foundation.[9] The banks repaymentrate was hit following the 1998 flood of Bangladesh before recovering again in subsequentyears. By the beginning of 2005, the bank had loaned over USD 4.7 billion[10] and by the endof 2008, USD 7.6 billion[11] to the poor.The Bank today continues to expand across the nation and still provides small loans to therural poor. By 2006, Grameen Bank branches numbered over 2,100.[12] Its success hasinspired similar projects in more than 40 countries around the world and has made WorldBank to take an initiative to finance Grameen-type schemes.[13]The bank gets its funding from different sources, and the main contributors have shifted overtime. In the initial years, donor agencies used to provide the bulk of capital at very cheaprates. In the mid-1990s, the bank started to get most of its funding from the central bank ofBangladesh. More recently, Grameen has started bond sales as a source of finance. The bondsare implicitly subsidised as they are guaranteed by the Government of Bangladesh and stillthey are sold above the bank rate.[14][edit] Application of microcredit
  3. 3. Grameen believes that charity is not an answer to poverty. It only helps poverty to continueas it creates dependency and takes away individuals initiative to break through the cycle ofpoverty, whereas loans offer people the opportunity to take initiatives in business oragriculture, providing earnings and enabling them to pay off the debt.Grameen regards all human beings, including the poorest, as endowed with endless potential,and that unleashing the creativity in each individual should be the answer to poverty.[15]Grameen has offered credit to many poor, women, illiterate and unemployed people. Itcreated access to credit on reasonable terms such as the group lending system and weekly-installment payment with reasonably long term of loans, enabling the poor to build on theirexisting skill to earn a better income in each cycle of loans.[15]Grameen’s objective has been to promote financial independence among the poor. Yunusencourages all borrowers to eventually become savers so that their local capital can beconverted into new loans. Since 1995, Grameen has funded 90 percent of its loans withinterest income and deposits collected, hence aligning the interests of its new borrowers anddepositor-shareholders. Hence, Grameen distinguishes itself from such institutions byconverting deposits made in villages into loans for the more needy in the villages (Yunus andJolis 1998).[16]It targets the poorest of the poor, with a particular emphasis on women, who receives 95percent of the bank’s loans. Women represent a suitable clientele because, given that theyhave less access to alternatives, such as traditional credit lines and incomes, they are morelikely to be credit constrained and they have an inequitable share of power in householddecision making. Lending to women also generates considerable secondary effects, includingempowerment of a marginalized segment of society (Yunus and Jolis 1998). This isespecially crucial as Yunus claims that in 2004, women still have difficulty getting loans as itrepresented less than 1 percent of borrowers from commercial banks (Yunus 2004).[16] Theinterest rates charged by microfinance institutes including Grameen Bank is high compared tothat of traditional banks; Grameens interest (reducing balance basis) on its main creditproduct is about 20%.[17]Down the years, Grameen has also diversified the types of loans it makes. Among its newinterests, hand-powered wells and loans to support the enterprises of Grameen membersimmediate relatives. There were also seasonal agricultural loans and lease-to-own agreementsfor equipment and livestock. The bank also set a new goal for itself: making each of itsbranches free of poverty, as defined by benchmarks such as having adequate food and accessto clean water and latrines. 16 Decisions[18] 1. We shall follow and advance the four principles of Grameen Bank: Discipline, Unity, Courage and Hard work – in all walks of our lives. 2. Prosperity we shall bring to our families. 3. We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest. 4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus. 5. During the plantation seasons, we shall plant as many seedlings as possible. 6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health. 7. We shall educate our children and ensure that they can earn to pay for their education. 8. We shall always keep our children and the environment clean. 9. We shall build and use pit-latrines.
  4. 4. 10. We shall drink water from tubewells. If it is not available, we shall boil water or use alum. 11. We shall not take any dowry at our sons weddings, neither shall we give any dowry at our daughters wedding. We shall keep our centre free from the curse of dowry. We shall not practice child marriage. 12. We shall not inflict any injustice on anyone, neither shall we allow anyone to do so. 13. We shall collectively undertake bigger investments for higher incomes. 14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her. 15. If we come to know of any breach of discipline in any centre, we shall all go there and help restore discipline. 16. We shall take part in all social activities collectively.Grameen Bank Building in DhakaGrameen Bank is best known for its system of solidarity lending.[13] The Bank alsoincorporates a set of values embodied in Bangladesh by the Sixteen Decisions.[19] At everybranch of Grameen Bank the borrowers recite these Decisions and vow to follow them. As aresult of the Sixteen Decisions, Grameen borrowers have been encouraged to adopt positivesocial habits. One such habit includes educating children by sending them to school. Sincethe Grameen Bank embraced the Sixteen Decisions, almost all Grameen borrowers have theirschool-age children enrolled in regular classes. This in turn helps bring about social change,and educate the next generation.[20]Solidarity lending is a cornerstone of microcredit and the system is now at work in over 43countries. Although each borrower must belong to a five-member group, the group is notrequired to give any guarantee for a loan to its member. Repayment responsibility solely restson the individual borrower, while the group and the centre oversee that everyone behaves in aresponsible way and none gets into a repayment problem. There is no form of joint liability,i.e. group members are not obliged to pay on behalf of a defaulting member. However, inpractice the group members often contribute the defaulted amount with an intention ofcollecting the money from the defaulted member at a later time. Such behavior is facilitatedby Grameens policy of not extending any further credit to a group in which a memberdefaults.[21]There is no legal instrument (no written contract) between Grameen Bank and its borrowers,the system works based on trust.[22] To supplement the lending, Grameen Bank also requiresthe borrowing members to save very small amounts regularly in a number of funds likeemergency fund, group fund etc. These savings help serve as an insurance againstcontingencies.[13]
  5. 5. In a country in which few women may take out loans from large commercial banks, Grameenhas focused on women borrowers as 97% of its members are women.[23] While a World Bankstudy has concluded that womens access to microcredit empowers them through greateraccess to resources and control over decision making, some other economists argue that therelationship between microcredit and women-empowerment is less straightforward.[24] Inother areas, Grameens track record has also been notable, with very high payback rates—over 98 percent. However, according to the Wall Street Journal, a fifth of the banks loanswere more than a year overdue in 2001.[25] Grameen claims that more than half of itsborrowers in Bangladesh (close to 50 million) have risen out of acute poverty thanks to theirloan, as measured by such standards as having all children of school age in school, allhousehold members eating three meals a day, a sanitary toilet, a rainproof house, cleandrinking water and the ability to repay a 300 taka-a-week (around 4 USD) loan.[26][edit] Village Phone ProgramAmong many different applications of microcredit by the bank, one is the Village Phoneprogram, through which women entrepreneurs can start a business providing wirelesspayphone service in rural areas of Bangladesh. This program earned the bank the 2004Petersburg Prize worth of EUR 100,000/-, for its contribution of Technology toDevelopment.[27] In the press release announcing the prize, the Development GatewayFoundation noted that through this program:...Grameen has created a new class of women entrepreneurs who have raised themselves frompoverty. Moreover, it has improved the livelihoods of farmers and others who are providedaccess to critical market information and lifeline communications previously unattainable insome 28,000 villages of Bangladesh. More than 55,000 phones are currently in operation,with more than 80 million people benefiting from access to market information, news fromrelatives, and more.[27][edit] Struggling members programIn 2003, Grameen Bank started a new program, different from its traditional group-basedlending, exclusively targeted to the beggars in Bangladesh.[28] This program is focused ondistributing small loans to beggars. The existing rules of banking are not applied, the loansare completely interest-free, the repayment period can be arbitrarily long, for example, abeggar taking a small loan of around 100 taka (about US $1.50) can pay only 2.00 taka (about3.4 US cents) per week and furthermore the borrower is covered under life insurance free ofcost.[29][edit] Operational statisticsOne unusual feature of the Grameen Bank is that it is owned by the poor borrowers of thebank, most of whom are women. Of the total equity of the bank, the borrowers own 94%, andthe remaining 6% is owned by the Government of Bangladesh.[23]The bank has grown significantly between 2003-2007. As of October 2007, the totalborrowers of the bank number 7.34 million, and 97% of those are women.[23] The number ofborrowers has more than doubled since 2003, when the bank had only 3.12 millionmembers.[30] Similar growth can be observed in the number of villages covered. As of
  6. 6. October 2007, the Bank has a staff of over 24,703 employees and 2,468 branches covering80,257 villages,[23] up from 43,681 villages covered in 2003.[30]Since its inception, the bank has distributed Tk 684.13 billion (USD 11.35 billion) in loansout of which Tk 610.81 billion (USD 10.11 billion) has been repaid.[31] The bank claims aloan recovery rate of 96.67%,[31] up from the 95% recovery rate claimed in 1998.[31] DavidRoodman has critiqued the accounting practices that Grameen used to determine this rate.[25][edit] Nobel Peace PrizeGrameen Bank received several prestigious awards including the highest civilian award inBangladesh, the Independence Day Award, in 1994. However, the greatest recognition of thebanks achievements came on October 13, 2006, when the Nobel Committee awardedGrameen Bank and its founder, Muhammad Yunus, the 2006 Nobel Peace Prize "for theirefforts to create economic and social development from below."[32] The award announcementalso mentions that:From modest beginnings three decades ago, Yunus has, first and foremost through GrameenBank, developed micro-credit into an ever more important instrument in the struggle againstpoverty. Grameen Bank has been a source of ideas and models for the many institutions inthe field of micro-credit that have sprung up around the world.[32]On December 10, 2006, Mosammat Taslima Begum, who used her first 16-euro (20-dollar)loan from the bank in 1992 to buy a goat and subsequently became a successful entrepreneurand one of the elected board members of the bank, accepted the Nobel Prize on behalf ofGrameen Banks investors and borrowers at the prize awarding ceremony held at Oslo CityHall.[33]Grameen Bank is the only business corporation to have won a Nobel Prize. In a speech givenat the presentation ceremony, Professor Ole Danbolt Mjøs, Chairman of the NorwegianNobel Committee, mentioned that, by giving the prize to Grameen Bank and MuhammadYunus, the Norwegian Nobel Committee wished to focus attention on dialogue with theMuslim world, on the womens perspective, and on the fight against poverty.[34]The Nobel prize announcement was celebrated with a lot of enthusiasm in Bangladesh.[35]Some critics asserted that the award affirms neoliberalism.[24][edit] Related venturesMain article: Grameen family of organizationsThe Grameen Bank has grown into over two dozen enterprises represented by the GrameenFamily of Enterprises. These organizations include Grameen Trust, Grameen Fund, GrameenCommunications, Grameen Shakti (Grameen Energy), Grameen Telecom, Grameen Shikkha(Grameen Education), Grameen Motsho (Grameen Fisheries), Grameen Baybosa Bikash(Grameen Business Development), Grameen Phone, Grameen Software Limited, GrameenCyberNet Limited, Grameen Knitwear Limited, and Grameen Uddog (owner of the brandGrameen Check).[36]
  7. 7. On July 11, 2005 the Grameen Mutual Fund One (GMFO), approved by the Securities andExchange Commission of Bangladesh, was listed as an Initial Public Offering. One of thefirst mutual funds of its kind, GMFO will allow the over four million Grameen bankmembers, as well as non-members, to buy into Bangladeshs capital markets. The Bank andits constituents are together worth over USD 7.4 billion.[37]The work of Grameen Bank in Bangladesh Inspired the creation of the Grameen Foundation,which aims to share the Grameen philosophy and accelerate the impact of microfinance onthe world’s poorest people.[38] Grameen Foundation, which has an A-rating from [CharityWatch],[39] not only provides microloans in the USA itself (the only developed country wherethis is done), but also supports microfinance institutions worldwide with loan guarantees,training, and technology transfer.[40] As of 2008, Grameen Foundation supports microfinanceinstitutions in the following regions:[41] Asia-Pacific: Bangladesh, China, East Timor, Indonesia, India, Lebanon, Pakistan, Philippines, Saudi Arabia, Yemen Americas: Bolivia, Dominican Republic, El Salvador, Haiti, Honduras, Mexico, Peru, USA Africa: Cameroon, Egypt, Ethiopia, Ghana, Morocco, Nigeria, Rwanda, Tunisia, UgandaPremiering at the 2010 Sundance Film Festival, the film To Catch a Dollar documents theprocess of establishing Grameen America programs in Queens, New York in 2008. Thedocumentary is expected to open in September 2010.[edit] CriticismAnalysts have suggested that microcredit can bring communities into debt from which theycannot escape,[42][43][44][45] citing situations where microloans from the Grameen Bank werelinked to exploitation and pressures on poor families to sell their belongings, leading inextreme cases to humiliation and ultimately suicides.[46]The Mises Institutes Jeffrey Tucker suggests that microcredit banks depend on subsidies inorder to operate, thus essentially becoming another example of welfare,[47] whereas Yunusbelieves that he is working against the subsidized economy, giving borrowers the opportunityto create businesses. Some of its criticism is based on interpretations of the Grameens 16decisions, seen as indoctrination, whithout further analysing what they mean in the context ofpoor, illiterate peasants.Maulana Ibrahim, a reactionary imam in Bangladesh, spoke out against the Grameen Bank in1993 for fostering "un-Islamic ways", alleging (referring to the lenders pledge) that womenwere taking a vow not to obey their husbands and not to live in poverty anymore.[48]Grameen bank has been accused of tax evasion in a Norwegian Documentary: "Caught inMicro debt" these accusations have recently been repeated in a Spanish documentary:Microcredit. The accusation is based on the unauthorised transfer of approximately 100million USD donated by The Norwegian Agency for Development Cooperation (NORAD)from one Grameen entity to another Grameen Kalyan in 1996, before the expiry of theGrameen banks tax exemption. Muhammad Yunus denies that this is tax evasion: There isno question of tax evasion here. The Government has provided organizations with
  8. 8. opportunities; we have made use of these opportunities with aim of benefitting ourshareholders who are the rural poor women of Bangladesh. The matter has since beenresolved.David Roodman[49] and Jonathan Morduch[50] question the statistical validity of studies ofmicrocredits effects on poverty, pointing to the complexity of the situations involved.[51]