A Review of
The Poor Always Pay Back
        The Grameen II Story

                     Submitted to


I.         Introduction ..........................................................................................
I.     Introduction

      The Poor Always Pay Back is the story of how Grameen bank has undergone a profound
      and r...
elect group and centre leaders board members of the bank through regular

       These features en...
borrowing from microlenders in Tangail borrow from more than one. This of course led
      to a lot of indebtedness and sl...
been primarily disbursed in conjunction with the palli phone project – where a
 borrower is identified to set up and run a...
years withdrawals may be made, subject to a minimum balance of 2,000 taka (about

      A third savings instru...
Although there were initial signs of reluctance, grumblings, negative jokes, and
        expressions of frustrations from ...
The viability of Grameen is essential and important for its external role that it plays as
the torchbearer of microcredit ...

Dowla, Asif and Barua, Dipal (2006), “The Poor Always Pay Back: The Grameen II Story”,
Kumarian Press Inc.

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A Review Of The Poor Always Pay Back

  1. 1. A Review of The Poor Always Pay Back The Grameen II Story Submitted to Prof. M S Sriram In partial fulfilment of the requirements of the course Management of Microfinance On 09th August 2009 By Shuvabrata Nandi
  2. 2. Contents I. Introduction .......................................................................................................................... 1 II. Classical Grameen: A Snapshot ...................................................................................... 1 III. Need for Change .................................................................................................................. 2 IV. Evolution of Loans under Grameen-II .......................................................................... 3 V. The Savings Revolution .................................................................................................... 4 VI. The Transition Process ..................................................................................................... 5 VII. Inclusion of the Poorest of the Poor ............................................................................. 6 VIII. Concluding Remarks .......................................................................................................... 6 References ......................................................................................................................................... 8
  3. 3. I. Introduction The Poor Always Pay Back is the story of how Grameen bank has undergone a profound and radical change in the celebrated Grameen methodology (touted as classical Grameen in microfinance circles) to adapt to the changing needs of its borrowers and the world around them without changing the basic paradigms on which the rock-solid foundation of Grameen is built – that the poor are creditworthy. Grameen Bank II is addressing the frontier issues in microfinance: open access savings, flexible loan products, self reliance and absence of donor dependency for funds, and product development to cater to the needs of the retirees (Grameen Pension Scheme) and their adult children (Higher Education Loans). And this book is about how this sweeping change came about and how Grameen was reborn. But of course, this book looks at the changes at Grameen through the internal lenses, since both the authors are insiders to the Grameen bank system, and hence, it renders a somewhat partial treatment of issues which are presented in a manner to uphold the Grameen flag. Through this review, I would try and uncover issues that forced Grameen to change and whether that change is for the better. Hence, in a way, the scope of this review would be to critically evaluate Grameen and Grameen II in the context set in the book The Poor Always Pay Back. II. Classical Grameen: A Snapshot As we all are aware of the Grameen movement started from the village of Jobra near University of Chittagong, where Prof Yunus was the head of the department of economics, back in 1979. Although the review deals with Grameen II, we need to understand the fundamental features of the Grameen movement first. - Microcredit targeted at poor women, identified through land holding - Offered to create self-employment through income generating activities, that have very low gestation period - Based on trust, sometimes criticised as coercive trust or social collateral - Only borrowers can be members and all members must be borrowers - Grameen I had obligatory savings programs for the borrowers (5% of loan amount which can’t be taken out before a borrower spends 10 years in the system) - All loans are essentially group loans - Groups of 5 women need to be formed to receive loans; 8-10 groups form a Grameen centre and 8-10 centres form a branch office of the bank. Borrowers [1]
  4. 4. elect group and centre leaders board members of the bank through regular elections These features enabled Grameen to be an efficient credit disbursal machine and it is often referred to be a Grameen debt treadmill, where each borrower needs to run at the same speed. Although it was highly efficient achieving a 98% repayment rate through coercive trust, there were tremendous amount of inflexibility and correlation risk present in the design, which revealed itself during the nineties when lots of competition came in and the system nearly collapsed during the flood of 1998. III. Need for Change The most important question to answer while trying to understand the metamorphosis of Grameen to Grameen II, from strict discipline to flexibility, is – what brought about this change? The authors represent the official Grameen reasons behind the change in focus for the bank – that of externalities exposing some internal design issues. In the flood of 1998, Grameen borrowers like many other people of Bangladesh, lost most of their possessions including their houses. 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 instalment sizes exceeded their capacity to repay. They gradually started to stay away from weekly centre meetings. Grameen Bank repayment started to show quick decline. These external factors reinforced the internal weaknesses in the system. The system consisted of a set of well-defined standardised 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 fulfil. More and more borrowers fell off the track. Then there was the multiplier effect. If one borrower stopped payments, it encouraged others to follow. (Yunus, Grameen Bank Website) When the repayment situation did not improve as desired, the management of Grameen bank decided to overhaul the system completely, and hence, Grameen II was born fresh out of the classical Grameen. But, looking back, there are more reasons than just the flood. One tends to agree with the line of thought of Daniel Pearl of the Wall Street Journal, that while some of Grameen's troubles stem from the 1998 flood others come from the bank's own success. The success of Grameen led to a rush of imitators and microlending lost its novelty. In Tangail district, signboards for rival microlenders dot a landscape of gravel roads, jute fields and ponds with simple fishing nets. As many as seven or eight microlenders were offering similar credit products - a typical repayment plan for a 1,000-taka ($17) loan is 25 taka a week for 46 weeks. At an annualized rate, that works out to 30% in interest. Surveys have estimated that 23% to 40% of families [2]
  5. 5. borrowing from microlenders in Tangail borrow from more than one. This of course led to a lot of indebtedness and slowly the borrowers fell into a debt trap. (Pearl, 2001) Another point to note is that Grameen Bank clients paid the kisti (weekly repayments) on their loans not from a single microenterprise, but from patching together earnings from casual employment, self-employment, remittances and a variety of loans from other sources. But, as clients stayed with Grameen Bank, they were under pressure to take bigger, ordinary loans alongside new housing loans. As a result, they took on levels of debt they could not service from their income. To stop them from defaulting, they were issued with larger loans by Grameen branch managers to repay earlier loans (Hulme, 2008). And slowly the borrowers found themselves unable to refinance their loans. This could have led to declining repayments as well. So, there existed a strong case to change for the better for the Grameen bank, the pathfinder of microcredit across the globe. Hence, began the transformation from a microcredit organization to a microfinance organization. IV. Evolution of Loans under Grameen-II In its new avatar as a second generation microfinance organization, Grameen II looks much better equipped to handle the demands and needs of the borrowers. GGS or The Grameen Generalised System (mostly referred to as Grameen II) is built around a primary loan product called the Basic loan – supplemented by the housing loan and the higher education loan for the member’s children. The duration of the basic loan varies from three months to three years as compared to the fixed one year loan under classical Grameen. In the previous system, a borrower was considered a defaulter if she couldn’t repay the amount in fifty-two weeks. But under Grameen II, a borrower has the exit route to step down from the Grameen debt treadmill without feeling guilty about failing to fulfil the requirement of the basic loan. This alternative route is provided through Flexible 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. So, in a way the good part is that Grameen II introduces flexibility in the discipline of Grameen I, but at the same time, there are strong debates regarding using the flexible loan to hide delinquencies and repayment rates from Grameen bank’s side. In that sense, a flexible loan is kind of a restructuring of the old loan, without making any provisions for the bad debt, which inflates the actual repayment rate. Under Grameen II, members may hold one basic loan but if they qualify (through repayment, savings and attendance behaviour) and have a viable business, they may also take a business expansion or special production loan. This micro-enterprise loan is a mixture of the leasing, palli phone and livestock loan under classical Grameen. This has [3]
  6. 6. been primarily disbursed in conjunction with the palli phone project – where a borrower is identified to set up and run a rural PCO using Grameen phone’s cellular network. This scheme of course changed the lives of the phone-ladies as they are known, but also had a great impact on the living standards of the entire village where a VPP was setup, through superior access to information. The housing loan which started during the Grameen I era continued to play a very important part in the loan portfolio of Grameen bank, one that is very important for the living standard of Grameen clients as well. Another important innovation created by Grameen II is the educational loan for the children of the borrowers. Over two decades of operation of Grameen, it came to realize that microcredit to a poor woman always doesn’t ensure poverty reduction; a very big element in that chain is the education of the children so that the next generation effect kicks in and poverty is defeated quicker. In that sense, education loan is an extension for Grameen’s core goal. Through microcredit to the poor, it solved the problem of imperfection in the market for physical capital and through educational loan it wants to replicate the same success for the market of human capital. And this would go a long way in securing a future for the poor children – a tool to earn their way out of the clutches of poverty. V. The Savings Revolution The most innovative and far-reaching change in Grameen II is the introduction of numerous savings products – both from the borrowers as well as deposits from the public. Under classical Grameen – the products and rules in force up to 2002 – Grameen took mostly obligatory savings from its members and stored them in accounts for individual members and in joint-owned group accounts. The bank also offered some basic current and savings accounts to the general public, though not in great volume. Under Grameen II, it has introduced greatly expanded deposit opportunities to both members and the general public. And so, by end of 2004 total deposits (from members and from the public) exceeded the value of loans outstanding for the first time in the bank’s history. This completes the bank’s transition from a microcredit bank to a true financial intermediary, a microfinance organization. Under Grameen II, each member opens a personal savings account, into which she may pay whatever she likes, subject to a weekly minimum that depends on the value of her loans from the bank, and withdraw whatever she likes whenever she likes, for any purpose, subject to being up-to-date in her loan repayments. When she takes a loan, 2.5% of its value is deposited to this account that can be withdrawn. Deposits earn interest at 8.5% pa: a much higher rate than passbook savings in commercial banks. At the same time, the member also opens a special savings account. This account also receives 2.5% of the value of loans issued, and is illiquid for first three years. After three [4]
  7. 7. years withdrawals may be made, subject to a minimum balance of 2,000 taka (about $30). A third savings instrument is available as an option, but becomes obligatory if the member holds a loan of 8,000 taka or more ($130). This is the new Grameen Pension Savings (GPS), a commitment-savings account modelled along the lines of Deposit Pension Scheme of commercial banks. A fixed sum per month, minimum 50 taka (less than $1) is deposited for a five or a ten year term, after which principal and interest – at a generous rate of 12% pa for the ten-year version (10% for five years) – are released, either as a lump sum or as monthly income. Finally, borrowers of Grameen loans deposit into a credit-life insurance savings fund. These savings are held in the member’s name and the principal returned without interest when she leaves the bank. Meanwhile the interest is used to repay loans held by members (or their spouses) at their death, so that heirs inherit the full value of any savings held but do not inherit the debt. The enormous success of savings mobilization under Grameen II enabled the bank to introduce various other savings products as well – fixed deposits of varying tenures, “double in seven years” scheme, and monthly income plans etc. From savings of 1 taka per week per member in 1979 to 30 billion taka in 2006, Grameen Bank has come a long way. The rapid increase in the voluntary deposit mobilization is one of the key successes of the Grameen II model, which essentially proved the earlier critiques of Grameen right, that microcredit was only one half of the story – savings is equally important if not more. Also, the experience of the bank and its borrowers during the floods of 2004 were completely different from the previous one when Grameen was forced to rearrange itself into a deposit taking organization. The savings saved both the borrowers and the bank. The huge success of savings schemes under Grameen II goes on to show that not only poor people save, but they save in quite large quantities to take care of various contingencies in life. It was the absence of formal financial services, that forced the poor to save in informal means or in commodities, but if they have access to depository services, they are most certainly going to make good use of the same. This revelation has important policy implication for the formal financial system. VI. The Transition Process The designing process for a new and improved Grameen 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 Generalised System" or GGS was ready for launching. There was an intensive staff training program for all the 12000 staff. [5]
  8. 8. Although there were initial signs of reluctance, grumblings, negative jokes, and expressions of frustrations from some staff members, top management went ahead with understanding and patience. Training continued cycle after cycle and soon uneasiness about the new system disappeared. The real worry was however to manage the transition 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 the process began, Grameen Bank II emerged. The last branch of Grameen Bank switched over to Grameen II during August 2002, completing the process of transition (Yunus, Grameen Bank Website). VII. Inclusion of the Poorest of the Poor There’s a huge debate regarding the effectiveness of microcredit for the poorest of the poor as mostly they do not have supporting inputs (like land, additional capital, education and knowledge of running a business). This results in low return from using credit in non-farm activities and consequently MFIs also get discouraged to disburse credit to these poorest among the lot. The author argues that under classical Grameen, the poorest of the poor got left out because of these people’s inherent lack of self-belief that they can continue with the demanding discipline of the Grameen model. Continuing the same logic, Grameen II would be able to reduce this problem since they can now have individual loans and choose their instalment size and schedule of repayment. But even after Grameen II, a very small proportion of borrowers are extremely poor. The struggling members programme is targeted at the extreme poor, but by December 2005 it had only 56,000 clients, against more than 25 million extremely poor people in the country. Average loan size for these members was only $6 and their average savings were $1 (Rutherford et al., 2006). While many poor and extremely poor people may benefit indirectly from Grameen II, (through employment, increased demand for products, greater availability of local level charity) the struggling members programme appears to be either failing or tokenistic. (Hulme, 2008) VIII. Concluding Remarks The Grameen Bank is set to remain a global icon, although there is some real confusion about the message that the Bank (and Professor Yunus) project. Internationally, it is still perceived as a micro lending institution, focused on extremely poor women, despite the fact that it has adopted a market-based, ‘financial systems’ approach since 2001. This book would go a long way to correct that information problem, demystifying Grameen II to policymakers, practitioners and the larger developmental community as a whole. [6]
  9. 9. The viability of Grameen is essential and important for its external role that it plays as the torchbearer of microcredit globally. Had the Grameen Bank collapsed, then optimism about the feasibility of poverty reduction and international development would have been dented. While the international message associated with the Bank – microenterprise credit for extremely poor women lifts them out of poverty – is now inaccurate, the broader thrust of this message – of hard working poor people using their personal agency to overcome the problems they face –is highly appropriate for the entire world. The Grameen Bank today is a very different organisation from what it was 20 years ago, but it still serves as an inspiration for those trying to help poor and low- income people in their own efforts to improve their lives, and Grameen II would certainly go a very long way in securing that goal, despite all the criticism and allegations of creative accounting. (2,961 words) [7]
  10. 10. References Dowla, Asif and Barua, Dipal (2006), “The Poor Always Pay Back: The Grameen II Story”, Kumarian Press Inc. Hulme, David (2008), “The Story of the Grameen Bank: From Subsidised Microcredit to Market-based Microfinance”, Brooks World Poverty Institute Working Paper 60 retrieved on 4th August 2009 from http://ssrn.com/abstract=1300930 Pearl, Daniel and Philips, Michael M, “Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag”, Wall Street Journal, November 27, 2001 retrieved on 5th August 2009 from http://online.wsj.com/public/resources/documents/pearl112701.htm Rutherford, Stuart (2002), “MicroSave Briefing Notes on Grameen II # 2 Member Savings”, retrieved on 5th August 2009 from http://www.safesave.org/MicroSave%20GB%20Briefing%20Note%20%23%201%20fi nal.pdf Rutherford, Stuart with Maniruzzaman, Sinha, S.K. and Acnabin & Co. (2006), “GRAMEEN II - The First Five Years: 2001-2006”, Grameen II Briefing Notes for MicroSave Yunus, Muhammad, “Grameen Bank II” retrieved on 4th August from http://www.grameen- info.org/index.php?option=com_content&task=view&id=30&Itemid=116 [8]