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1. A Glimpse of Project at Grameen Bank
Ramandeep Singh Saini
Supervision: Nobel Laureate Prof. Yunus
1 Introduction
During the internship, The author went through rigorous training program
which involved visiting various Grameen Bank businesses. He learned the con-
cept of Grameen Bank Micro finance model by visiting two branch offices in
village and interviewing Grameen Bank borrowers, field workers and all officer.
The author worked at the Yunus center to conceptualize the Social Business
model. He also studied the Growth impact due to Grameen bank in Bangladesh
and these studies helped to build investment decision models for sustainable
development under uncertainty. The project ended by organizing international
seminar at Grameen Bank.
Note: The investment decision models build-ed during the internship
are the part of a long project at the Grameen Bank and due to Non
disclosure agreement cannot be depicted here.
2 The Micro Finance Model
The concept of Micro-finance was first developed and initiated in Bangladesh.It
promises to lift poor and near poor people out of poverty.
2.1 Definition
Micro-finance is a form of financial services for people lacking access to these
services.Micro credit, as a prominent category of micro finance, is provision of
credit services to poor clients. In developing economies and particularly in rural
areas, many activities that would be classified in the developed world as financial
are not monetized: that is, money is not used to carry them out. This is of-
ten the case when people need the services money can provide but do not have
dispensable funds required for those services, forcing them to revert to other
means of acquiring them.Poor people find creative and often collaborative ways
to meet these needs, primarily through creating and exchanging different forms
of non-cash value. Common substitutes for cash vary from country to coun-
try but typically include livestock, grains, jewelry and precious metals.Micro-
finance is defined by the process of formulating groups within a community to
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2. assist poverty stricken people by lending them money without the need of credit
or collateral.It encourages building permanent institutions and integrating the
financial needs of poor people into a country’s mainstream financial system.
Micro-finance is considered a tool for socio-economic development, and can be
clearly distinguished from charity. Families who are destitute, or so poor they
are unlikely to be able to generate the cash flow required to repay a loan, should
be recipients of charity. Others are best served by financial institutions.
2.2 Grameen Bank
The section explores Grameen Bank’s origins, structure, culture, performance
and efforts. Founder of the Grameen Bank, Prof. Muhammad Yunus adopted
two basic premises.First, that credit is a human right; second, that the poor
are those who know best how to better their own situation.As Grameen bank
has developed and expanded in the years since its beginning, it continues to
operate on those same two principles. Today, Grameen bank still assumes that
when individuals are provided credit, they will be able to initiate upward social
mobility for themselves through entrepreneurial endeavors.
2.2.1 Origin
Yunus attributes the origin of his vision to a chance encounter in Jobra with
Sufia Begum, a 21-year-old woman who, desperate to support herself, had bor-
rowed about 25 cents from moneylenders charging exorbitant interest rates ap-
proaching 10 percent per day. Yunus found 42 people in Jobra in the same
poverty trap, and in 1976 he experimented by lending them small amounts of
money at reasonable rates. Yunus lent a total of $27—about 62 cents per bor-
rower. To his pleasant surprise, all the borrowers repaid the loans, in the process
convincing him that this success could be replicated across Bangladesh.Yunus
answered these challenges by founding an institution of his own, Grameen Bank,
the name of which derives from gram, the Bengali word for “village.” He did so
in the belief that capital is a friend of the poor and that its accumulation by the
poor represents their best means of escaping the abject poverty that the wel-
fare state and wasteful, corrupt and incompetent international aid organizations
have failed to combat.
2.2.2 Credit Supply System
It is believed at the GB that the main problem of the poor is a lack of access
to credit lines despite their productive capacity.This bank has been successful
in overcoming this problem by replacing collateral by peer pressure and social
sanctions.The extremely poor can get small loans at GB if they form groups
of five people. Each member of the group receives an individual loan; however,
they are mutually responsible for all five credits. The bulk of GB’s borrowers are
women who constitute the weakest social group among the rural poor. Lend-
ing money to women has largely enhanced recover-ability for GB’s loans.The
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3. members of the group elect a chairperson, who receives her loan only after the
neediest members of the group have met the terms of their loans, including the
often weekly schedule for repayments.
Each of Grameen’s 1,178 branches (as of December 2003) is run by a branch
manager and several center managers, who together cover an area of 15 to 22
villages. Together they learn their local area of operations intimately in order to
identify and develop strong relationships with prospective clients. This effort to
get close to the community is reflected in the program’s operating costs.Interest
rates are kept relatively low and as close as possible to prevailing commercial
rates. While these low rates squeeze the bank’s profit margins, they support its
primary focus on alleviating poverty rather than generating high returns.
3 Important Features of Grameen Bank
Grameen Bank operates a micro-credit model that has been replicated world-
wide, and which has evolved over many years. The following are the main
features of this model:
3.1 Administrative Organization
Grameen Bank is organized into four levels: the head office, zone offices, area
offices and field branches. GB is a highly decentralized organization. Such an
autonomy has been a crucial factor in attaining its present success. Branches
are independent profit maximizing units, which borrow money from the head
office at an interest of 8 per cent and lend it at 20 per cent. Typically, a branch
encompasses about 60 centers in an area not greater than 50km2. Zone offices
and area offices are known as regional offices. There is one area office for about
ten to 15 branches. It is at the area level that credit is approved based on
branches recommendations. Zone offices are set for supervision only and they
control five to ten area offices. Finally, the head office is located in Dhaka,
capital of Bangladesh. It has a total of 400 employees, and is in charge of
obtaining loanable funds and providing training to branch workers.
3.2 The Unique Approach
Unlike conventional banks where customers visit the bank’s branches, the GB
approach is to take banking services to centers and villages. In the center, mem-
bers receive the funds, pay the due installments or fill in any bank requirement.
As a result, information asymmetries decline, as bank employees are usually well
informed about problems and achievements as they arise.Once a year, Grameen
Bank rates its branches according to a five-star system designed to promote
core Grameen values, notably savings and education. Branches are awarded
stars of different colors based on their achievements against the following four
main benchmarks: Green star(100% repayment), Blue star(profitability), Vio-
let star(deposits exceed loans) and Red star(borrowers have crossed the poverty
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4. line).
Grameen bank has recently experimented with a system in which new branches
get no money. It starts off by going to the local villages, marketing their services
and encourage people to bring deposits. On the opening day, the branches take
deposits and start making loans the following day.Grameen’s savings rate has
risen steadily, a manifestation of a change in local attitudes toward savings that
has enabled Grameen to rely mainly on internal sources of funds.
3.3 Purpose of Loan
Grameencredit is, by definition, credit for income-generating activities, as well
as for housing for the poor. It is credit for self-employment, rather than for
consumption. Grameen Bank’s micro-credit is often used for the purchase of
small plots of land for cultivation, paddy husking and lime-making. Manufac-
turing and processing activities s are also targeted, such as pottery, weaving
and garment sewing. Other end uses include commercial activities like storage,
marketing and transport services.
3.4 Repayment Method
Repayments are due one week after loans have been granted, and the compulsory
savings referred to above commence simultaneously with the first loan repay-
ment. While the size of weekly installments is generally small, borrowers have
the option of varying it to reflect their actual ability to pay or to reflect the
actual performance of their business.Grameen Bank’s weekly loan repayment
method has been criticized as imposing undue burden on borrowers. To start
with, few micro-enterprises can generate enough revenues to make repayment
possible within one week of investing loan funds. To meet with the tight repay-
ment plan, therefore, borrowers might be compelled to borrow from informal
moneylenders to be able to repay Grameen Bank loan, which then exposes them
to a cycle of debt. On the other hand, borrowers may be forced to retain part of
the loan for use in loan re payments instead of investing the whole loan amount
in the business.
3.5 Loan Size
Usually, very small loans of between 2000-3000 Bangladesh Taka are given. This
is because weekly installments for a larger loan size may be burdensome and
may not be sustained by most borrowers. Another important reason is that
Grameencredit is targeted at the very poor. One long-standing criticism of
small loan policies – whether of Grameen Bank or any other MFI - is that
the loan amount may not be sufficient to finance a business that would bring
meaningful returns, and, thus, only serves the purpose of condemning the poor
to perpetual poverty.
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5. 3.6 Loan Terms
One of the main problems of the defunct Grameen Classic System (GCS) was
the inflexibility of loan terms. Weekly repayment amounts were fixed, and to
continue to stay with the bank, clients were required to demonstrate a degree of
active participation in the scheme by borrowing continuously for a whole year,
even when they only needed loans for a few months. But,under the Grameen
Generalized System, loan terms are more flexible. Clients borrow only when
they need loans, except that new loans become available to borrowers only if
their previous loans have been repaid. A borrower can be granted more than
one loan type simultaneously.The weekly installment amounts can be varied:
clients whose business are seasonal can increase their installment sizes during
peak business seas on, and pay less during the off peak period
3.7 Risk Management Strategy
Grameen Bank maintains its own regulation system outside the purview of the
Central Bank of Bangladesh and relies heavily on social pressure among the
group members to keep default rates low. The members of each lending group
experience great peer pressure to meet the terms of their loans, as they know
everyone in the group well enough to understand the importance they place
on receiving their disbursement. Defaulting will cost a member her reputation
in the village because her failure deprives others of needed loans. The combi-
nation of support and peer pressure from the group provides borrowers with
sufficient motivation to meet the terms of their loans. First line of risk manage-
ment is the loan group of women from the same village.Women put pressure on
one another because default affects the ability of each member in the group to
take loans.This is the most important factor in keeping defaults low.Next line
of defense is surprise internal audits which includes quarterly monitoring and
evaluation along with surprise center visits by branch managers.
3.8 Success and Failure
Since its founding Grameen Bank’s objective has been to promote financial
independence among the poor. Yunus encourages all borrowers to become savers
so that their local capital can be converted into new loans.The following are the
major success and failures of the bank:
3.8.1 Repayment Rate
Grameen Bank’s loan repayment rate is currently 99%, a rate considered very
high by banking standards, and unmatched by any commercial bank in Bangladesh.
It does seem, then, that Grameen Bank’s high loan recovery rate is not at the
expense of clients’ social and economic well-being.
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6. 3.8.2 Transaction cost to clients
Compared to commercial banks, or even informal Bangladeshi moneylenders,
Grameen Bank’s transaction costs are low. This is despite the fact that the
bank’s loan sizes are small. Low transaction costs seem to be a function of
the unique lending features discussed earlier. The low drop-out rate may also
suggest wide social acceptance of the scheme, and this may be attributed in
part to the fact that borrowers do not regard Grameen Bank loans as unduly
expensive or exploitative.
3.8.3 Interest Rates
Grameen Bank charges lower interests than commercial banks and other MFIs
in Bangladesh. The low interest rates are in part a reflection of the bank’s low
transaction costs, and the fact that the bank sets out to make modest, rather
than normal profits. Grameen Bank has been criticized on the grounds of its
inability to reach the poorest of the poor in Bangladesh. Indeed, this is a failing
it shares with most MFIs. Despite the shortcoming of missed target , Grameen
Bank has remained one of the most replicated poverty reduction initiatives in
modern history.
4 Social Enterprises
In particular, the label ‘social enterprise’ can be especially problematic. This
is because there is no shared understanding of the underlying business models
beneath the ‘social enterprise’ umbrella. By definition, a social enterprise is
an organization that applies commercial strategies to maximize improvements
in human and environmental well-being, rather than maximizing profits for ex-
ternal shareholders. Whilst many social enterprises will today accept finance
and other forms of support from the state, they are essentially enterprises that
seek independence from both the state and private capital through strategies
that create a social economy.Although the potential benefits offered by social
entrepreneurship are clear to many of those promoting and funding these activ-
ities, the actual definition of what social entrepreneurs do to produce this order
of magnitude return is less clear. In fact, we would argue that the definition
of social entrepreneurship today is anything but clear. As a result, social en-
trepreneurship has become so inclusive that it now has an immense tent into
which all manner of socially beneficial activities fit.
4.1 Types of Social Entrepreneurship
The social entrepreneurship has been categorized into 3 types:-
• Social Bricoleur: The kind of entrepreneurship as a largely localized un-
dertaking. It is partly driven from first hand exposure to problems.
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7. • Social Constructionist: It often focus on issues that are relevant to local
concerns but their solution may be applicable to many different contexts.
Their advantage is in recognizing an application that may be expandable
to solve a problem occurring in different contexts.
• Social Engineering: It focuses on deconstructing and reconstructing the
engines of society to achieve broad social aims.They mostly focus on large-
scale issues with mass appeal – issues that are well-known in a variety of
settings and often understood by persons with limited knowledge of any
particular aspects of the problem
4.2 Social Business Model
The organizational theory has been diversified into three major types according
to their objective:-
• Profit maximizing businesses: Financial profit maximization with self sus-
tainability
• Not-for-Profit organizations: Social profit maximization with no recovery
of invested capital
• Social Businesses: Social profit maximization with self sustainability
A social business is designed and operated just like a regular business enterprise,
with products, services, customers, markets, expenses and revenues. It is a no-
loss, no-dividend, self-sustaining company that sells goods or services and repays
investments to its owners, but whose primary purpose is to serve society and
improve the lot of the poor.
4.2.1 Type of Social Business
1. Companies that focus on providing a social benefit rather than on max-
imizing profit for the owners, and that are owned by investors who seek
social benefits such as poverty reduction, health care for the poor, social
justice, global sustainability, and so on, seeking psychological, emotional,
and spiritual satisfactions rather than financial reward.
2. Profit-maximizing businesses that are owned by the poor or disadvantaged.
In this case, the social benefit is derived from the fact that the dividends
and equity growth will go to benefit the poor, thereby helping them to
reduce their poverty or even escape it altogether.
Note: Further work done during the internship cannot be depicted
in the article due to Non disclosure agreement.
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8. 5 Impact of Grameen Bank: A note
Assessing the impact of micro-credit programmes seems to be a rather contro-
versial issue. It is very difficult and costly to measure impact, and the results
are susceptible to various interpretations or distortions, depending on how con-
cepts are defined. The section is divided into two parts: Economics impact and
the Social impact of the Bank on life of people of Bangladesh.
5.1 Assessment of Positive Economic Impact
5.1.1 Impact on Income and Consumption
We conclude that micro-credit institutions can have a positive impact on com-
bating poverty. In Grameen Bank villages 71% of participants who have taken
no loans or only one loan are below the poverty line, compared to only 53% of
those who have taken five or more loans.Further, the study showed us that the
poverty rate of members falls by around 18% for moderate poor and by 26%
for ultra-poor, when they have a loan for up to three year.However, this rate
of poverty reduction appears to decline with duration of membership. Thus,
the reduction of the level of poverty is variable and declines with the passage of
time.
The length of association with the MFI did not have a significant impact
on income. The positive impact, it was found, decelerates with increases in the
amount of loans, but not with the number of loans or the length of membership.
However, the per capita spending and net worth of the members has increased
to a significant number.
5.1.2 Impact on employment and productivity
Grameen Bank have been successful in expanding the opportunities of self-
employment for their members. Self-employment generates a higher return than
wages.Also, Labor force participation rates among women have increased com-
pared to non-members living in control villages.Still, the average returns are
higher in non-agriculture activities compared to those in livestock and agricul-
ture.
5.2 Assessment of Positive Social Impact
Here, we need to note that Grameen Bank mostly targets women in Bangladesh.
The main reason is based on the culture of the country. Women are not sup-
posed to have any income, independent of their husbands. Education for girls
is considered as unnecessary.Finding a good husband to marry with is far more
important for the status of the family. Dowries are paid and women have to
make sure that their husbands do not leave them. It is obvious that under these
conditions, females attending meetings with male leaders and being in control of
finances, are aspects of micro-credit programmes that violate patriarchal values.
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9. Thus, we further study the impact of the Bank’s service on life of women in next
sub-sections:
5.2.1 Involvement in Family
Grameen members have a larger role in decision-making within the household
than control group members. As the wife is now seen rather as a source of
income than a burden, her status will rise and with it also her decision-making
power.
5.2.2 Domestic Violence
Domestic violence against women is a serious problem in Bangladesh.The en-
trance of women in public life when joining a micro-credit institution turns out
to be the most important factor in explaining the reduction in domestic vio-
lence. Because members have contact with people outside their family, new
social control mechanisms are playing a role and husbands fear the reaction of
the village people on their violent acts.
5.2.3 Mobility
The mobility of Bangladeshi women is highly restricted. However, Grameen
Bank has been able to improve this mobility. Members go even outside the
village to participate in various training programmes.
5.2.4 Awareness
Various studies indicate that contact of the members with other people within
the micro-credit organization has a serious impact on the knowledge and aware-
ness of those members. Further, interaction with other men and authorised
people gives the women more confidence and helps them to learn to talk in
public. They even get the chance to take up leadership in their group or the
center, where meetings take place.
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