Lecture 18 grameen bank experience

Lecture 18 Grameen Bank experience
Grameen Bank Experiences
Short History
The origin of Grameen Bank can be traced backto 1976 when Professor
Muhammad Yunus, Head of the Rural Economics Program at the University of
Chittagong, launched an action research project to examine the possibility of
designing a credit delivery system to provide banking services targeted at the rural
poor. The Grameen Bank Project (Grameen means "rural" or "village" in Bangla
language) came into operation with the following objectives:
 extend banking facilities to poormen and women;
 eliminate the exploitation of the poorby 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 pooresthouseholds,
within the fold of an organizational format which they can understand and
manage by themselves; and
 reverse the age-old vicious circle of "low income, low saving & low
investment", into virtuous circle of "low income, injection of credit,
investment, more income, more savings, more investment, more income".
The action research demonstrated its strength in Jobra (a village adjacent to
Chittagong University) and some of the neighboring villages during 1976-1979.
With the sponsorship of the central bank of the country and supportof the
nationalized commercial banks, the project was extended to Tangail district (a
district north of Dhaka, the capital city of Bangladesh) in 1979. With the success in
Tangail, the project was extended to several other districts in the country. In
October1983, the Grameen Bank Project was transformed into an independent
bank by government legislation. Today Grameen Bank is owned by the rural poor

whom it serves. Borrowers of the Bank own 90% of its share
The Experience of Grameen Bank
H.I Latifee
Given the fact that the poorhave not been traditionally welcomed to financial
institutions because
• They have no asset
• They have nothing to offer as collateral
• They have no business experiences
• They have no training
• They have no credit history
• They have no education and given the belief that Credit is a Human Right as
advocated by Nobel Laureate
ProfessorMuhammad Yunus, and if this right is established for the poor, they can
overcome poverty by generating their own employment and income, the necessity
to develop a financial system for the poorbecame urgent.
But how?
• How to provide credit and other financial services to the poor?

• What should be the methodology for credit delivery and recovery?
• How the poormay be identified and organized?
• Whether the existing banking system could be used for the service or a new
system
should be developed?
These became big questions.
ProfessorMuhammad Yunus with his concern and commitment for financial
inclusion for poverty alleviation came forward with his strong determination to
develop a financial system for the poorwhich should
• Only serve the poorto help themselves to overcome poverty
• bring the disadvantaged people within the folds of some
• Organizational format which they can understand and operate, and can find
sociopolitical and economic strength in it through mutual support.
• create opportunities for self-employment and income for the poor
• be cost-effective and sustainable
• be need based
• be flexible and
• have a positive impact on the life of its borrowersIn order to achieve these
objectives, he started the Grameen Bank Project in 1976, which became a bank in
1983. The Grameen Bank is a bank for the poorand of the poor. It has grown
through a process oflearning by doing. It is a highly innovative institution. It has

developed unique inclusive financial products and services, its own criteria of
targeting and a system of credit delivery and recovery, as well as training and
technical assistance.
Grameen has a revealed preference for the poorestwomen. It regards women as the
effective agents of greater family welfare and social change. If one is poor, she is
welcome by Grameen, if one is poorer, she is more welcome and if one is the
poorestshe is the most welcome to Grameen.
Grameen Bank provides loan without any collateral. It is a trust-based banking. It
does not require any credit history or business experience for providing loans.
In Grameen system, the bank goes to the poor. Its credit delivery and recovery
mechanism is very client friendly and flexible. Repayment is made in weekly
installments. It promotes social capital. The entire Grameen system is built on peer
supportwith the framework of a five- member group and the broader framework of
a centre. It develops leadership quality among its members through annual election
of group and centre leaders, electing board members as the institute is owned by
the borrowers.
In Grameen, all banking transactions take place at the centre meeting. All
transactions are highly transparent. The poordo not come to the bank but the bank
goes to the poor. As of September 2008, Grameen has 1,40,016 centers, 1,98,038
groups and about 7.6 million members. 97% of its members are women.
Grameen has always taken into consideration the potential and capacity of its
borrowers, their affordability and viability. It has developed loan products and
terms according to their needs. One can borrowmore and more as one grows in
confidence, skills, experiences and fulfill Grameen requirements.

Grameen promotes and maintains a problem-solving culture. It puts total trust in
the creative potential of its staff and clientele in crisis management. Trust is the
foundation of the Grameen system.
Grameen has both loan and savings products. Itconsiders savings mobilization an
integral part of its lending program. Its loan program includes basic loan, housing
loan, higher education loan for member’s children, micro enterprise loan, loan for
village phone, business loan for graduate students of Grameen families and loan
for struggling members. Grameen has also life and loan insurance products.
The period for the basic loan may vary from 3 months to 3 years. The period for
housing loan is 10 years. Micro enterprise loan is also given for a period up to 3
years, education loan provided for the period of education. Grameen has also
scholarship program for the children of its members. The basic loan which includes
all income generating loan activities constitutes about 98 percent of the total loan
portfolio. Grameen has different kinds of savings products. Theseare Grameen
Pension Savings (for Grameen Bank members and staff), personal savings (open to
all), double in 7 years-term deposits (open to all), loan insurance savings fund
(Grameen Bank members), Fixed Deposit with monthly income (open to all) and
others (like weekly compulsory saving at the rate of taka 10, additional GPS etc.).
Grameen has mobilized more than US$ 826 million as deposits including US$ 373
from non-members (Sept. 2008). The depositas percentage of outstanding loans is
136 percent. Grameen Bank offers very attractive rates for deposits. Minimum
interest offered is 8.5 percent and maximum rate is 12 percent.
As Grameen is always for developing and operating a sustainable micro credit
program, it charges the borrowers an affordable interest rate. It remains cautions to
avoid changing a price which makes the borrowers pay for any inefficiency of the

system or luxury of its management. The struggling members program of Grameen
is a very special program. It is an example of deepening financial inclusion. It is a
program for beggars only. The objective of the program is to provide financial
services to the beggars to help them find a dignified livelihood, send their children
to schools and graduate into becoming regular Grameen Bank members. More than
100000 beggars have already joined this program and many of them already left
begging.
Basic features of the struggling members program are:
1) Existing rules of Grameen Bank do not apply to beggar members; they make
up their own rules.
2) All loans are interest–free. Loans can be for very long term, to make repayment
installments very small.
3) Beggar members are covered under life insurance and loan insurance programs
without paying any cost.
4) Groups and centers are encouraged to become patrons of the beggar members.
5) Struggling Members are not required to give up begging, but are encouraged to
take up additional income-generating activities like selling popular consumer items
from doorto door, or at the place of begging.
In order to encourage competition and achieve the objectives of sustainable
operation and poverty alleviation. Grameen has introduced 5 star system in its
management. It examines both financial and social performance and leads the
system to higher level growths.

The 5 star are Green, Blue, Violet, Brown and Red. These are provided to branches
and staff for 100 percent achievement of a special task. The green star is for 100%
repayment, the Blue is for earning profit, the Violet is for self-financing, the
Brown is
for all children in schooland the Red is for all the members moving out of poverty.
The Experience of Grameen Bank It is a great privilege for me to be with you here this morning,
to learn from your
experiences and wisdom and share with you the contribution of Grameen Bank in the
field of financial inclusion.
Given the fact that the poor have not been traditionally welcomed to financial
institutions because
• They have no asset
• They have nothing to offer as collateral
• They have no business experiences
• They have no training
• They have no credit history
• They have no education
and given the belief that Credit is a Human Right as advocated by Nobel Laureate
Professor Muhammad Yunus, and if this right is established for the poor, they can
overcome poverty by generating their own employment and income, the necessity to
develop a financial system for the poor became urgent.
But how?

• How to provide credit and other financial services to the poor?
• What should be the methodology for credit delivery and recovery?
• How the poor may be identified and organized?
• Whether the existing banking system could be used for the service or a new system
should be developed?
These became big questions.
Professor Muhammad Yunus with his concern and commitment for financial inclusion
for poverty alleviation came forward with his strong determination to develop a
financial system for the poor which should
• only serve the poor to help themselves to overcome poverty
• bring the disadvantaged people within the folds of some
• organizational format which they can understand and operate, and can find socio-
political and economic strength in it through mutual support.
• create opportunities for self-employment and income for the poor
• be cost-effective and sustainable
• be need based
• be flexible and
• have a positive impact on the life of its borrowers
Presented at the Conference on “Deepening Financial Sector Reforms and Regional
Cooperation in South Asia”
held at the Gulmohar Hall, India Habitat Centre, Lodi Road, New Delhi-110003, India,
November 06 – 07, 2008 Page 2
In order to achieve these objectives, he started the Grameen Bank Project in 1976,
which became a bank in 1983. The Grameen Bank is a bank for the poor and of the
poor. It has grown through a process of learning by doing. It is a highly innovative

institution. It has developed unique inclusive financial products and services, its own
criteria of targeting and a system of credit delivery and recovery, as well as training
and technical assistance.
Grameen has a revealed preference for the poorest women. It regards women as the
effective agents of greater family welfare and social change. If one is poor, she is
welcome by Grameen, if one is poorer, she is more welcome and if one is the poorest
she is the most welcome to Grameen.
Grameen Bank provides loan without any collateral. It is a trust-based banking. It does
not require any credit history or business experience for providing loans.
In Grameen system, the bank goes to the poor. Its credit delivery and recovery
mechanism is very client friendly and flexible. Repayment is made in weekly
installments. It promotes social capital. The entire Grameen system is built on peer
support with the framework of a five- member group and the broader framework of a
centre. It develops leadership quality among its members through annual election of
group and centre leaders, electing board members as the institute is owned by the
borrowers.
In Grameen, all banking transactions take place at the centre meeting. All transactions
are highly transparent. The poor do not come to the bank but the bank goes to the
poor. As of September 2008, Grameen has 1,40,016 centers, 1,98,038 groups and
about 7.6 million members. 97% of its members are women.
Grameen has always taken into consideration the potential and capacity of its
borrowers, their affordability and viability. It has developed loan products and terms
according to their needs. One can borrow more and more as one grows in confidence,
skills, experiences and fulfill Grameen requirements.
Grameen promotes and maintains a problem-solving culture. It puts total trust in the
creative potential of its staff and clientele in crisis management. Trust is the

foundation of the Grameen system.
Grameen has both loan and savings products. It considers savings mobilization an
integral part of its lending program. Its loan program includes basic loan, housing
loan, higher education loan for member’s children, micro enterprise loan, loan for
village phone, business loan for graduate students of Grameen families and loan for
struggling members. Grameen has also life and loan insurance products.
The period for the basic loan may vary from 3 months to 3 years. The period for
housing loan is 10 years. Micro enterprise loan is also given for a period up to 3 years,
education loan provided for the period of education. Grameen has also scholarship
program for the children of its members. The basic loan which includes all income
generating loan activities constitutes about 98 percent of the total loan portfolio.
The first disbursement of Grameen loan was US$ 27 to 42 members. The cumulative
disbursement by the end of September 2008 stood at US $ 7.4 billion. The monthly
disbursement is more than US $ 80 million. The amount of loan outstanding was US $
609.60 million in September 2008.
Grameen has different kinds of savings products. These are Grameen Pension Savings
(for Grameen Bank members and staff), personal savings (open to all), double in 7
years-term deposits (open to all), loan insurance savings fund (Grameen Bank
members), Fixed Deposit with monthly income (open to all) and others (like weekly
compulsory saving at the rate of taka 10, additional GPS etc.).
Grameen has mobilized more than US$ 826 million as deposits including US$ 373
from non-members (Sept. 2008). The deposit as percentage of outstanding loans is

136 percent. Grameen Bank offers very attractive rates for deposits. Minimum interest
offered is 8.5 percent and maximum rate is 12 percent.
As Grameen is always for developing and operating a sustainable micro credit
program, it charges the borrowers an affordable interest rate. It remains cautions to
avoid changing a price which makes the borrowers pay for any inefficiency of the
system or luxury of its management.
According to Professor Muhammad Yunus poverty focused microcredit programs
should charge a lower rate of interest which may be equal to the cost of funds at the
market rate plus up to 10 percent. He calls it Green Zone. It may be in the Yellow
Zone as well which equals the cost of funds plus 10 to 15 percent. If any program
charges an interest rate higher than the Yellow Zone, they operate in the Red Zone,
which according to Professor Muhammad Yunus is the territory of the moneylenders.
This is for maximizing profit and not for maximizing social benefit.
The interest rate Grameen Bank charges for its loans is lower than the rate of interest
the government of Bangladesh has fixed for government run microcredit programs.
The interest rate for government program is 11 percent flat. It is only 10 percent flat
for Grameen basic loans. There are in fact four interest rates for loans from Grameen
Bank: 20 percent (declining basis) for income generating loans, 8 percent for housing
loan, 5 percent for student loan and interest free loans for struggling members who are
beggars. All interests are simple interest. The amount collected from the borrowers in
interest can never exceed the principal amount. Grameen Bank earns profit. It has
earned profit every year except in 1983, 1991 and 1992.
The struggling members program of Grameen is a very special program. It is an
example of deepening financial inclusion. It is a program for beggars only. The
objective of the program is to provide financial services to the beggars to help them
find a dignified livelihood, send their children to schools and graduate into becoming

regular Grameen Bank members. More than 100000 beggars have already joined this
program and many of them already left begging.
Basic features of the struggling members program are:
1) Existing rules of Grameen Bank do not apply to beggar members; they make
up their own rules.
2) All loans are interest–free. Loans can be for very long term, to make repayment
installments very small.
3) Beggar members are covered under life insurance and loan insurance programs
without paying any cost.
4) Groups and centers are encouraged to become patrons of the beggar members.
5) Struggling Members are not required to give up begging, but are encouraged to
take up additional income-generating activities like selling popular consumer
items from door to door, or at the place of begging.
Grameen Bank has developed a decentralized system. It always delegates decision
making power and authorities to the lower level- zonal offices, area offices, branches,
centers and groups. It operates a transparent system so that everything remains visible.
It follows a participatory process.
Grameen monitors all its activities continuously and thoroughly. It tries to reach out
even to the remote and dark corners of the system to keep them clean. It has
developed a strong Management Information System (MIS). All its branches are
computerized.
Grameen has a well-organized Internal Audit System. It conducts both financial and

management audit of its offices at all levels.
Grameen believes in human dignity and value building. The principles of self-esteem,
self-confidence, self-discovery, self-reliance, unity, work and discipline are very
important in the Grameen system.
Grameen is not only interested in providing financial services to the poor but it is also
interested in improving the quality of their lives. Grameen credit is not an end in itself.
It is a means to end poverty. The 16 decisions taken by the members themselves and
10 indicators to assess the poverty level are the examples of this. According to a
recent report 65 percent Grameen members have already crossed the poverty line.
In order to encourage competition and achieve the objectives of sustainable operation and
poverty alleviation. Grameen has introduced 5 star system in its management. It examines
both financial and social performance and leads the system to higher level growths.
The 5 star are Green, Blue, Violet, Brown and Red. These are provided to branches
and staff for 100 percent achievement of a special task. The green star is for 100%
repayment, the Blue is for earning profit, the Violet is for self-financing, the Brown is
for all children in school and the Red is for all the members moving out of poverty.
Conclusion:
• If we consider people as both the end and the means of development and if by
development we mean a positive change in the lives of the bottom half of the
population we must give due attention to the financial inclusion.
• The success of Grameen Bank in helping poor come out of poverty can be
attributed to its focus on providing microcredit as a human right.
• If this right is established and if adequate institutional, financial and legal steps
are taken with due diligence to create an enabling environment to help
microcredit programs grow for an inclusive microfinance, it will pave the way
for building a poverty free world.

Profitable andsustainable financial intermediationispossiblewiththe poor,whoare otherwise
excludedfromthe formal creditsystembecause of lackof collateral,andpovertyreductionispossible
throughtargetedcredit.Thisisthe keyfindingof an ongoingstudyof the GrameenBankconducted
jointlybythe WorldBankand the BangladeshInstitute of DevelopmentStudies.Thisstudyuses
aggregate andbranch- level dataof GrameenBankfor 1985 through1993 to determine how the Bank
operates,atwhat cost,and whetheritsprogramissustainable andreplicable.The studyusesvillage-
level datatoexamine macro-level effects,suchasthe Bank's impacton rural wages.The studyalsouses
householdsurveydatatoexamine householdandintrahouseholdimpacts onincome,employment,
assetaccumulation,nutrition,health,andeducation.Some of the findingsof thisstudyare reported
below.
StrategiesforPovertyReduction
GrameenBankbelievesthatlackof accessto creditisthe biggestconstraintforthe rural poor.If the
poor are providedcreditonreasonable terms,theythemselvesbestknow how toincrease their
incomes.GrameenBanktargetsandmobilizesthe poorandcreatessocial andfinancial conditionsso
that theyreceive creditbyidentifyingasource of self-employmentinfamiliarrural non-farmactivities.
The Bank's methodof targetingthe pooris effectiveasitmobilizesonlythose whoare willingtobear
the costs of group formation,training,andmonitoringeachother'sactivities,andthose whoare
satisfiedwiththe relativelysmall sumstheycanborrow andrepay.To bettermeetitsultimate goal of
social and economicdevelopment,GrameenBanktargetswomenmore thanmen.Bydoingso,it
directlychannelscredittothe poorestandthe least empoweredandhelpsimprove the livingstandards
of theirfamilies.Alongwithprovidingcredit,GrameenBankoffersguidelinestomembersforcodesof
conduct andactivitiesaimedatimprovingtheirsocial andfinancial conditions.Italsoprovidestraining
to womeninmaternal health,nutrition,andchildcare togenerate greaterdemandforbasichealthcare
services.
StrategiesforFinancial Intermediation
Lendingentailshighriskof loandefaultdue toadverse selectionof borrowersanddisabilityof lenders
to enforce the loancontracts.Contrary to the practice of formal finance,GrameenBanklends(insmall
amounts) tothe poorbasedon groupresponsibilitywhere individual accesstocreditdependsongroup
repaymentbehavior.Grouplendingusespeerpressure tomonitorandenforce contractsandhelps
screengoodborrowersfrombad ones.Unlike otherdevelopmentbanks,GrameenBankmobilizes
savingsas an integral partof lending.Eachmemberisrequiredtosave Taka1 each weekandbuya
GrameenBankshare worthTaka 100. In addition,eachborrowercontributes5percentof the loan
amountto a group fundand Taka 5 forevery1,000 Takas above loansize greaterthanTaka 1,000 to an

emergencyfund.These savingsmobilizationschemesprovideprotection of loansagainstdefault,an
internal source of finance,andastake for the membersinBankoperations.
Grameen'sSuccessas a Bank inReachingthe Poor
In 1993, with1,039 branchescoveringalmosthalf of Bangladesh'svillages,the Bankservedmore than
1.8 millionborrowersanddisbursed$169 million.By1993, cumulative membersavingstotaledover
$218 million.Almost94percentof the Bank'smembersare poor women,accountingfornearly70
percentof savingsmobilized,andreceivingover80 percent of the total loansdisbursed.Itsloan
recoveryrate has beenconsistentlyover90percentcomparedwithratesfrom25 to 50 percentfor
otherfinancial institutionsinBangladesh.Contrarytocommonbelief,Grameen'sexperience isthat
womenare bettercreditriskswithhigherloanrecoveryratesthanmen(97 percentcomparedto89
percentin1992), and that the dropoutrate islowerforwomen(15 percent) thanformen(25 percent).
The Grameenmodel isbeingreplicatedinmore than30 countriesandthe WorldBank has provideda
grant of $2 millionforitsreplicationinlow-income countries.
Grameen'sSuccessinPovertyReduction
While sophisticatedeconometricanalysisisunderway,preliminaryanalysissuggeststhatGrameenBank
has generatedanumberof benefitsbothatthe householdandvillage level.Atthe householdlevel,the
benefitsfromprogramparticipationinclude changesinincome,employment,assetsaccumulation,
networth,andotherhouseholdwelfare indicators(suchascontraceptive use,school enrollmentof
children,etc.).Programparticipationhasenabledmemberstoenhance theirassetsandnetworth.For
example,aprogramparticipatinghouseholdowns56 percentmore resourcesand51 percentmore
networththana nonparticipatinghousehold. Programparticipationhasalsoincreasedcalorie intake,
especiallyamongfemalehouseholdmembers.The incidence of povertyissubstantiallyreducedamong
program participants.Laborforce participation,especiallyamongwomen,ishigheramongparticipants
than nonparticipants;women'slaborforce participationis66 percentamongprogramparticipants
comparedto 52 percentfornon participants.The school participationrate of girlsisalsohigherfor
participants(57 percent) thanfornonparticipants(36percent).Programparticipationalsoincreasesthe
use of contraceptives,bettertoiletfacilities,andbetterdrinkingwater.Inaddition,programplacement
generatesincome gainsforthe pooras a whole throughitsimpactsonthe local resource allocation.For
example,the dailymale wage is23 percenthigherinprogramvillagescomparedwithnonprogram
villages.Evenaftercontrollingforvillagecharacteristics,the studyfindsthatupto 11 percentof the 23
percentwage increase isdue toGrameenBank programplacement.

Grameen'sSustainability
The leadershipof ProfessorMuhammadYunushasbeenthe guidingforce forGrameen'sinceptionand
expansion.But,overtime,GrameenBankhasinstitutionalizedadecentralizedmanagementstructure
witha cadre of dedicatedprofessionalsthatisoperatingwithoutmuchof hisinvolvement.Moreover,
subsidizedfundsandgrantshave beeninstrumental foritsinstitutional development.However,through
increasedmembershipandlending,the Bankhasreduceditssubsidydependencyfrom23 percentof
subsidyperTaka lendingin1987 to 12 percentin1993. Nearly55 percentof its1,039 branchesare now
operatingwithprofits.Ittakesaboutfive yearsof operationforabranch to realize aprofit.
Since economiesof scale existinbranchoperation,GrameenBankhasthe potential toeliminate
subsidiesthroughexpandingitsmembershipandlending.Butitsexpansiondependsonthe
entrepreneurialabilityof borrowersandmarketopportunities.The highloanrecoveryrate,the low
dropoutrate andthe findingof apositive village-level wage effectsuggestthatthe benefitsfrom
program participationare highandsustainable.Butitscontinuedsupportof traditionalnon-farm
activitiesmaynotprove self- sustainingasGrameenBankexpands.The Bankmustbe able toexpand
lendinginmore growth-orientedactivitiesforitssurvival inthe longrun.
Grameen's Replicability
The group-basedlendingisreplicable inothercountrieswherethe marketfailurerequirescredittobe
targetedbutthe existingfinancial institutionscannotbe usedtodelivercredit.The model isalso
desirable if financial intermediationrequiressocial mobilizationsuchasorganization,andimperfect
informationandimperfectenforcementmake lending highlyriskyandcostly.Inordertosuccessfully
replicate group- basedlendingforpovertyalleviation,the poormayneedorganizational helpandother
inputstoimprove theirincome andproductivity.Butprovidingsuchinputsare costlyforanorganization
whichmay alsoneedexperimentationtodetermine the modusoperandi of anappropriate delivery
mechanism.However,the poorare not likelytobe capable of bearingthe full costsassociatedwith
program adaptationandimplementation.Thus,successful replicationdependsonthe availabilityof
subsidizedfundsatthe initial stage andabove all,onthe creativityandcommitmentof the leadership.

Lecture 18 grameen bank experience

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