Making loans available to the poor has been instrumental in poverty alleviation all over the world now. The concept of Micro credit was pioneered by the Bangladesh-based Grameen Bank, which broke away from the age old belief that low income amounted to low savings and low investment. It started what came to be a system which followed this sequence: low income, credit, investment, more income, more credit, more investment, more income.
Grameen Bank Project was founded by Mohammad Yunus, in the village of Jobra, Bangladesh, in 1976. In 1983 it was transformed into a formal bank under a special law passed for its creation. It is owned by the poor borrowers of the bank who are mostly women. Borrowers of Grameen Bank at present own 95 per cent of the total equity of the bank. Remaining 5 per cent is owned by the government.
Why should I be aware of this?
In a stand that is quite counter-intuitive to bankers, Grameen Bank does not require any collateral against its micro-loans. Since the bank does not wish to take any borrower to the court of law in case of non-repayment, it does not require the borrowers to sign any legal instrument. Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. Repayment responsibility solely rests on the individual borrower, while the group and the centre oversee that everyone behaves in a responsible way and none gets into repayment problem. There is no form of joint liability, i.e. group members are not responsible to pay on behalf of a defaulting member.
All about Grameen Bank
The Grameen Bank Project (Grameen means rural) came into being with the following objectives:
- To extend the banking facilities to the poor.
- To eliminate the exploitation of money lenders.
- To create opportunities for self employment for the vast unutilized and under utilized manpower resources.
- To bring the disadvantaged people within the framework of some organizational format which they can understand and operate and can find socio-political and economic strength through mutual support.
- To reverse the age-old vicious circle of "low income, low savings, low investment "into an expanding system of" low income, credit, investment, more income, more credit, more investment, more income".
The Grameen Bank Method of Action
- Start with the problem rather than the solution: a credit system must be based on a survey of the social background rather than on a pre-established banking technique.
- Adopt a progressive attitude: development is a long-term process which depends on the aspirations and commitment of the economic operators.
- Make sure that the credit system serves the peasants, and not vice-versa: credit officers visit the villages, enabling them to get to know the borrowers.
- Establish priorities for action vis-a-vis the target population: the most poverty-stricken peasants needing production resources, who have no access to credit.
- At the beginning, restrict credit to income-generating production operations, freely selected by the borrower. Make it possible for the borrower to be able to repay the loan.
- Lean on solidarity groups: small informal groups consisting of co-opted members coming from the same background and trusting each other.
- Associate savings with credit without it being necessarily a prerequisite.
- Combine close monitoring of borrowers with procedures which are simple and standardized as possible.
- Do everything possible to ensure the system's financial balance.
- Invest in human resources: training leaders will provide them with real development ethics based on rigor, creativity, understanding and respect for the rural environment.
Credit as a powerful weapon
To Grameen Bank, credit is a powerful weapon. The founder of the bank, Mohammad Yunus, believes that the more credit one receives the more power he can command. He can then carve out a dignified way of living his life. Mohammad Yunus set out to reverse the banking system of the time which was anti-poor, anti-illiterate and anti-women. Banks would lend to those who had more. His priority was to lend to those who had the least. Yet 48 percent of those who have been borrowing from the bank for 10 years have crossed the poverty line and another 28 percent are close to doing so.
Three Cs of Credit
Here are, in the language of the Grameen Bank, the three Cs of Credit :
- Character: means how a person has handled past debt obligations: From credit history and personal background, honesty and reliability of the borrower to pay credit debts is determined.
- Capacity: means how much debt a borrower can comfortably handle. Income streams are analyzed and any legal obligations looked into, which could interfere in repayment.
- Capital: means current available assets of the borrower, such as real estate , savings or investment that could be used to repay debt if income should be unavailable.
Focus on women borrowers
96% of Grameen Bank borrowers are women who are required to form groups of five borrowers to ensure that the members of the group influence each other to repay the loans. In case of default the whole group forfeits the right to borrow further. The bank focused on women as it had correctly observed that loans to men did not reach the women and the children. On the other hand the whole family stood to benefit if the woman was the borrower. A parallel organization, Kashf Foundation, in Pakistan offers collateral-free loans to poor women.
Branches borrow from the headquarters at 12 percent and lend at 20 percent. With that 8 percent spread they have to become profitable, which takes on average seven years.
Once a year, Grameen Bank rates its branches according to a five-star system designed to promote core Grameen values, notably savings, prudence and education. Branches are awarded stars of different colors based on their achievements against the following five benchmarks:
- Green Star—a 100 percent repayment rate
- Blue Star—profitability
- Violet Star—deposits exceed loans
- Brown Star—all children of borrowers attend school
- Red Star—borrowers have crossed over the poverty line
Banks in other major countries that also provide micro-credit are --
- The Banco do Nordeste in Brazil
- The Dagang Bali Bank in Indonesia.
- The United States and the United Kingdom have also welcomed micro-lending institutions for their own impoverished populations.
- The People's Fund in the US – Since 1995 they are granting micro-loans to poor women and ethnic minorities
- In Britain there are a number of micro-credit units functioning. According to the British Bankers' Association, there are 62 local schemes lending £5,000 or less to help the less privileged to start their own business.
- The UN has encouraged Western banks to lend more money to micro-lending institutions
- Grameen Bank does not require any collateral against its micro-loans. Since the bank does not wish to take any borrower to the court of law in case of non-repayment, it does not require the borrowers to sign any legal instrument.
- The total number of borrowers in Grameen Bank is 8.33 million.
- 97 per cent of them are women.
- Loan recovery rate is 98.11 per cent.
- Muhammad Yunus and Grameen Bank were jointly awarded the Nobel Peace Prize for 2006, for their efforts to create economic and social development through micro-credit.
- Grameen Bank has 2,565 branches. It works in 81,373 villages. Total staff is 22,249.
- Total amount of loan disbursed by Grameen Bank, since inception, is Tk 576.83 billion (US $ 9.87 billion). Out of this, Tk 512.57 billion (US $ 8.76 billion) has been repaid. Current amount of outstanding loans stands at TK 64.26 billion ( US $ 922.34 million).
- It awarded 30% dividend in 2009.
In 2003, Grameen Bank started a daring scheme of lending to the beggars of Bangladesh, thereby reinforcing that credit is a human right. Beggars, however, were not required to form a micro-credit group and were not obliged to attend the weekly meetings. They were treated at par with all other members and given all due respect.
A typical loan to a beggar was Tk 500 ($9.00) and was collateral free and aimed at not only empowering them financially but also to boost their morale.
- Barefoot College
- Social Accountability International
- Socially Responsible Investing
- Community Investing
- Case Study: BANGLADESH'S MICRO-LOANS
- Grameen Bank's Struggling (Beggar) Members Programme
- Grameen Bank
- Education and Poverty Eradication
- The Grameen Bank and women in Bangladesh
- Grameen Bank: Taking Capitalism to the Poor
- Features of Grameen's Credit Delivery System
- Grameen Bank's Method of Action
- The Work of Muhammad Yunus
- The Price of a Dream: The Story of the Grameen Bank