GRAMEEN BANK

Introduction

• Founded by Professor Mohammed Yunus in 1976 • Dr. Yunus is the winner of the 1994 World

Food Prize• The largest rural finance institution in

Bangladesh 2,431 branches 78,659 villages (more than 94% of total villages in

Bangladesh) 7.21 million borrowers 97% women

• Loan size 318 bn T• Default Rate < 2% • Interest rate : 20% (declining basis) for income

generating loans, 8% for housing loans, 5% for student loans, and 0% (interest-free) loans for Struggling Members (beggars)

“Grameen” bank, means the “rural” or the “village” bank

What is Grameen Bank ?

• It provides credit and financial services :

• Exclusively to the rural poor in Bangladesh.

• Without any collateral for creating self employment

opportunities to quickly increase their income and

empower the poor

• Banking system based on mutual trust, accountability,

participation and creativity• Serves as a catalyst in the over all development of socio-economic conditions of the poor

Objectives

• Extend banking facilities to poor men and women

• Eliminate the exploitation of the poor by 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 poorest households, within the fold of an organizational format which they can understand and manage by themselves

• 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”

GRAMEEN

BANK

Covers almost

the Whole

Country

2,431 Branch Office 50-60 Centres per Branch

7.21 million borrowers

Each Centremade up of8 Group of 5 borrowers

each

Head Office

18 Zonal Office

123 Area Office

Group

Organization Structure

• Basic Loan

• Housing Loan

• Higher Education Loan

Loans Programme

Microcredit : An Overview

• Extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty

• Typically borrowers are people not considered bankable

• 7,000 microfinance institutions, serving some 16 million poor people in developing countries (World Bank estimates)

• 500 million households benefit from these small loans

• Examples: Grameen Bank, SKS India, Women’s World Banking

Basic Loan

Flexible Loan

Social Collateral Approach:Peer Group of Borrowers Collateral

• Small borrowers self-select into group

• Information • Diversification• Peer pressure

ensures repayment

• Individual finds others to co-sign or guarantee

• Banker must screen• Diversification is

banker’s responsibility

• Banker monitors borrower for repayment

Social Collateral approach: Traditional credit approach:

Key Features of Social Collateral Approach

1.Peer pressure

2. Information transfer

3. Mutual insurance

4. Cooperation

Peer Pressure

Joint liability: every member of the peer group is in default if any member is.

If peers can/will impose social penalties on each other, this adds an additional incentive not to default on one’s portion.

=> reduces moral hazard reduces the riskiness of the loans increases likelihood of obtaining

the loan

Borrowers self-select into groups with people they know and trust.

reduces incidence of adverse selection

new or low income entrepreneurs more welcome

increased value of the group loan as an asset (to the lender)

Information Transfer

Mutual Insurance

• The group is a safety net against default and its consequences for each borrower and the lender. Members effectively insure each other across project-specific downside risks.

=> Less credit risk. =>Applications rates rise.=> Loan approval rates can rise.

Cooperation allows for bundling of too small loans into one reasonable size loan.

Cooperation = coordination to simultaneously open the right mix of interdependent businesses.

enhances lending efficiencyenhances value of pre-existing

collateralborrower group is self-diversified

Cooperation

The 4 Principles of Grameen Bank

• Discipline• Unity• Courage• Workers

The 16 Decisions of Grameen Bank• To respect the four principles of

the Grameen Bank• To provide good living standards

for families• To repair dilapidated houses and

work to build new ones. • To cultivate vegetables the whole

year round and sell the surplus. • To pick out seedlings during the

season for planting, • To have small families, reduce

expenses to a minimum and take care of health.

The 16 Decisions of Grameen Bank• To educate children and ensure

their earning capability• To ensure cleanliness of children

and homes • To build latrines and use them. • To only drink water drawn from a

well. If not, boil the water or use alum.

• To not accept a marriage dowry for sons and not give one to daughters at their marriage.

• To cause harm to no one and to not tolerate anyone who should do us harm.

• To make important investments in common to increase our income

• To be always ready to help each other.

• To help and restore order if we learn that discipline is not respected in a centre

• To introduce physical culture in all centres and to take part in all social events

The 16 Decisions of Grameen Bank

Indicators of Poverty Level

A Grameen Bank borrower is said to have moved out of poverty if the family satisfies the following criteria:

– The family lives in a house worth at least Tk. 25,000 or a house with a tin roof, and each member of the family is able to sleep on a bed instead of on the floor.

– Family members drink pure water of tube-wells, boiled water or water purified by using alum, arsenic-free, purifying tablets or pitcher filters.

– All children in the family over six years of age are all going to school or finished primary school.

Indicators of Poverty Level

• Minimum weekly loan installment of the borrower is Tk. 200 or more.

• Family uses sanitary latrine. • Family members have adequate

clothing for every day use, warm clothing for winter, such as shawls, sweaters, blankets, etc, and mosquito-nets to protect themselves from mosquitoes.

• Family has sources of additional income, such as vegetable garden, fruit-bearing trees, etc, so that they are able to fall back on these sources of income when they need additional money.

Indicators of Poverty Level

• The borrower maintains an average annual balance of Tk. 5,000 in her savings accounts.

• Family experiences no difficulty in having three square meals a day throughout the year, i. e. no member of the family goes hungry any time of the year.

• Family can take care of the health. If any member of the family falls ill, family can afford to take all necessary steps to seek adequate healthcare.

The Credit Delivery System

• Exclusive focus on the poorest of the poor– Clear eligibility criteria for targeted clientele– Priority for credit increasingly given to women– Delivery system in sync with the socio-economic needs

of the poor

• Borrowers organised into small homogeneous groups– Primary groups of 5 members which are federated into

centres– Centres functionally linked to the Grameen Bank– Centre meetings for workers every week– Facilitate group solidarity and participatory interaction

• Special loan conditionalities suited for the poor– Small loan amounts without collateral– Repayment in weekly installments spread over a year– Loan eligibility depends on past credit history– Individual, self-chosen, quick income generating

activities– Close supervision of credit– Transparency in bank transactions

The Credit Delivery System

• Simultaneous undertaking of social development agenda– Raise social and political consciousness of the newly

organized groups– Increasing focus on poor women– Encourage and monitor social and physical infrastructure

projects

• Design and development of organization and management systems– Special training needed for highly motivated staff– Gradually decentralized decision-making and operational

authority

• Expansion of loan portfolio to meet the needs of the poor– Credit for building latrines– Credit for installing tube-wells– Credit for seasonal cultivation– Credit for joint enterprises of the group and the centre– Finance projects undertaken by fmily of borrower

Loans paid off at death

• Loan insurance program to cover for death• Each time a loan is given 3% of the loan

amount is deposited in loan insurance fund• This amount transferred from special

savings account• If current balance in the insurance savings

account is more than/ equal to 3% no deposit required

• Loan insurance is extended to husbands with additional deposits

• Outstanding amount of loan paid-off if husband dies

Loan insurance statistics

• Total deposits in loan insurance savings account USD 55.68 milion

• Upto date 64480 insured borrowers died

• Total outstanding loans and interest of USD 6.72 million paid-off by bank

• Families of deceased not required to pay the loans

Life insurance

• Borrowers are automatically insuerd by being shareholders of the bank

• Borrowers not required to pay any premuim

• Life insurance benefits of USD 0.12 to 0.14 million paid each year

• Total of 94216 insured borrowers have died so far

• Total insurance amount worth USD 3.72 million has been paid

Pension fund for borrowers

• Pension fund introduced for the old aged

• Borrowers required to save USD 0.72 per month for 10 years

• At maturity the borrower gets twice the money she deposited

• Current balance under this account is USD 212.66 miion with USD 56.73 added in past year

Loan loss reserve

• Loan not paid on time is converted into flexible loan with 50% provisioning done at first annual closing

• 100% provisioning done at end of second year

• At end of third year full loan amount written off even if loan repayment continues

• Loan reserves worth USD 40.49 million and writen off amount USD 24.6 million

Retirement benefits paid out

• Any staff can retire after 10 years of service

• Gets retirement benefits in cash worth avg USD 10040

• Paid within one month of retirement

• 6421 staff members have retired• Total mount worth USD 64.47

million paid

Vicious cycle of poverty

• Formation of group of 5 people to provide mutual moral group guarantees

• At first 2 members of group given loan

• Depending on their performance next two borrowers can apply

• Women given access to credit proved to be good borrowers and astute entrepreneurs

• Today over 90% of customers are women

Vicious cycle of poverty

• Intensive discipline, supervision & servicing are carried out by bicycle bankers with considerable delegated authority

• Rigorous selection of borrowers and projects and powerful peer pressure used

• Repayment scheme based on 50 weekly installments

• Savings are encouraged

Objections overcome

• Poor would not be able to find remunerative occupations

• Poor would not be able to repay• Poor women not bankable• Poor cannot save• Rural power structures would

ensure that the bank failed

Method of action

• A credit system must be based on a survey of the social background rather than on a pre-established banking technique

• 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 poor, credit officers visit the villages, enabling them to get to know the borrowers.

• Serve the most poverty-stricken people needing investment resources.

• 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.

Method of action

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 rigour, creativity, understanding and respect for the rural environment.

Is Grameen Bank Sustainable?

• In order to be sustainable, the bank must

– Promote its organizational development within given costs for its institutional viability

– Operate efficiently, given the program design and institutional framework, to attain financial and economic viability

– Help generate sustainable benefits for its members to reduce their poverty and achieve borrower viability

Is Grameen Bank Sustainable?

• Financial & Economic Viability – Reduced dependency on

Subsidies• Since economies of scale exist in branch

operation, Grameen Bank has the potential to eliminate subsidies through expanding its membership and lending

• Through increased membership and lending, the Bank has reduced its subsidy dependency to 0% from 23 % of subsidy per Taka lending in 1987

– Profitability of Branches• Majority of its 2431 branches are now

operating with profits. It takes about five years of operation for a branch to realize a profit.

Is Grameen Bank Sustainable?

• Institutional Viability– Grameen Bank has institutionalized a

decentralized management structure with a cadre of dedicated professionals that is operating without much of Prof. Muhammad Yunus ’ involvement

• Borrower Viability– Low drop-out rates: 15%– 40% annual growth rate in savings– Grameen Bank has recorded exceptionally

high recovery rates (about 98 %), highest among DFI’s

Challenges in Sustainability

• Expansion depends on the entrepreneurial ability of borrowers and market opportunities

• Continued support of traditional non-farm activities may not prove self- sustaining as Grameen Bank expands.

• The Bank must be able to expand lending in more growth-oriented activities for its survival in the long run.

Poverty Reduction Strategy : The Grameen Bank Experience

• Targets and mobilizes the poor – Creates social and financial

conditions so that they receive credit by identifying a source of self-employment in familiar rural non-farm activities

• Targets women more than men – women are more likely to

reinvest their earnings in the business and improve the living standards of their families

• Offers support services– Offers business advice and

counseling, while clients provide peer support for each other through solidarity circles

• Recycling of funds– continual reinvestment of

repaid loans multiplies the impact of each dollar loaned.

Struggling members programme

• Focuses on distributing small loans to beggars

• The existing rules of banking are not applied:– The loans are completely

collateral-free and interest free.

– The repayment period can be arbitrarily long

– The borrower is covered under life insurance free of cost.

– The struggling members (beggars) are not required to form any micro credit group.

• The bank does not force borrowers to give up begging– Rather encourages them to use

the loans for generating income by selling low-priced items.

Struggling members programme

• The goal of the programme is not only to economically empower but also to boost the morale and dignity of the beggars

– The bank treats its struggling members with the same respect and attention as regular members and refrains from using the term “beggar.

– They are given identity badges with the bank’s logo as physical evidence of the Bank’s support behind them

– The bank has arrangements with local shops to give the members a credit line up to a given amount to pick-up any merchandise from the store and sell in the village

– The regular group members act as mentors to the struggling members, providing guidance and support to them

• As of 2005– Around 45,000 beggars have taken loans of about

Tk 28.7 million (approx. US$441,538) and repaid Tk. 13.66 million (about US$210,154).

– A total of 786 members have already quit begging

Rural telephone programme

• A programme to bring telephones to distant villages

• Using the nationwide network of Grameen phone, Grameen Telecom, brought radio-telephones and mobile phones to almost half of the villages of Bangladesh

• The bank distributed loans to almost 139,000 poor women in rural areas to pay for the phones.

• The women set up call centers in their homes where the other villagers can come and pay a small fee for using the phone.

GRAMEEN BANK-II

BACKGROUND

• Existing Repayment crises• Floods in 1998 caused widespread

havoc• Grameen Bank conceptualizes

Rehabilitation Program– Fresh loans to start income generation

and repair of houses• Installment sizes exceed

borrower’s capacity– Led to repayment crisis– Borrowers demanded refund of “group

tax”– Snowballing effect: one defaulter

prompted other borrowers not to repay

Grameen Bank-II

Back to the Drawing Board• Design of a new methodology• Incorporating all lessons

learnt• Design pilot tested in certain

regions• After repeated fine-tuning and

testing, the new system (GGS) was ready for implementation

The Transition

• Intensive staff training program– Introduction to GGS– Quelled any resistance from staff

• Mammoth task of transition from GCS to GGS across 1175 branches

• Transition took more than a year and GGS was in place by august 2002.

Grameen Bank-II

• Changes Galore….– No general/seasonal/family loans– No branch-wise, zone-wise

ceiling– No Fixed weekly installment

• However, underlying assumption is the same – “Poor people always pay back

their loans”

Grameen Generalized System

• Based on one prime product– The basic loan

• In addition two loan products– Housing Loan– Higher education loan

• Borrowers on the verge of default are given an alternative route– Flexible loan

• Involves re-negotiation to arrive at a fresh repayment schedule

Flexible Loan

• Just a Re-scheduled loan• Does not imply that the borrower would

not repay• Acts as a cushion for the borrower and

helps him to get back on the “credit highway”

• Normal flexi-loan period ranges from 6 months to 2 years

• Bank has to provide for the flexi-loan during this period– An additional cost for the bank

• Cost is minimized by creatively designing the Basic Loan

• Removes tension from both the bank and borrower

Default under Flexi-Loan

• Willing Defaulter– Unable to repay – Takes flexi-loan repeatedly – Still unable to repay

• Unwilling Defaulter– Unable to repay– Not willing to take the flexi-loan

Advantages of GGS

• Custom-made micro-credit• Encourages staff to be

creative• Pension fund promotes self-

reliance• Loan Insurance is a borrower

friendly measure• Loan Ceiling grows with the

borrower

What has GGS achieved??

• Enthusiastic staff– Urge to create five-star branches

• Repayment rate of 98%• Put borrowers out of poverty• Happy and growing borrower

base

GRAMEEN BANK REPLICATION

Grameen Bank Replication Program (GBRP)

• As a response to growing demand• Grameen Trust (GT) supports all

replication projects• Promising individuals are invited to

Grameen Bank branches and trained

• Highly committed project leads are chosen

• Financial, technical and information support are provided

REPLICATORS

• Savings program in operation for at least 2 years

• Reached at least 500 homes• Cumulative repayment rate of

95% or more• Mobilized borrower saving of

10% of loans

Replications

• Grameen Bank replications in 30 countries, including the United States

• The most well-established is ACCION International– Originally founded in 1961 to aid Latin

America – Has opened six associate organizations in the

United States– Follows the basic Grameen model and has

similar objectives

• Others replications– Full City Fund, Chicago– Good Faith Fund, Arkansas– Lakota Fund, South Dakota– Small Enterprise Foundation, South Africa

Grameen Bank Outreach

• Simple, Universal Concept• Far Reaching Impact• Easily adaptable to different

countries– Adapted in the US, Australia,

Costa Rica and many more countries

• Attracts the poorest of the poor

Outreach…….

• Some projects that have adopted the Grameen approach:– Amanah Iktiar, Malaysia– Projek Usahmaju, Malaysia– Project Dungganon, Negros,

Philippines– Ahon sa Hirap, Laguna,

Philippines– Karya Usaha Mandin, Indonesia– Savecred, Sri Lanka