Grameen micro credit

grameen micro credit

"Notes on the Grameen Bank and

the International Microcredit Movement"

Econ 353: Money, Banking, and Financial Institutions

Last Updated: 28 March 2015 Latest Course Offering: Spring 2011

Econ 353 Home Page: http://www2.econ.iastate.edu/classes/econ353/tesfatsion/

Course Instructor: Professor Leigh Tesfatsion

http://www2.econ.iastate.edu/tesfatsi/

tesfatsi AT iastate.edu

Background to the Debate

Microcredit is the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans because they lack collateral. Microcredit lenders rely on trust and community peer pressure to maintain high repayment rates rather than on more traditional banking means such as collateral requirements and the legal enforcement of contracts.

Dr. Muhammed Yunus has been a major impetus for the successful establishment of microcredit arrangements in many developing countries. Dr. Yunus has won many awards for this work, including the 2006 Nobel Peace Price and the Presidential Medal of Freedom awarded by President Obama in 2009.

In 1976, Dr. Yunus founded the Grameen ("Village") Bank Project in Bangladesh for the purpose of offering microcredit to the poor in rural Bangladesh. At the time, Dr. Yunus -- a Ph.D. graduate of Vanderbilt University in 1972 -- was Head of the Economics Department at Chittagong University in Bangladesh.

Dr. Yunus organized this "socially conscious capitalist enterprise" in accordance with the following three principles:
  • Loans were to be repaid, and on time.

  • Only the poorest villagers (the landless) were to be eligible for loans.

  • Lending would primarily be to women, because women were socially and economically the most impoverished, and because the immediate beneficiaries of loans to women were generally their children.
  • In 1983 the Grameen Bank Project was transformed into a private independent bank --- the Grameen Bank (GB) --- by a Government Ordinance. According to the official Grameen Bank Website . the GB currently has 1,658 branches operating in 57,791 villages with a total staff of 14,989. The GB services over 7.5 million borrowers (96 percent women) and has a loan recovery rate of 98 percent. Borrowers of GB own 94 percent of the total equity of the bank, with the remaining 6 percent owned by the Bangladesh Government. Moreover, since 1995 the GB has not requested any fresh funds from donors but instead has relied on its growing amount of deposits to run and expand its credit program. Over 64 percent of these deposits come from the GB's own borrowers.

    In addition, the GB has now expanded to include a family of GB enterprises .

    The standard Grameen Bank (GB) loan process is as follows.
  • To qualify for a GB loan, a borrower must demonstrate that her family assets fall below a certain threshold set by GB.

  • A GB borrower is not be required to put up collateral. Rather, she must join a five-member group of GB borrowers, attend a weekly group meeting,and encourage "loan discipline" within the group. This loan discipline includes the assumption of responsibility for the GB loans of all of her group members, and adherence to "sixteen decisions" such as keeping families small and not accepting (or paying) a dowry for a son's (or daughter's) wedding).

  • A GB borrower's continued access to GB credit is conditional on prompt loan repayment by all of her group members.

  • Most GB loans have been for two years periods with an annual interest rate of 20 percent (calculated on a declining principal), which is about four percentage points above the commercial rate in Bangladesh for similarly structured loans with collateral.

  • GB never forgives loans, although it restructures them (extends their maturity) when necessary; and no free services are provided.
  • UNESCO presents the following description on its GB website:

    "Grameen Bank has reversed the conventional banking wisdom by removing collateral requirement(s) and created a banking system based on mutual trust, strict supervision, accountability, participation and creativity. " GB sees credit as an empowering agent, an enabling element in the development of socio-economic conditions of the poor who have been kept outside the banking orbit on the simple ground that they are poor and hence not bankable. The founder of the (Grameen Bank) views credit as a powerful weapon (and) a fundamental human right. Credit creates entitlement to resources and is the basis for the economic emancipation of the poor in general and the poor women in particular."

    Questions and Challenges

    1. Long-Run Financial Viability of the GB:

    Critics of the GB, and even some well-wishers, have questioned its long-run financial viability.

    In November 2001, after extensive back-and-forth email correspondence with Muhammed Yunus, Wall Street Journal (WSJ) reporters Daniel Pearl and Michael M. Phillips published a rather negative article on the GB titled "Grameen Bank, Which Pioneered Loans for the Poor, Has Hit a Repayment Snag."

    Note: Pearl is the reporter who was kidnapped and killed by terrorists in Pakistan early in 2002.

    Yunus (January 2002) responded at some length to the criticisms laid out in the WSJ article. His reponse included an interesting exchange of email correspondence between himself and Pearl prior to the publication of the WSJ article.

    (a) Repayment Problems Hidden by Non-Standard Accounting Procedures?

    Pearl and Phillips (November 2001) criticized Grameen Bank's financial reporting procedures and suggested that repayment problems were being masked by non-standard accounting practices.

    For example, Pearl and Phillips charged that the GB was simply delaying inevitable defaults and hiding problem loans by not reporting refinanced problem loans as loans at risk. Instead, under the GB's "flexible loan" program, delinquent loans that were refinanced were being treated as back on schedule as long as some regular payment was being made. Since the GB was not under any formal regulatory supervision, it was difficult to know with any certainty what percentage of the GB's current loan portfolio was actually at risk.

    Yunus (January 2002) stressed that the repayment problems noted in the WSJ article were temporary, caused by mistakes made in response to a devastating flood in 1998 -- half of Bangladesh was under floodwater for over ten weeks. Fresh loans were made without requiring borrowers to pay back existing loans, and some borrowers were not able to handle the resulting loan burdens. The repayment rate then dropped, to around 90 percent by the time the WSJ article was written; but the repayment rate was once again rising and was expected to reach 98 percent by December 2002.

    Yunus also stressed that the GB used non-traditional accounting procedures because it had had to create new systems to balance financial and human considerations. "Grameen is based on human-relationships, not on threats of penalty imposed by legal system or any other agency." The policy is to rehabilitate delinquent borrowers, not to punish them.

    Finally, Yunus disputed the claim that the GB was operating without supervision. He stated that the Central Bank of Bangladesh "has the responsibility of audit and inspection over us. They check our books carefully. We have never heard any complaint from them about our (loan) provisioning criteria." He also noted that the GB "started to distribute widely its monthly statement containing all basic information about its operation from February, 1980, nearly twenty-two years back, when it was not even a bank yet."

    The official Grameen Bank Website now includes a site devoted entirely to GB financial reports and performance indicators . including access to yearly

    financial reports. This suggests that Yunus has actively taken steps to increase the transparency of GB accounting procedures.

    (b) Moral Hazard Problems?

    Pearl and Phillips (November 2001) also gave anecdotal evidence that some GB loans were being used for consumption rather than for productive purposes, and that some borrower groups, rather than enforcing repayment discipline on their members, were instead bandeding together to force Grameen Bank to offer more lenient repayment terms to their members.

    Yunus (January 2002) noted that various loans to women for home expenditures that would be considered as consumption loans under traditional accounting practices are treated as productive loans by GB since it is recognized that the women's homes are their workplaces.

    Yunus also disputed that the GB was having increasing difficulties with borrower groups. He claimed that "85 percent of the 2.4 million borrowers are paying back their loans with clockwork precision. Only 15 percent of them are having difficulties in paying back." Moreover, he argued that these difficulties were temporary, caused by the flood problems outlined above and not by borrower resistance to paying back their loans.

    The official Grameen Bank Website now includes the claim that the current GB loan recovery rate is 98 percent.

    (c) Too Many Competitors?

    Finally, Pearl and Phillips (November 2001) raised the possibility that increasing competition from other microcredit institutions had resulted in problems with overlapping loans from multiple institutions and less ability to impose effective discipline on borrowers.

    In an email message to Daniel Pearl dated 26 August 2001, appended to his response, Yunus (January 2002) dismissed this as a minor issue. "Not even 5 percent of all (GB) borrowers are involved in multiple sources for their loans! In some location it may be high, but over-all it is not worth worrying about."

    The official Grameen Bank Website provides an extraordinarily rosy picture of the current financial condition of the GB. If even a fraction of these claims are solid, the GB would seem to be a smashing success.

    2. Potential Difficulties with GB Technology Transfer:

    Some commentators have also raised doubts regarding the transferability of the GB microcredit concept to other countries. For example, Bornstein (1995) notes:

    "Bangladesh has a long tradition of self-employment. By comparison, very few Americans -- not even one in ten -- work for themselves, and low-income Americans who wish to be self-employed typically require training, technical assistance, and perhaps most important, access to business networks along with credit. " Because of the high cost of training and the low disbursements, to date no micro-enterprise lender in the United States has come close to breaking even, and only a handful have more than a few hundred borrowers." (M)any have abandoned the hope of achieving financial self-sufficiency. Instead they defend their program costs by framing the issue in terms of social justice. "

    On a more hopeful note, Imran Matin (February 2002) provides a carefully documented study of available evidence regarding innovation in product design and organizational arrangements in the contemporary microfinance industry in Bangladesh.

    Microfinance refers to savings, insurance, and credit instruments, and hence is a more general concept than microcredit.

    Matin rejects the workability of a "one size fits all" approach to microfinance -- e.g. the global adoption of the GB type of microcredit arrangements.

    However, based on detailed case studies of three microfinance institutions in Bangladesh (ASA, SafeSave, and Gono Bima), Matin concludes that the careful tailoring of microfinance products and arrangements to local demand and supply conditions can achieve substantial improvements in the daily lives of the poor while at the same time ensuring financial self-sufficiency.

    The first microfinance program established in the USA was ACCION USA . founded in 1991 in New York. Currently ACCION USA is the largest microlender in the USA.

    In January 2008 the GB officially established Grameen America . in New York City. An additional branch of Grameen America was established in Omaha, Nebraska (Summer 2009) and in two additional bouroughs of New York (Manhattan and Brooklyn) in January 2010.

    The concept of microcredit has been strongly endorsed by both President Bill Clinton and Secretary of State Hillary Clinton; see the remarks of Bill Clinton on behalf of the Microcredit Summit Campaign .

    However, in recent years strong new criticisms have been raised against microcredit lending. These criticisms stem from both political and economic considerations. For discussions of these criticisms, see the readings below by Ahmed, Bajaj, Lee and David, and Kristoff.

    References and Other Related Readings

  • Official Grameen Bank Website

  • The United Nations Educational, Scientific, and Cultural Organization (UNESCO) maintains a website on the Grameen Bank that explains the basic structure and operation of the bank, the Grameen banking philosophy, and the founding of the bank by Dr. Muhammed Yunus in 1976.

  • Anis Ahmed, "Bangladesh Court Rejects Yunus Appeal Against Dismissal". Reuters, 5 April 2011. (pdf,26K)

  • Vikas Bajaj, "Microlenders, Honored with Nobel, are Struggling". NYT, 6 Jan 2011. (pdf,19K)

  • Beatriz Armendáriz and Jonathan Morduch, The Economics of Microfinance. Second Edition, MIT Press, May 2010.

  • Nitin Bhatt and Shui-Yan Tang, "Making Microcredit Work in the United States: Social, Financial, and Administrative Dimensions," Economic Development Quarterly, vol. 15, no. 3 (2001), pp. 229-241.

  • David Bornstein (December 1995), "The Barefoot Bank with Cheek" . The Atlantic Monthly. December, 1995.

  • Nicholas Kristof, "Is Bangladesh Trying to Take Over Grameen Bank?". NYT, 5 Jan 2011. (pdf,16K)

  • Yoolim Lee and Ruth David, "Suicides in India Revealing How Men Made a Mess of Microcredit". Bloomberg, 28 Dec 2010. (pdf,33K)

  • Evaristus Mainsah, Schuyler R. Heuer, Aprajita Kalra, and Qiulin Zhang (2004), Grameen Bank: Taking Capitalism to the Poor . Columbia Business School, CHAZEN Web Journal of International Business, Spring.

  • Imran Matin (February 2002), "New Thinking and New Forms of Microfinancial Service Provision in Bangladesh: A Comparative Study of ASA, SafeSave, and Gono Bima" (html) . Finance and Development Research Programme, Working Paper No. 37, University of Manchester, United Kingdom, February, 2002.

  • Jonathan Morduch (1999), "The Microfinance Promise". Journal of Economic Literature. Volume 37, pp. 1569-1614.

  • Daniel Pearl and Michael M. Phillips (November 2001), "Grameen Bank, Which Pioneered Loans for the Poor, Has Hit a Repayment Snag" . The Wall Street Journal. November 27, 2001.

  • Marguerite S. Robinson (2001), The Microfinance Revolution: Sustainable Finance for the Poor. World Bank, Washington, D.C.

  • Muhammed Yunus (January 2002), Excerpts from "The Grameen Bank, Micro-Credit, and the Wall Street Journal" . Grameen Dialogue.

  • The Microfinance Gateway Website includes research and publications, specialized resource centers, organization and consultant profiles, and the latest news, events, and job opportunities in microfinance.

  • Uganda: A Little Goes a Long Way . Story Synopsis and Video, Frontline Story, PBS, October 31, 2006. This story/video discusses the organization and activities (particularly in Uganda) of an on-line San Francisco company, Kiva.org, that promotes the funding of microloans for entrepreneurs throughout the developing world --- Africa, South America, Asia, Southeast Asia, and parts of the Near East and Middle East.

  • The WWW Virtual Library on Microcredit and Microfinance is a repository of information on alternative, non conventional financial systems and the informal credit markets, with extensive links to documents and case studies

  • The Wikipedia entry "Microcredit" contains many useful weblinks.
  • Copyright © 2011 Leigh Tesfatsion. All Rights Reserved.

    Source: www2.econ.iastate.edu

    Category: Payday loans

    Similar articles: