Yet another monsoon season was approaching; but Joshuna Begum (Begum) unlike her neighbours

was not worried about her house getting damaged during the monsoon. Her house now had a tin
roof, mud walls and wooden windows, a luxury in rural Bangladesh. Earlier, Begum’s house had a
straw roof and bamboo walls, which used to get damaged in the monsoon season, forcing the whole
family to live in the kitchen. She got her hut repaired with a loan from the Bangladesh Grameen
Bank (Grameen Bank)[4].

Begum wasn’t the only one; there were thousands of people in rural Bangladesh
who had improved their living conditions with the help of the microfinance programs
of Grameen Bank, a pioneer in microfinance (Refer Exhibit I for more about
microfinance). Grameen Bank helped thousands of poor Bangladeshi women to
improve their lives by extending loans to them to start. their own enterprises. By
2003, it was reported that between 33-48% of Grameen Bank borrowers had
moved above the poverty line[5] . By 2003, with 1,170 branches across Bangladesh,
Grameen Bank was seen as a role model for microfinance all over the world.

The Grameen Bank model was replicated across the world -- not only in developing countries like
India, Pakistan, and Vietnam, but even in developed countries such as Australia and the USA, where
similar schemes were set up to improve the lives of the urban poor (Refer Exhibit II).

However, the Grameen Bank also attracted criticism from the media and economists all over world.
Analysts pointed out that there was no proper monitoring of how the loans were utilized; it was
reported that the loans availed of by women were used largely for consumption rather than for
investment purposes. Analysts also pointed out that the accounting methods used by Grameen Bank
were not in accordance with industry standards, and that the bank did not provide full details about
its financial position and loan repayments position.

BACKGROUND NOTE

In the mid-1970s, Professor Muhammad Yunus (Yunus), then Head of the Rural Economics Program
at the University of Chittagong, observed that banks did not extend their credit schemes to the rural
poor as they were not considered creditworthy. In this situation, the rural poor were forced to
approach moneylenders who charged exorbitant rates of interest. In 1976, Yunus launched The
Grameen Bank Project, on an experimental basis to study the framework of banking services for the
rural poor. The objectives of the Grameen Bank Project were:

• Providing banking services to the rural poor

• Eliminating exploitation of the rural poor by moneylenders
• Facilitating self-employment projects for unemployed rural people
• Making women self-reliant by providing them opportunities through Grameen Bank
• To reverse the vicious cycle of – low income, low saving & low investment, into a new cycle of “low
income, credit, investment, more income, more credit, more investment, more income.”

BACKGROUND NOTE Contd...

TABLE I
GRAMEEN FAMILY
FOUNDATION DESCRIPTION
Grameen Trust was formed in 1989. It provided training to
Grameen Trust organizations for replicating Grameen Bank model in other
countries.
Grameen Fund was formed in 1994 to provide capital for
Grameen Fund
the new ventures.
Grameen Grameen Bank’s IT department was hived off into Grameen
 Communications in 1994. In 1997, it entered the ISP
Communications
market.
Grameen This was formed in 1996 to provide renewable energy in
Shakti/Energy the rural areas.
This was established in 1997 to provide education to bank’s
Grameen
members and their children. It also extended scholarships
Shiksha/Education
to the children for pursuing higher education.
Grameen Telecom was formed to provide telephone
services to the rural areas. It provided GSM cellular mobile
Grameen Telecom
phone services to 100 million rural people in and around
68,000 villages.
A 100% export-oriented composite knitwear factory with
Grameen Knitwearknitting, dyeing, finishing and garments production facilities
Limited and majority of its finished products were being exported to
Europe.
This became operational in 1996 and it provided Internet
Grameen Cybernet
service. It also offered customer service, technical support
Ltd.
and web page consulting.

By 2002, Grameen Bank had 2.4 million borrowers (95% of them were women) and its activities
were spread across 41,000 villages with over 1,100 branches. By August 2002, it had disbursed
cumulative loans of $3708.22 millions and the loan repayment rate was reported to be around 95%.

THE GRAMEEN BANK MODEL

The Grameen Bank model was one of the most widely researched microfinance models all over
world. The Bank had four tiers, the lowest level being branch office and the highest level being the
head office (Refer Figure I). The branch office supervised all the ground activities of the bank such
as organizing target groups, supervising the credit process and sanctioning loans to members. For
every 15-22 villages, a branch was set up with a manager and staff. An area office supervised
around 10-15 branch offices. Program officers assisted the area office to supervise the utilization of
loans and their recovery. All area offices were under the purview of a Zonal Office. Each zonal office
supervised around 10-13 area offices and all zonal offices reported to the head office situated in
Dhaka.

Grameen Bank operated on the principles of mutual trust, supervision, accountability and member
participation. Unlike commercial banks, which granted credit on the basis of collateral security,
Grameen Bank did not demand any security for extending credit. The interest charged by Grameen
Bank was higher than that charged by commercial banks, but lower than the interest charged by
moneylenders. The difference between the interest earned by the Grameen Bank and interests paid
by it on the loans taken from commercial banks was used to cover the operational costs of the Bank

Grameen Bank adopted an innovative Group Lending Technique for extending loans
to the rural poor. Under this technique in the first stage, around six to eight groups
were formed. Each group consisted of 5 women who became members of the
Grameen Bank. All the members were given training for a week, which included
introducing them to the rules of the bank and the bank’s social contract. It was
mandatory for the members to abide by the social contract known as Sixteen
Decisions for getting loans from Grameen Bank (Refer Exhibit IV). These sixteen
decisions helped in increasing awareness about social issues among the rural poor.

Every group had to pass an oral examination, which tested the members’ understanding of the
bank’s rules and decisions. After the group cleared the oral examination, two financially weak
members were chosen for loans. After choosing members for loans, each group had to submit
proposals for loans to the branch. All the groups discussed the loan proposals in the branch’s weekly
meetings and approved loans were sanctioned in sequence.

The loan amount usually ranged between 1000 to 3000 Taka[8] , which had to be repaid in 50 weekly
installments spread over one year. Initially, a 16% interest rate was charged on the declining
balance; in 1992, the interest rate was increased to 20%. In addition to paying interest, every
member of the group was bound to contribute 5% of the loan amount to the group fund. The group
fund was utilized during emergencies. In addition to this, in order to mobilize savings among the
poor, each member had to save 1 Taka every week and buy non-saleable Grameen Bank shares.

In 1984, apart from offering loans for entrepreneurial ventures, Grameen Bank also started
extending housing loans to its members. Unlike the traditional methods followed by banks and
financial institutions, Grameen Bank did not demand any collateral against the housing loans.
Initially, Grameen Bank offered housing loans of upto US $312.5 (around 15,000 Taka) in its
Moderate Housing category. Later on the amount was increased to US $520.83 (around 25,000
Taka). In 1987, Grameen Bank introduced a new housing loan – Basic Housing Loan up to US
$145.83 (around 7,000 Taka), which became very popular. In 1989, another type of housing loan,
the Pre-Basic Housing Loan, was introduced in the northern part of the country (Refer Exhibit III).
Grameen Bank also provided loans for buying land for constructing a house. Grameen Bank charged
8% interest per annum on housing loans and repayment was in weekly installments spread over 10
years.

Bangladesh Grameen Bank – Pioneer in Microfinance

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A SUCCESSFUL MODEL

When Grameen Bank started, many felt that it would soon fail; but on the contrary the bank
expanded its operations very rapidly. From 15,000 borrowers in 1980, the membership
increased to 100,000 in 1984; by 1991 it had 910,842 members, and by 2002, the number
increased to 2.3 million. From a figure of US $498 in 1976, the bank’s total disbursements
increased to US $170.39 million in August 2002 (Refer Table II).

The loan repayment rate was reported to be 95%. The high repayment rate was
probably a result of peer group pressure, and the Grameen Bank’s rule – that for
availing of fresh loans, earlier loans had to be repaid. Another important factor
that led to high repayments of loans was social pressure. When a member failed
to repay the installments, other members went to her home and demanded the
installments. Creditors’ knocking at the door for loan repayments was
considered disgraceful among Bangladeshis. It is believed that the above factors
led to the success of Grameen Bank which also succeeded in improving the lives
of its members.
Many research studies indicate that Grameen Bank bought positive changes in the lives of
thousands of rural Bangladeshis. The landless poor benefited the most from the Grameen Bank
movement. The landless poor, who earlier worked as agricultural laborers, acquired land for
their own farming activities after becoming Grameen Bank members. According to a World Bank
study conducted in 1994, Grameen Bank had improved the position of women in rural
Bangladesh.

Women members of Grameen Bank were more confident and socially aware than their non-
Grameen Bank counterparts. Grameen Bank members even took active part in politics. In the
1997 local elections, more than 2,000 Grameen Bank women members were elected to local
civic bodies.
Grameen Bank also encouraged the rural poor to get educated. It provided educational loans to
its members to enable their children to go to school and college. According to reports, the rate
of school-going girls among Grameen Bank member families was 57% higher than that in non-
member families

A SUCCESSFUL MODEL Contd...

TABLE II
GROWTH OF BANGLADESH GRAMEEN BANK OVER
THE YEARS
(in $ millions except for 1976)

PARTICULARS 1976* 1983 1988 1993 1998 2002**

Yearly Loan Disbursed
· General 498 2.29 43.71 260.24 393.9 170.36
· Housing 0 0 5.41 42.09 20.64 1.09
Total Disbursement 498 2.29 49.12 302.33 414.54 171.45
Cumulative Disbursement 498 8.19 136.11 848.56 2652.2 3708.22
Cumulative Amount
166 6.08 100.76 618.84 2255.64 3376.98
Repaid
Balance of Group Fund
0 0.51 6.46 40.83 92.74 0
Savings
Balance of Members
0 0 0 0 0 152.4
Savings
No. of Houses built 0 0 44556 258194 491012 549911
Coverage
Members 10 58320 490363 1814916 2368347 2366488
Groups 1 11667 98073 372298 486870 500639
Centers - 2443 19663 57649 66712 70057
No. of Villages Covered 1 1249 10552 33667 39045 41015
Employees 1 824 7093 11459 12850 11752
No. of Branches 1 86 501 1040 1137 1175
No. of Area Offices - 0 61 110 121 123
No. of Zonal Offices 1 5 9 12 15 15
* in dollars
** August 2002

Source: www.grameen-info.org

TESTING TIMES

The Grameen Bank faced a difficult situation in 1997 when Bangladesh experienced the worst-ever
floods in the country’s history. Around 75% of the country was submerged for around two-and-a-
half months. In addition to the huge loss of human lives and livestock, there was a large amount of
crop damage, and damage to housing and infrastructure. The floods affected around 1.2 million
Grameen Bank members. Grameen Bank declared around 24,000 centers as disaster-stricken
centers and suspended all banking activities in those centers. Even weekly loan repayment was
suspended and employees were allowed to utilize group collective savings.

QUESTIONS FOR DISCUSSION:

1. According to analysts, Grameen Bank was successful because of its unique working model.
Analyze the working model of Grameen Bank and discuss how it differs from the traditional
commercial banking model?

2. Many analysts criticized Grameen Bank for its style of functioning. Analyze the drawbacks of the
Grameen Bank model.
3. Microfinance has tremendous potential as an instrument for poverty reduction. Explain the role
played by Grameen Bank in reducing poverty in Bangladesh. Do you suggest that the Grameen
Bank model for poverty alleviation be emulated in other developing countries? Explain with reasons.

EXHIBIT I
ABOUT MICROFINANCE
Microfinance refers to providing loans and finance to poor people for self-
employment. Generally, small amounts are disbursed as loans, and the
timeframe for repayment of loans is longer compared to commercial banks.
Together with providing financial services, many microfinance institutions work
for social development in the areas in which they operate. For instance, Grameen
Bank’s sixteen decisions were intended to bring in social development in
Bangladeshi villages.

Microfinance institutions generally have the following characteristics:

• Providing small loans for the working capital requirements of the rural poor.
• Minimal appraisal of borrowers and investments as compared to commercial
banks.
• No collateral demanded; however, these institutions impose compulsory
savings and group guarantees.
• Based on the loan repayment history of the members, microfinance institutions
extend larger loans to the members repeatedly.

Though microfinance institutions provide the necessary monetary support and try
to increase social awareness among their members, their activities do not include
providing training for basic skills required for doing business. They do not extend
any marketing facilities nor undertake activities to improve the literacy rate and
health conditions of members.

Adapted from World Bank reports and various newspaper articles.

Bangladesh Grameen Bank – Pioneer in Microfinance

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EXHIBIT II
WORLDWIDE REPLICATION OF GRAMEEN BANK*
COUNTRY PROJECT NAME
Brazil Banco do Nordeste
Indonesia Dagang Bali Bank
USA People’s Fund
People's Institute for Development and Training (PIDT), The Activists
India
for Social Alternatives (ASA)
Pakistan KASHF Foundation, TARAQEE
Malaysia Yayasan Usaha Maju (YUM)
Philippines Ahon Sa Hirap, Inc.
Uganda Micro-Credit Development Trust (MCDT)
Vietnam Capital Aid Fund to Employment of the Poor.
Senegal Horizon Vets.
Samoa South Pacific Business Development Foundation
* This list is not exhaustive
Bangladesh Grameen Bank – Pioneer in Microfinance
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EXHIBIT IV
SIXTEEN DECISIONS OF GRAMEEN BANK
• We respect the four principles of the Grameen Bank - discipline, unity, courage
and work - and we apply them to all our lives.
• We wish to give our families good living standards.
• We will not live in dilapidated houses. We repair them and work to build new
ones.
• We cultivate vegetables the whole year round and sell the surplus.
• During the season for planting, we pick out as many seedlings as possible.
• We intend to have small families. We shall reduce our expenses to a minimum.
We take care of our health.
• We educate our children and see that they can earn enough money to finance
their training.
• We see to it that our children and homes are clean.
• We build latrines and use them.
• We only drink water drawn from a well. If not, we boil the water or we use
alum.
• We will not accept a marriage dowry for our son and we do not give one to our
daughter at her marriage. Our centre is against this practice.
• We cause harm to no one and we will not tolerate that anyone should do us
harm.
• To increase our income, we make important investments in common.
• We are always ready to help each other. When someone is in difficulty, we all
give a helping hand.
• If we learn that discipline is not respected in a centre, we go along to help and
restore order.
• We are introducing physical culture in all centres. We take part in all social
events.

Source: www.grameen-info.org

EXHIBIT V
RELAXATIONS ANNOUNCED BY GRAMEEN BANK IN
1998
• Grameen Bank extended new loans to the members who had 5 – 10
installments due.
• It also extended new loans to borrowers who had repaid around half of the
loans, and the repayment schedule was extended for a year.
• It also decided to extend seasonal loans to the members who had paid 16
installments of the total 50 installments.
• It also extended a supplementary loan of 5,000 Taka to its existing housing
loan members for repairing their houses.
• It also extended around 2,500 Taka to the people who had not received
housing loans earlier.
• It extended new housing loans to members whose houses were completely
damaged.

Source: www.grameen-info.org

ADDITIONAL READINGS & REFERENCES:

1. Poverty Reduction Strategy: the Grameen Bank Experience, www.gdrc.org, February 1994.
2. Bornstein David, The Barefoot Bank with Cheek, www.theatlantic.com, December 1995.
3. The Other Government In Bangladesh, The Economist, July 23, 1998
4. Pepall Jennifer, Bangladeshi Women and the Grameen Bank, www.idrc.ca, August 4, 1998.
5. New Study Confirms Benefits Of Bangladesh's Microcredit Programs, www.worldbank.org, January
14, 1999.
6. Milner Kate, Fighting poverty in Bangladesh, www.news.bbc.co.uk, March 17, 2000.
7. Pearl Daniel & Philips M. Michael, Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a
Repayment Snag, The Wall Street Journal, November 27, 2001.
8. Muhammad Yunus, Grameen Bank, Micro-Credit and the Wall Street Journal, www.grameen-
info.org, December 2001.
9. Grameen Bank in 'strongest position ever', www.news.bbc.co.uk, March 12, 2002.
10. Microcredit in Bangladesh: Mr. Elahi's Ray of Sunshine, The Economist, May 9, 2002.
11. Microcredit' rebuilding houses, lives in Bangladesh, Asian Economic News, June 3, 2002.
12. Muhammad Yunus, Grameen Bank II - Designed to Open New Possibilities, www.grameen-
info.org, October 2002.
13. Pathania M. Jyoti, Bangladesh’s Micro Credit: Millennium's Recipe For Poverty Alleviation,
www.saag.org, February 24, 2003.
14. Gopalakrishnan Anirudh, Micro Finance Route To Poverty Alleviation, Indian Management, May
2003.
15. www.worldbank.org
16. www.grameen-info.org
17. www.microfinancegateway.com