GRAMEEN MODEL AND EVALUATION:
Grameen’s model is well-tailored to the environment in which it thrives: it takes into account the social relationships which govern the village as well as the social norms which constrict women’s access to other financial means. That most financial transactions are conducted in the village rather than the branch office is an example of such understanding: services are therefore more accessible to village women who traditionally rarely leave the village, and would most likely be intimidated by the atmosphere of a commercial bank. Taking into account the likelihood of intimidation, Grameen simplifies many of its rules not only so they are easily comprehensible (especially to the illiterate), but also because of the trust it elicits through the transparency of transactions. The primary group of five is small enough to make close personal relationships and frequent contact among members possible; the 30-40 member centers are a more efficient size for conducting credit transactions, and large enough to create an identity within a community and to give the individual member a sense of belonging to an organization.
Furthermore, weekly repayment allows the borrowers to pay their loan installments from generated income, rather than the original capital. As such, borrowers were shown to accumulate capital as soon as they joined Grameen, indicated by a study by H.I. Latifee in 2003. Also shown in the study was that the borrower’s capital base increases drastically as subsequent loans are taken, allowing for medium and long term investments such as machinery, cattle, tools, and equipment. This investment pattern promotes the household’s capacity to sustain their gains over a long period of time. Moreover, the investments and savings accumulated have demonstrated themselves to improve the coping mechanisms of the poor in light of natural disaster, such as the 1998 floods in Bangladesh.
The emphasis on self-initiative and self-employment rather than consumption also creates new employment, significant in that it brings a new labor demographic into the market: women. Thirty-one percent of borrowers reported themselves as unemployed prior to joining Grameen, ostensibly because these women did not have the opportunity to work outside of their own homes. Self-employment addresses many of the social issues surrounding the ability to work: many surveyed women were able to incorporate their businesses without excessive difficulty into their daily duties of child rearing and household management, duties which cannot easily be foregone in a traditional environment. Hossain also found that the average age of employment for members increased from about 6 working days to 18 working days per month. Naturally, income increase is also an outcome from increased employment: income in member households were 28% higher than in nonparticipating households in Grameen villages. The higher incomes of Grameen households were attributed to increases in income from processing and manufacturing, trading, and transport services financed with loans from Grameen Bank. Per capital food consumption also increased in member households, as did investments in housing, education, and sanitation.
Though the emphasis of Grameen is not on consumption, a World Bank study found that “profits from Grameen-financed businesses were increasing borrowers’ consumption by 18% per year, and that the percentage of Grameen borrowers living in extreme poverty was reduced by 70% within 4.2 years of joining.” (WORLD BANK VIA 3502). A Grameen Bank internal survey reported that by 2001, 42% of all member families had crossed the poverty line; the assertion was made by an evaluation of ten indicators (loan size, savings amount, housing condition, house furniture, clothing, education, etc). Understandably, more than 91% of borrowers reported that Grameen had made a positive contribution to their standard of living. Housing loans provided by Grameen has also allowed for 528,385 new houses to be built, with women owning 92% of these houses and owning the property on which the houses were built.
The Sustainable Group Lending model pioneered by Grameen is most fascinating when studied in its light on family units, not just individuals. That women are targeted by Grameen is key: the Special Unit on Microfinance of the UNCDF reported that “women’s success benefits more than one person. Several institutions confirmed the well-documented fact that women are more likely than men to spend their profits on household and family needs. Assisting women therefore generates a multiplier effect that enlarges the impact of the institutions’ activities.” Naila Kabeer adds that it has been popularly demonstrated that “women’s interests are likely to be better served by investing effort and resources in the collective welfare of the household rather than in their own personal welfare.” Proponents of targeting women cite women’s repayment records as evidence of their benefit to institutional sustainability, reinforcing the collective wisdom that women’s repayment rates surpass those of men. Lower loan loss rates do have an important effect on the efficiency and sustainability of the institution.
But the Sustainable Group Lending model does alienate some: the Grameen system capitalizes on the ability of women to pressure one another to repay loans. That social capital is so vital to living in a village translates into the exclusion of those women who doubt their own ability to make timely repayments and comply with the rules of Grameen Bank; this protects Grameen from loan default, but also requires then that many borrowers already have some sort of confidence in their own abilities before they approach Grameen. Rahman and Hossain estimate that roughly half of the rural poor in Bangladesh are “hard core poor”, or those forced to subsist on a per capita income that is less than half of that of the poverty line. Many of the “hard core poor” self-select out of participation in Grameen out of a lack of faith in their own abilities; though they are poor, they do not believe themselves to be bankable. Similarly, Khandker studied attrition rates in Grameen villages, concluding that the factors which prevented many from joining in the first place also were the same factors which led to drop-out after a cycle or two: those who either lacked access to a reliable source of income from which to pay weekly installments or those who were married to irresponsible men (and therefore did not have a means of insuring the security of their weekly installments) were forced through social pressures to leave. In short, the effect of poverty is more than deprivation of financial opportunity: it may, in some situations, cultivate an environment which deprives many of the ability to grasp opportunity at all. This poses a problem for the model’s ability to reach the masses, as there are simply masses who cannot be reached through such means; however, as Grameen’s mission is to help others “help themselves”, this result is not entirely problematic to Grameen’s existence or its claims.
Grameen’s credit environment must be observed when analyzing its success: as the pioneer of Solidarity Group Lending, Grameen did not face competition when entering the market for microfinance. That this notion was unheard of led to particular difficulties in establishing credibility, as Yunus and Nurjehan Begum elucidate in interviews. Women were initially distrustful of the system, as its aim to provide credit to the non-creditworthy seemed contradictory; men were opposed because of the possible social upheaval of women generating their income. Through a process of individual convincing of villages, however, Yunus and Nurjehan Begum managed to bypass these obstacles with a small group. The group’s success allowed for the idea to spread. That this was a revolutionary concept instilled at a time of widespread destitution (after debilitating famines in Bangladesh) most likely enhanced the reception of such an unconventional idea: conventional means of alleviating poverty were failing, and as such those who were suffering were more willing to try something to better a dire situation. Furthermore, the revolutionary status of the idea benefited Grameen’s growth: that it was a new idea granted it publicity and therefore generated interest. Grameen’s efforts have obviously grown remarkably, and its current credit environment does face some competition. BRAC is a major competitor of Grameen in many villages, with significant overlap in the target areas of both groups: upon questioning of villagers, it was not unheard of to hear BRAC and Grameen functioning in the same villages. BRAC’s concentration is more focused on capacity building than is Grameen: BRAC’s strategy therefore includes human rights and legal education courses, provision of legal aid clinics, theater as a means of raising awareness of social problems, household visits by volunteer health workers, and gender equity training. Furthermore, BRAC’s mission statement claims that it aims to reach the “hard core poor” mentioned above, entailing a more aggressive, intensive approach than that of Grameen. That Grameen does not operate in urban areas also limits its target size: for urban poverty, groups such as Manabik are necessary. Grameen’s niche in the credit market particularly targets self-motivated rural women who require capital to develop their entrepreneurial ability.
Finally, Grameen must be lauded for its extraordinarily strong institutional identity. That Grameen is a well-established chartered bank grants the institution more legitimacy than if it were to be simply another NGO. Conflict with the government has been minimal as well, as it is supported publicly, not financially, by the government; were the support to extend to explicit financial donation, worries of corruption could possibly spread. The transparency of the organization on every level does lessen these concerns of corruption among those villagers willing to participate, yet highly distrustful of initiatives backed by a government which has previously shown itself to be corrupt. Grameen’s transparency, coupled with the cultivation of a strong identity and compelling vision, has been highly important in generating support and guiding its staff on the field; furthermore, it lends an air of credibility to the Bank’s functions, instilling the trust that is a pre-requisite to participation in microfinance itself.
THE GRAMEEN LENDING MODEL :
Microcredit outreach in Bangladesh is wildly successful: market penetration is estimated to be over 75% of poor, eligible, and willing families. Moreover, a 2003 World Bank study demonstrated that Bangladeshi microcredit programs “affect not only the welfare of participants and non-participants but also the aggregate welfare at the village level,” and they also have a “greater impact on greater impact on extreme poverty than on moderate poverty” . Furthermore, internal studies conducted by Grameen Bank show that 42% of its borrowing families crossed the poverty line as of 2001, assessed by ten indicators of loan size, savings amount, housing condition, warm clothing, etc. Such a level of astounding performance, however, has not been duplicated in any Grameen replicating institution; Muhammad Yunus reports that the most common response is that replicating institutions have not enough capacity to deepen outreach.
Surely the Grameen model cannot be blamed for its complexity: its appeal lies in the simple yet effective method of dispersing loans to those who demonstrate a need and desire for self-motivated entrepreneurship. Understanding that the poorest of the poor have been excluded from access to financial services, Grameen’s Solidarity Group Lending model uses social collateral to ensure repayment of small loans approximately (in size). Essentially, small loans are distributed individually to women organized in groups of five; it is the job of this group to ensure that weekly loan repayments are met.
“Grameencredit,” as Muhammad Yunus terms the model, has specific targets which distinguish it from other financial programs. The primary mission of Grameencredit is to help families help themselves to overcome poverty: its intention is to create “self-employment for income-generating activities and housing, as opposed to consumption”. Believing that credit is an essential human right, the system operates on a premise of trust and a vehement conviction that poverty is not created by the poor, but rather the institutions and policies which surround them. Pitt and Khandker (1998) underscore this notion in their examination of individual and household outcomes in Bangladesh; they conclude that access to credit is a significant determinant of many household outcomes, allowing for increased labor supply and asset holding.
Grameencredit aims to promote the skills of the poor which remain “unutilized or under-utilized”, in order to bring them out of poverty by “unleashing [their] energy and creativity to answer poverty”. It is due to this belief that Grameen does not offer job training or career building services. Rather, the emphasis is on building social capital in the impoverished women by incorporating them into a system which gives them the ability to exercise leadership (through group or center leadership) and self-initiative (through proactive entrepreneurship).
Who is eligible?
Grameen caters to the rural landless who qualify as the poorest of the poor: this means that their lack of collateral has disqualified them from traditional financial services. Qualifying as landless means that one possesses less than half an acre of land or assets that amount to less than the value of an acre of medium quality land: this definition thus makes eligible approximately half of the rural population. Less than this established quantity of land indicates that the potential client has few resources which can be effectively used for income generation; as such, they will benefit greatly from financial assistance. Grameen’s unique model addresses the issue of collateral when dealing with the destitute. This demographic has been denied access to financial institutions because they have no collateral with which to ensure repayment of a traditional loan. The high opportunity cost of the meeting and the small amount of loan makes the Grameen system unappealing to large farmers and the rural rich, effectively dismissing them from the program.The demographic targeted then is inherently narrowed to the landless and the destitute.
To guarantee payment, Grameen developed a Solidarity Group Lending model in which groups of five are assembled to use peer monitoring and social collateral to enforce repayment and efficient monitoring of the business. High risk borrowers are screened out of the process, as in a village environment one’s reputation as unreliable would prevent others from joining with in a group with that individual. Furthermore, joint liability is imposed upon the group. If one member of the group defaults on a loan, all are penalized for such a behavior. Group members are thus given a strong motivation to not only help one another, but also ensure repayment and proper conduct as per the rules of Grameen Bank. Peer monitoring reduces transaction costs incurred by the primary institution by placing it in the hands of the social pressure mechanism.
The groups are self-selected and must be homogenous in their gender composition. Although men and women both have opportunities to join, women have dominated the process and now take 94% of all distributed loans. Group members cannot be related in any manner, must have similar social and economic backgrounds to prevent unequal bargaining strength, and must be from the same village. Upon selecting a suitable group, the members are sorted into a center consisting of five groups each.
The process of screening now begins: members are subjected to fourteen days of meetings in which they must learn to sign their name, learn about Grameen’s objectives, and memorize Grameen’s Sixteen Decisions for proper social conduct.
Discipline is highly emphasized during this month of training, with the assigned loan officer testing and quizzing members to ensure their suitability for the program. Furthermore, the training also fosters a closer relationship among women not only in the group but also in the center; this creates a strong social network in which women can support each other as they embark on what will be for many their first entrepreneurial venture.
Loans are disbursed only when the loan officer is satisfied with the knowledge of all members of each group.
Self-selection and peer pressure are the two salient features which allow the Solidary Group Lending model to work. The former, however, may interestingly work to the detriment of what Syed Hashemi terms the “hard core poor”. Though most studies of Grameen Bank laud the institution for its remarkable ability to target the poor, the issue of differentiation within the ranks of the poor problematizes an effective targeting of this demographic. The “hard core poor” are those who are “forced to subsist on a per capita income that is less than half that of the poverty line; this group often self-selects itself out of Grameen participation only because they consider themselves to be not creditworthy. In Hashemi’s words, they “do not feel they have enough resources to generate incomes to pay back loans…and thus self-select themselves out of membership”. Out of 313 target group households interviewed in Rangpur and Faridpur, 120 women had chosen not to participate: 55 thought they would not be able to manage the money and thus would incur more debt; 35 thought that leaving home for Grameen meetings with males present would violate social norms; 11 were rejected for being high-risk or having high-risk husbands; and 19 said the rules were too complicated to understand and they were unable to memorize the Sixteen Decisions. This observation of the self-selection bias is important in that it indicates that microfinance must be tailored to suit the individual perceptions of the target groups: encouraging confidence and optimism in the ability to help oneself is a necessary prerequisite for the success of a microfinance program hinged upon self-initiative.
Services offered
General Loan: The General Loan is a loan of Tk 1000 dispersed to women for entrepreneurial activities. There is a 20% declining interest rate on these loans. The loans are entirely financed from the banks own deposits, with over 64% of the deposits coming from the bank’s own borrowers.
Housing Loan: Housing loans are provided for the construction of sanitary and stable housing. The maximum amount dispersed is Tk 15000, with the amount to be repaid over a period of 5 years in weekly installments at 8% interest. The average housing loan is approximately Tk 13000. To date, 627058 houses have been built with the assistance of this loan, with Tk 8.33 billion dispersed to that end.
Emergency Loan: The Emergency Loan can be granted in times of distress.
Struggling Members Program Notably, Grameen has expanded its services to include what is called the Struggling Members Program, which disperses small loans to beggars with a completely flexible and optional repayment term. No interest is charged, and members are covered under life insurance and loan insurance programs. The intention is to increase the self-esteem of beggars and allow them to sell small goods as they beg, in the hopes of stimulating some form of entrepreneurial spirit. To an extent, the Program targets those who self-select out of participation in Grameen’s more mainstream programs because of a lack of resources or of confidence in one’s entrepreneurial abilities. Approximately 63000 beggars have already joined the program, with disbursed amount standing at Tk. 45.92 million.
Housing Loan: The housing loan was introduced in 1984, with the maximum amount disbursed Tk 15000. Housing loans are provided at an interest rate of 8% to encourage clients to strive to have sanitary and stable structures as homes. A total of Tk 8.33 billion has been disbursed thus far as part of the housing loan.
Microenterprise Loan: These larger loans are granted to borrowers with significant business savvy, with no maximum amount specified. The funds are used to purchase merchandise such as irrigation pumps, transport vehicles, and other equipment not accessible due to restrictions of the smaller loan. Thus far, 668,389 members have taken these larger loans, with Tk 14.50 billion dispersed.
Education Loans: Children of parents who are involved with Grameen are given education loans which cover tuition, maintenance, and other school expenses, provided that they have reached the tertiary level of education. As of December 2005, almost 9000 students had received these loans.
ORGANISATIONAL MODEL:
Grameen’s efficiency lies in its decentralization. The transparent, simple system of loan disbursement delegates decision-making powers to the lowest relevant level, whether that is the branch, center, or group. The group-lending process dismisses the often high transaction costs associated with targeting a lower socioeconomic demographic. Grameen is able to maintain a large target size because the group-lending process not only encourages peer pressure as a means of repayment enforcement, but also because the screening process is no longer concentrated in the hands of the bank, as it is in the traditional financial sector. Shifting the time-intensive burden of the screening process to the client reduces quite a bit of transaction cost and labor intensity.
Weekly meetings also enhance the transparency of the loan disbursement, emphasizing their regular and public nature, as well as cuts down on adverse selection problems by encouraging discussion of any issues facing a group or center. Furthermore, the regularity of the weekly meeting creates an organizational structure in which loans are paid regularly, loans can be received continuously and simultaneously, and the loans are monitored consistently and transparently. This cuts down on messy, time-consuming efforts of repayment enforcement, as the group and center inherit this responsibility rather than Grameen as an institution. Corruption is also kept to a minimum by the weekly meeting: financial transactions take place in front of all borrowers and the rationale for granting or rejecting loan applications are openly discussed, so the potential for bribery and preferential treatment is limited. Suspicion that such corrupt practices may occur is also defeated, and encourages those relationships of mutual trust which are so vital to the function of the Group Lending Model.
The weekly visits of the loan officer to the center develop a close, personal rapport between lender and borrower, facilitating problem solving and enhancing consistent transparency. Constant contact with the clients in the clients’ own communities also ensures a high level of familiarity with sociocultural demands on and the economic needs of particular borrowers, and allows a tailor-made response to any obstacles that may arise as a result of these particular situations. The design of the system allows for a certain amount of flexibility in implementation, and as such the procedures of the program become “fine-tuned” by the staff in order to best suit their clients. Minor problems, such as issues of interference by husbands and family members, can be addressed by the field staff effectively and quickly as a result of this decentralized system. Furthermore, the transparency of the operating procedures instills a trust in the system that could not be earned were there not a decentralized, personalized system of monitoring.
Grameen’s emphasis on self-sufficiency and initiative is visible even on the organizational level: branches are encouraged to become self-sufficient as soon as possible. Branches monitor the center’s behavior and offer day-to-day contact with members. Area offices manage the branches, and function under the auspices of zonal managers. According to Hashemi, almost all major policy decisions are taken at zonal manager conferences in which “extensive critical assessments” of performance and intensive deliberations occur. Each zone policy is thus geared towards managing the problems that occur in its own jurisdiction according to norms and cultural nuances in each. The ability of the staff to familiarize themselves and target the issues in their jurisdiction is reinforced by an intensive introductory training program as well as in-service staff training, intended to support “a problem-solving culture [which] puts total trust in the creative potential of its staff and clientele in crisis management”.
Approach to Social Reform:
Grameen’s approach to social reform is embodied in the Sixteen Decisions: these are an example of a social development program intertwined with microcredit delivery. Developed in 1984, the Sixteen Decisions are an integral part of Grameen Bank’s mission: all potential and current borrowers are expected to memorize them, and adherence to the Decisions is monitored by the Loan Officer. Additionally, the loan officer is to explore one decision per week in-depth, and reinforce its applicability to the borrower’s lives and answer their questions to that end. The decisions are:
1. We shall follow and advance the four principles of the Grameen Bank (discipline, unity, courage, and hard work) in all walks of our lives.
2. We shall bring prosperity to our families.
3. We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest possible.
4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus.
5. During the planting seasons, we shall plant as many seedlings as possible.
6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health.
7. We shall educated our children and ensure that they can earn to pay for their education.
8. We shall always keep our children and the environment clean.
9. We shall build and use pit-latrines.
10. We shall drink tube-well water. If it is not available, we shall boil water or use alum.
11. We shall not take any dowry in our sons’ weddings, neither shall we give any dowry in our daughters’ weddings. We shall keep the center free from the curse of dowry. We shall not practice child marriage.
12. We shall not inflict any justice on anyone, neither shall we allow anyone to do so.
13. For higher income, we shall collectively undertake bigger investments.
14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help them.
15. If we come to know of any breach of discipline in any center, we shall all go there and help restore discipline.
16. We shall introduce physical exercise in all our centers. We shall take part in all social activities collectively.
The Sixteen Decisions are a social development agenda that places primary responsibility on members rather than on Grameen Bank for implementation; as such, the expenditure incurred by Grameen for this social development program is minimal. The simple approach is easily understood by the participants, and reinforced through regular recitation and discussion. Furthermore, they are closely tailored to the setting of rural Bangladesh by having tangible and specific demands, rather than nebulous, ambiguous statements of principle.
