GRAMEEN BANK--MOHAMMED YUNUS

Micro-credit revolutionized rural economic development. While micro-credit institutions such as the Grameen Bank were heavily subsidized in the past, the current view among policy makers is that self-sustainability is needed to add to the impact of these institutions. However, some of Grameen Bank’s goals, such as fighting poverty and increasing the standard of living of the poorest people in Bangladesh, run against profit maximization principles that would lead to self-sustainability. This article will argue that to alleviate poverty and increase standards of living, it is necessary to strike a balance between subsidization and the quest for profit.

Mohammad Yunus behind Grameen Bank

                                      

The micro finance model was a reaction to the failure of both governments and international institutions to implement economic development programs efficiently. Micro finance institutions instead provided small loans to poor people who would not otherwise have access to loans from traditional banks. Traditional commercial banks require that certain pre-conditions be met in order for borrowers to receive loans. In addition, micro-lending addressed a major shortcoming of the state and institutional planning approach by channeling money directly to those who needed it most, while avoiding corrupt intermediaries. Because it became possible for the poor to become entrepreneurs, the micro-enterprises that were at the root of their economic subsistence improved.

The Bank’s Model

Acción International launched the first micro-credit organization in Recife, Brazil, although several others followed, such as Bank Rakyat in Indonesia and BancoSolin Bolivia. The Grameen Bank in Bangladesh is only one of these initiatives. It’s founder Mohammed Yunus, an Economics professor at Chittagong University in 1976, started lending money out of his own pocket to nearby villagers in order to support their crafts’ businesses. He later supported the craftsmen to get a traditional bank loan by acting as their guarantor (1). Yunus realized that his experiment resulted in substantially higher standards of living for borrowers, and that the majority of villagers repaid their loans. To expand his lending system, Yunus created the “Grameen Bank Project” in 1976 and turned it into a financial institution in 1983.

The Bank’s lending system, based on the functioning of market-based credit institutions, was adapted to break down barriers that had previously prevented access to credit by the poorest people. The Bank provided small amounts of credit at low interest rates without the need for paperwork or the provision of collateral. Instead, the Bank required group-lending with joint liability. Five people had to associate in order to receive a loan. Each person in the group would be responsible for the repayment of each others’ loans. If one person in the group did not pay, the other four would not be able to receive further loans (2). The delivery system for the loans and payments also differed from that of regular financial institutions. Instead of having to travel to a branch to do business, eight groups of five people met with a bank officer every week for a village “centre meeting,” where payments were processed and loans handed out.

Contributions of the Bank

The Bank addressed some structural determinants of poverty that were major impediments to rural economic development. For example, the Bank allowed rural entrepreneurs to successfully create new opportunities for themselves through self-employment, thereby dismantling the fallacious “entrepreneurial gap.” It was thought that rural areas lacked the entrepreneurial spirit necessary to raise the standard of living of villagers in developing countries (3). The Bank showed that when the focus was placed on developing the right environment, poor villagers could put their ideas to work and contribute to the development of their communities.

The Bank also addressed the lack of investment by financial institutions in rural areas as well as the restricted access to financial services by poor people which hampered development in these areas. A unique methodology was used where loan officers visited villages instead of forcing borrowers to travel to the closest branch to work out the conditions of a loan. Having bank officers travel directly to the villages not only improved access to financial services, but it also minimized the risk of dealing with corrupt intermediaries.

Women also benefited from the establishment of microfinance in Bangladesh. The Bank targeted female lenders, and therefore improved their economic and social status. More than 96% of Yunus’ borrowers are women. With this, Yunus not only contributed to the economic development of rural areas, but also to the increased economic contribution of women to their communities, to women’s improved sense of self-worth, higher community respect and increased financial independence.

The Bank chose to work in sectors where females were the decision-makers, such as craft-making and processing. Women, who are more vulnerable than men due to a lack of alternative business options, as well as a comparatively higher shame of non-compliance, were found to be more likely to pay back their loans (4). In addition, by targeting women Yunus substantially corrected the overrepresentation of women amongst the poorest villagers. An unexpected added benefit was that money obtained by women was more likely to be spent on the needs of the family. Therefore, not only did the standard of living of the villagers improve from the borrower’s investment return per se, but also from the subsequent use of the money made by them.

This is from my side how the Grameen bank revolutionized the Micro sector lending.Keep reading my blog.