Support to Take Matters into One's Own Hand

Grameen Bank: Development Financing by Microloans

Hardly to believe, but in developing countries just very small amounts may help to families to sustainably secure their existance. Based on this awareness Muhammad Yunus in Bangladesch developed a business model: the Grameen Bank. This organization, that meanwhile is extended by numerous non-profit companies, now for more than three decades very sucessfully deals in microloans - especially to women. In the year 2006 the Grameen Organisation and its fonder Muhammad Yunus received the Nobel peace prize. A professor from Jena University of Applied Sciences looks behind the seats of this bank showing its idea, function and selfconception.

By Professor Dr. Wolfgang Eibner, University of Applied Sciences Jena and Dipl.-Wirt.-Ing. Michael Anding, Munich

Diesen Beitrag als PDF.

What is the reason, why so many developing counties permanently less developed? One of the main reasons for the long-lasting backwardness of a large part of the developing countries is, that the ultra-large majority of the population is not actively involved in the business cycle as a productive supplier and enquirer of economic outputs.

The cycle of producing and earning, as well as consuming cannot be started up for a wide cross-section of the people. One possibility to start that cycle, is to support the landless rural people as well as the urban people living in slums by microloans within the framework of comprehensive assistance for the self-employed. A very successful example of such a poverty-oriented development financing is the work of the GRAMEEN BANK in Bangladesh

The Bank for Pennyless Entrepreneurs

The bank was founded by Professor Muhammad YUNUS, who In 2006 he received the Nobel peace prize for this support to people living below the poverty line. His bank grants so-called entrepreneurial self-help microloans to the destitute and thereby helps them to set up and keep up new businesses (cf. YUNUS/ JOLIS, 2003).

The bank finances itself primarily with public funds and aid for development. Only with such targeted, ‘first push' financing for the destitute self-reliance can be reached in the Third World and the much too limited economic purchasing power of wide sections of the population might increase.

27 US-Dollar led 42 Poor Families out of Poverty

The idea to establish a new kind of a "Bank for the Poor" was set by Muhammad Yunus, that time Head of the Rural Economics Program at Chittagong University, in the very south of Bangladesh. After a famine in Bangladesh in 1974 Yunus walked through a starving village near by, Jobra, and came up with a list of 42 people who were basically stuck in poverty over a matter of pennies: Just the ability to buy sewing needles, material or an old loom would have led them out of their serfdom-founded poverty.

Who is Muhammad Yunus?

Muhammad Yunus was born June 28^th 1940 in Chittagong, Bangladesh. In the 1960^th he studied economics at Vanderbilt University/ USA. In the 1970^th was appointed to a professorship of economics in his native city in Bangladesh. Yunus can be considered as the father of the idea of microloan financing. In 2006 he received the Nobel peace prize for this support.

Yunus is quoted with this sentence: "When I added up the total amount they needed, I got the biggest shock of my life: It added up to 27 dollars! I felt ashamed of myself for being part of a society which could not provide even 27 dollars to 42 hard-working, skilled human beings." (Cf. [www D. Murphy 11/2004].) So he lent US-$ 27 to 42 families to get them of the hook.

Individual loans between 30 and 50 US-Dollar

Because poor people are not collateral, conventional banks do not lend to such people. Therefore Yunus lent money from the bank for himself to give it then to the rural people. In 1976 he finally launched his own bank: The Grameen Bank. The basic work of this Grameen Bank is to help out the rural people of Bangladesh with microloans without requiring collaterals. One credit is about US-$ 30 to 50.

Because of a higher moral of repayment and to increase the role of women in the society, credits were mainly given to women. To receive a credit one woman has to incorporate with four other women to a group of five, to make repayment more likely. Each member of the group can get a credit. But first of all only two of them get financial support. If they can pay back on time the other three can apply for a credit too.

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Evenhanded Credit-policy

In case of an extraordinary intervention (for example the husband disappears with the money) that causes insolvency, the borrower can ask for a new credit. The first credit then will be transferred into a long-term credit that is free of interest and the borrower can decide when he pays back that credit. In general the rate of interest for a common credit is 20 %. For credits used for education the interest rate is 5% and to build a house a borrower would pay 8 % annually.

The repayment scheme is based on weekly installments. The loan does either come from non-profit organizations or institutions owned by the borrowers of the Grameen Bank that have some extra money to give away. If none of these works, the Grameen Bank tries to borrow money from a profit organization with an interest rate as low as possible.

There are no legal regulations between the bank and its borrowers. If a client can not repay his credit in time, he is able to reschedule his payments. And: No matter what the total interest is on a loan, it may never exceed the amount of the loan.

The Co-operative Principle: Owners of the Bank are the Debtors

The system of the bank is based on mutual trust, creativity, participation and accountability. Owner of the bank are the borrowers. They possess 90 % and the government owns the other 10 %. There is an annual election of a group of leaders that are members of the bank; those people decide about who awards a credit.

In contrast to the conventional banks the branches of the Grameen Bank are in poorer areas close to the village they support. The employees go from door to door to distribute the credits among the poor people. In this process there is a selection with certain criteria that specify whether somebody can get a credit or not. If there is a catastrophe like a flood disaster, branches at the hit areas close down and the employees go into the villages to help the people, for example giving financial support to buy food. All the money is acquitted by the income of the bank.

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Grameen Bank Strengthens the Position of Women

The Grameen Bank lends money with no advices, nor hints. In this way rural people shall try to be creative. In the years after 1976 the members of the Grameen Bank increased enormously. A positive side-effect: Women are respected more and more by their husbands and the society. More people participate in Bangladesh's politics; members of the Grameen Bank started to run for election. The birth rate decreases and more children attend school. This results in a lower illiterate rate falling from 90 % to 70 %.

A Bank and its 16 Principles

There are 16 general principles of the cooperative organized Grameen Bank that are supposed to be internalized by all members of the Grameen Bank in order to help the rural people in Bangladesh.

These 16 principles of Grameen Bank are the following (as of [www Grameen Bank 11/2006]):

1. We shall follow and advance the four principles of Grameen Bank - Discipline, Unity, Courage and Hard work - in all walks of our lives.
2. Prosperity we shall bring 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.
4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus.
5. During the plantation seasons, we shall plant as many seedlings as possible.
6. We shall plan to keep our families small. We shall minimize our expenditure. We shall look after our health.
7. We shall educate 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 water from tubewells. If it is not available, we shall boil water or use alum.
11. We shall not take any dowry at our sons' weddings, neither shall we give any dowry at our daughters wedding. We shall keep our centre free from the curse of dowry. We shall not practice child marriage.
12. We shall not inflict any injustice on anyone, neither shall we allow anyone to do so.
13. We shall collectively undertake bigger investments for higher incomes.
14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her.
15. If we come to know of any breach of discipline in any centre, we shall all go there and help restore discipline.
16. We shall take part in all social activities collectively.

Grameen is More Than a Bank

In 1989 the Grameen Bank started additional new loan programs, as for the building of lavatories, septic systems and water supply. The Grameen Bank furthermore established a group of non-profit oriented companies mostly organized as a cooperative, which are in action with plenty of activities for the poor. These companies meanwhile became known as the 'Grameen Bank family' (cf. [www Grameen Family 02/2007]). The most relevant of these enterprises will be introduced below.

• Grameen Fund: The Grameen Fund was incorporated in January 1994 as a non-profit-oriented institution and started operations on February 1^st, 1994. Its emphasis is on providing finance to ventures that are risky, technology-oriented and otherwise deprived of financing from existing formal lending institutions.

• Grameen Communications/ IT: Grameen Communications is a technology firm that participates in the foundation of firms and validates to give away computers and provides internet service. This company as a member of the Grameen family also is a non-profit organization. Using the internet the residents of the villages shall see what is happening in the world and try to participate in international businesses. It has been providing complete system solution through developing software products and services, internet services, hardware- & networking services and IT education services since its inception in 1997. The idea is to earn more foreign exchange, helping to increase the economic development of the whole country.

• Grameen Shakti/ Energy: Grameen Shakti is a non-profit-oriented rural power company whose purpose is to supply renewable energy to villages in Bangladesh which are still not connected to the power supply system. Grameen Shakti expects not only to supply renewable energy services, but also to create employment in rural Bangladesh and therefore improve better income-generation opportunities.

• Grameen Shikkha/ Education: Established in 1997 the main objectives of Grameen Shikkha are to promote mass education in rural areas, provide financial support in the form of loans and grants for the purpose of better education, use information technologies for alleviation of illiteracy and development of education, promote new technologies and innovate ideas as well as in general to support new methods for the development of education etc. Grameen Shikkha has been conducting Life Oriented Education Projects, Pre-school/Child Development Programs, Early Childhood Development Program and Arsenic Mitigation Programs in various districts of Bangladesh.

• Grameen Telecom and GrameenPhone: Yunus merged with the Norwegian telephone company Telenor in 1996 that gave him mobile phones which he distributes among the villages. This serves the purpose of giving the poor the opportunity to make an emergency call, make an order, and shorten mailing route and time. Grameen Telecom is planning, until 2010, to provide GSM 900/1100 cellular mobile phone service to 100 million rural inhabitants in 68,000 villages by (1) financing 60,000 members of Grameen Bank to provide village pay phone service and (2) providing direct phones to potential subscribers. As of January 2007 there are 283,000 village phones already in operation.
  Grameen Telecom holds 38 % share of the also non-profit GrameenPhone Ltd., which commenced operation in March 1997; the company that was awarded a nationwide license for GSM 900 cellular mobile phone services. It is a joint venture enterprise with Telenor (62 %), the largest telecommunications service provider in Norway with mobile phone operations in 12 other countries. GrameenPhone is now the leading telecommunications service provider in the country with more than 10 million subscribers as of November 2006. At present, there are about 15 million telephone users in the country, of which a little more than one million are fixed-phone users and the rest mobile phone subscribers.

• Grameen Knitwear Limited: This company is a 100 % export oriented composite knitwear factory, located in the Export Processing Zone in Savar in the vicinity of Dhaka, the capital of Bangladesh. It has knitting and garments production facilities including dyeing, and offers a range of good paid jobs. The countries where the goods are currently exported to are mostly Europe, thus bringing pressingly needed foreign exchange into the country.

• Grameen Cybernet Ltd: Grameen Cybernet Ltd. has been Bangladesh's leader in Internet service provision since it commenced operation in July 1996.

The whole project of Grameen Bank's microloans meanwhile is sponsored by the central bank of the country and gets support of the nationalized commercial banks.

In October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation. In contrast to the situation with conventional banks, 98 % of the clients of the Grameen Bank repay their money on time.

The Track Record at a Glance

It started with 42 families in 1974 and as of January 2007, Grameen Bank has 6.95 million borrowers, 97 percent of whom are women. With 2,343 branches, it provides services in 75,359 villages, covering more than 90 percent of the total villages in Bangladesh; 2,120 of the 2,343 branches already work with computerized accounting. The Grameen Bank shows a consistent increase of its clients that are spread out over whole Bangladesh.

As of January 2008 the Grameen Bank shows a cumulative amount disbursed since inception of US-$ 6.009 billion, whereof a cumulative amount of 5.344 billion was repaid; this is equal to a repayment quota of 98.48 % of the due loans. [Data from [www Grameen Bank 01/2008a].)

Total revenue generated by Grameen Bank in 2005 was US-$ 112.40 million.

Total expenditure was US-$ 97.19 million. Interest payment on deposits of US-$ 34.74 million was the largest component of expenditure (36 %). Expenditure on salary, allowances, pension benefits amounted to US-$ 25.37 million, which was the second largest component of the total expenditure (26 %). Grameen Bank made a profit of US-$ 15.21 million in 2005.

Entire profit is transferred to a rehabilitation fund created to cope with disaster situations. This is done in fulfillment of a condition imposed by the government for exempting Grameen Bank from paying corporate income tax (cf. [www Grameen Bank 02/2007]).

The contribution of Grameen Bank to the GDP of Bangladesh amounts to more than 1.1 % (cf. [www Grameen Bank 12/2007]).

The income of Grameen Bank clients is estimated to be about 50 % higher than the target group in non-supported control villages.

The landless have benefited most by the microloans, followed by marginal landowners. This has resulted in a reduction of 20 % in the number of Grameen Bank members that live below the poverty line.

There has also been a shift from agriculture to petty trading with a high rate of self employed people.

Such a shift in occupational patterns also has an indirect positive effect on the employment and wages of other agricultural waged laborers. What started as an innovative local initiative, has thus grown to the point where it has made an impact on poverty alleviation at the national level, as also Figure 2 might show:

Grameen Bank's Development Financing is Trend-setting

This promising success of Grameen Bank in helping developing Bangladesh was and is of exemplary function for a multitude of other institutions and even for the World Bank, that is engaged in microfinancing - even when its payments still are of a rather symbolic value - by the 1999 initiated ‘World Bank Group's Microfinance Institutional Action Plan':

The goal of this plan for action is to build a robust microfinance industry and to strengthen existing microfinance institutions to build their portfolios and extend outreach to the poor.

Additional to Grameen Bank especially the following organisations in the field of microloan financing have to be named: 

• ACCION International, having pioneered parallel to the Grameen Bank in the fields of microloans and disbursed US-$ 9.4 billion in microloans for 4 million clients (cumulated 1996 - 2006), 65 % of whom are women; 97 % of these loans were repaid. ACCION provides loans in 23 countries in Latin America, the Caribbean and sub-Saharan Africa, and in the U.S.A. (cf. [www ACCION 02/2007]), thus being the World's second largest microfinance institution just behind Grameen Bank, ranked by the number of borrowers,
• FINCA, that currently serves over 120,000 clients in 17 countries on 5 continents. Its largest operations have been in Latin America, but it is rapidly setting up new programs in the former Soviet Union's newly independent states (CIS),
• the Foundation for Local Development and Partnership (FONDEP), offering cheap microloans to about 45,000 active beneficiaries in Morocco,
• the Aga Khan Microfinance Agency, focused on central and south Asia, Egypt, Syria and parts of Africa; the development network making 25,000 micro loans, totaling US-$ 35 million,
• the charitable foundation Opportunity International, using its donations for the setup of microfinance institutions,
• the ecumenical development companionship Oicocredit, that assigns 50 % of all credits to microfinance institutions and
• the worldwide operating Soros Economic Development Fund (SEDF).

Relevance for international Development Policy

At present almost 130 million poor people can ask for microloans at microloan institutions in more than 60 countries and thus can start their own businesses having a plain occupation.

Concluding Figure 3 illustrates the strong track record of the very important instrument of microloans in regard to international development policy:

Authors

Professor Dr. Wolfgang Eibner is teaching economics and economic policy at Jena University of Applied Sciences in the Department of Business Administration & Engineering as well as at various privately-run Universities

Diplom-Wirtschaftsingenieur Michael Anding was a collaborator of Professor Dr. Eibner for many years and now works as a portfolio manager at the E.ON Sales & Trading GmbH in Munich.

Bibliography

Udo RETTBERG, 2007: Kleinstkredite neu verpackt. Banken legen Fonds, Anleihen und Zertifikate auf, in: Handelsblatt, No. 44, 2./3./4.3.2007, p. 34

Muhammad YUNUS/ Alan JOLIS, 2003: Banker to the Poor: Micro-Lending and the Battle against World Poverty, New York 2003

Internet Bibliography

[www ACCION 01/2008]:
http://www.accion.org/NETCOMMUNITY/Page.aspx?pid=492&srcid=254, retrieved 9.1.2008

[www Grameen Bank 01/2007]:
http://www.grameen-info.org/bank/hist2005$.html, retrieved 16.1.2007

[www Grameen Bank 02/2007]:
http://www.grameen-info.org/bank/GBGlance.htm, retrieved 19.2.2007

[www Grameen Bank 12/2007]:
http://www.grameen-info.org/bank/contribu.html, retrieved 31.12.2007

[www Grameen Bank 01/2008a]:
http://www.grameen-info.org/bank/Statement1US$.htm, retrieved 9.1.2008

[www Grameen Bank 01/2008b]:
http://www.grameen-info.org/bank/the16.html, retrieved 9.1.2008

[www Grameen Family 01/2008]:
http://www.grameen-info.org/gfamily.html, retrieved 9.1.2008

[www D. Murphy 11/2004]:
Dave MURPHY: Covey describes 8^th habit, San Francisco Chronicle vom 13. November 2004, in:

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2004/11/13/ BUGLD9QLT81.DTL, retrieved 19.02.2007