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I will like to focus my report on Grameen bank in Bangladesh. The patriarch culture in Bangladesh where women are treated as inferior to men restricts them from seeking wage employment. Their only source of income is self employment and they face difficulty in accessing individual lending programs. The labour force has been growing by 2.4% a year, while the agricultural, industrial and service sector can only accommodate 1.7% annual growth of the labour force. The agricultural sector which provides 78% of employment is saturated and limited due to technical constraints. The modern urban sector is too small to absorb additional labour, increasing productivity and income through self employment in the informal sector and improving human capital are the only viable ways to alleviate poverty and promote economic growth (World Bank 1997). The poverty in Bangladesh is mainly as a result of landlessness, high unemployment, low literacy and high population growth. The main determinants of social class in the rural areas are land ownership and command of financial resources.
The Grameen bank was formally established in 1983 by Dr Muhammad Yunus, a professor in economics at the Chittagong University in Bangladesh, who instead of teaching economics decided to do something practical about it. Based on the philosophy that everyone has the right to credit, but the poor are excluded from conventional banking system.
2 BASIC OPERATIONAL FEATURES OF THE GRAMEEN BANK
Lending is mainly directed towards rural poor women (97% of membership are women) with a maximum landholding of half an acre of land because the average farm size in Bangladesh is 2.4 acres (1984 figures) or non land owners. Only one member is allowed per household. These women are grouped into cells of five and they take collective responsibility for each others’ loan (no joint liability). This helps to substitute physical collateral with social collateral as it eliminates information asymmetry. These groups are separated according to gender, 5 to 8 groups come together to form a centre known as Kendros (between 25 to 40 women) organised by the bank’s staff. Weekly meetings are held at these centres where members of each groups attend to pay their weekly loan instalments, learn, practice, and discuss the rules of the program and other group activities.
Members are required to save TK1 to TK2 per week (to create financial discipline). It is only of recent that the bank increased its weekly savings to TK5. A new member must have successfully saved for two consecutive weeks before qualifying for a loan and a deposit of 5% of the loan amount into a group fund (i.e. group tax). It offers interest rates for deposits between 8% and 12% and does not allow members to withdraw their savings from the group fund. However, members can borrow from at no interest from the group fund provided that all the other members of the group approve of the amount and its usage and that the loan does not exceed half of the fund’s total. If a borrower has been a member for 10 years, the bank will transfer total savings with interest to the savings account and the member can withdraw at will. One can argue that the lack of easy access to savings can be viewed as a short term additional fee for being a member and cannot be classified as a financial service but a down payment on a loan and a screening device. At the end of October 2009, total deposits in Grameen bank stood at TK74.55 million (US$ 1079.47 million). Deposits from its members constituted 54% of the bank’s total deposits. Balance of member deposits has increased at a monthly average rate of 2.29% during the last 12 months. The poor people in Bangladesh save between 2% and 12% of their annual income mainly to acquire land followed by providing family securities against unforeseen circumstances. Children’s education and their marriage and purchase of agricultural inputs are other factors.
Collateral is not required to obtain a loan from the bank and the loan is repayable over 50 week’s instalment. Interest is payable at the end of the loan cycle. 20% interest for income generating loan, 8% for housing loans, 5% for student loans and 0% (interest free) for struggling members (beggars). If the loan is repaid on time, the borrower will be charged a 10% flat rate instead of 20% for an income generating loan at the end of the loan cycle. The interest charged is low compared to other government managed micro credit programs charging a fixed interest of 11% at flat rate which amounts to 22% on declining basis.
The bank realised from the activities of BRAC that provisions of credit to the poor is not sufficient to alleviate poverty. In addition to credit provision, it also trains its borrowers to improve their skills and provision of other organizational inputs.
All credit transactions are transparent and are openly conducted at the centre meetings. The virtue of this openness is to mitigate vested interest and constellations of power as well as deterring individuals from taking anti group actions. This peer monitoring mechanism works both within the group and at the centre, eliminating the danger of group collusion when the groups are self elected.
3 INNOVATIONS IN SERVICE DELIVERY
The focus of microfinance agenda is now increasingly client or market driven as a result of the industry’s focus on competition and dropouts. Competition, together with MFIs policies of encouraging clients to take larger loans each cycle has tempted some clients to take out multiple loans, far more than it exceeds their repayment capacity and they end up defaulting. The defaults were attributed to the fact that the poor do not always want to neither borrow nor automatically increase their loan size and the failure of MFIs to interact and keep contact with their clients in order to provide innovative products. Loans borrowed for microenterprise development, are mostly used to meet a multiple needs i.e. the fungibility of credit (Sebstad and Cohen, 2001) and this clearly shows the industry was not in tune with its clients. Borrowers demonstrated the imperfect nature of the products by withdrawing from the program. The high rate of drop out raised the operational cost for MFIs. Competition and client dissatisfaction was putting pressure on institutions to be innovative in their service delivery.
Citing from the words of Hulme and Mosley (1997), they noted that the designers of the financial services for poor people need to acknowledge that “the poor” is not a homogenous group with broadly similar needs and the one size fits all approach will not work. However, recognising the heterogeneity of the poor clearly complicates matters for scheme designers. Homogeneity may be good for keeping the delivery cost low, but is it not necessarily good for institutional sustainability if dropout rates were kept low. Adopting the client-product nexus approach and improving the institutional-client linkages through the management information system to gather information from bottom up will help to broaden and deepen the outreach, and recognizing the financial landscape of clients for better evaluation of client’s debt burden will aid better assessment of loan repayment capability of clients in order to reduce drop out rates.
The bank has to some extent recognized the importance of product diversification to its clients as its financial structure and product diversification were subjected to questioning when the bank almost collapsed during the 1998 flood in Bangladesh. It decided to take up a huge rehabilitation programme by giving new loans start new income generating activities and to repair or rebuild their houses. Borrowers started to feel the pressure of accumulated loans as the new instalments sizes exceeded their capacity to repay. Another major factor unknown to donor agencies was that prior to the flood, some branch managers at the bank were giving out loans to customers who had defaulted on weekly repayments so the new loans could be used to make payments. This resulted to accumulated debts by the customers and the balance sheet statements did not reflect the true financial position of the bank. This led to the development of the Grameen Generalised System (GGS) commonly referred to as Grameen II. Under this new scheme, many rules that existed under the Grameen Classic System (GCS) were abolished or transformed. The major innovations under the Grameen Generalised System (GGS) are explained below.
3.1 Basic Loan
The basic loan was introduced to provide for other unforeseen circumstances the borrower might face along the loan cycle. It provided an exit option for the borrowers. This is referred to as a flexi loan which provides an alternative route to any borrower who needs it without making her feel guilty about failing to fulfil the requirement of the basic loan. The basic loan is normally referred to as the Grameen Microcredit Highway. The logic behind the basic loan is that if a borrower keeps up with repayments (stays on the highway) throughout the loan cycle, she can borrow a larger sum (change gear and accelerate faster) on the next loan cycle and she knows ahead of time how much enhancement in loan size is coming, and can plan her activities accordingly. But if the borrower should experience some difficulties (such as natural disaster, sickness etc) during the loan cycle, she can renegotiate the loan (first detour) by reducing the instalment size that she can afford to pay by extending the loan period. The essence is to help the borrower overcome the problem in order to get back to the basic loan. Even if the borrower defaults further (second detour), the flexi loan will be renegotiated to another flexi loan until the borrower can comfortably keep up with the instalment payment. This flexibility was absent under the Grameen Classic System. It is important to note that once a borrower renegotiates to a flexi loan, she will loose the loan ceiling she must have accumulated over the years and can only re-enter the basic loan scheme with a loan size equivalent to a new entrant and as long as she’s on the flexi loan, the borrower can only borrow the same amount for every loan cycle.
Fig. 3.1: The interlink between basic loan and flexi loan
3.2 Custom-made Credit Service
The GGS has created a methodology which can provide custom-made credit to a poor borrower. It allows a staff to be creative. He can design his loan product to make it a best fit for his client in terms of duration with the flexibility of variation from any number of months and years, timing of the loan and the size of weekly instalments can be varied. A borrower can pay more weekly when the business is doing well, and pay less during difficult times. In an extreme case, each instalment can be of different size. In the other extreme, all instalments can be exactly equal, like in GCS.
3.3 Group Fund Replaced
Every new member is obliged to save 5% of the total loan amount into the obligatory savings account formally known as group tax. But now, half of the 5% is deposited into a personal savings account and the remaining half goes to a special savings account. A borrower can withdraw any amount from her personal savings account any time she desires. There is no restriction on her withdrawal. Weekly saving still continues and it goes to personal savings account. Special savings account is non withdrawable for the first three years. Then withdrawal is allowed generally once in three years keeping a minimum balance of TK2000 or half the amount in the account, whichever is larger. Under special circumstances the entire amount in the special savings account can be withdrawn. Some money from this account will be used to buy shares of the Bank.
3.4 Pension fund-Leading to Financial Self-Reliance
Grameen Bank requires all borrowers with loans above TK8, 000 (US$ 138) to contribute a minimum of TK50 (US$0.86) each month in a pension deposit account. After ten years a borrower will receive a guaranteed amount which is almost double the amount she has put in for 120 months. The pension fund generates about TK 100 million ($1.75 million) per month. I find this very interesting because households in Bangladesh are large in size and it is customary for several generations to live together within a household. In such households, there is no need for retirement saving, and it can internalize many of the insurance activities that would require saving. For example members of the household can insure against health risk and old age. But this has not been the case with Grameen Bank because the benefit of the insurance package is appealing to its members and the pension pot also serves as a means of financial stability for the bank.
3.5 Other Savings
The bank accepts deposits from non borrowers as well by incorporating a number of savings products into the system. Total amount of deposits account for 67% of the total outstanding loans of Grameen Bank in July, 2002, after paying back TK3.3 million (US $ 60 million) of its loans to the central bank, local commercial banks and foreign lenders, fell due the same period.
3.6 Loan Loss Provisioning and Write-off Policy
If a borrower fails to pay her instalment for ten consecutive weeks or if she fails to repay the total amount she is required to pay within a six month period and she does not move into flexible loan, she becomes a defaulter. If she becomes a defaulter, 100 per cent provisioning must be made for the unpaid principal and interest. Exactly one year later, the amount must be written off. Writing off will be done on a monthly basis, rather than at a time of annual account closing. If a borrower is on flexible loan, generally the same policy will hold. Fifty percent provision must be made for the total balance amount of flexible loan and accrued interest on the annual closing date, even if the payment rate of flexible loan is 100% of the whole bank
Fig. 3.2: Provisioning policy in Grameen Bank II
3.7 Loan Insurance
Once a year, on the last day of the year, the borrower is required to put in a small amount of money in a loan insurance savings account. It is calculated on the basis of the outstanding loan and interest of the borrower on that day. She deposits 2.5% of the outstanding amount. If a borrower dies any time during the year, her entire outstanding debt is paid off by the insurance fund which is created by the interest income of the loan insurance savings account. In addition, her family receives back the amount she saved in the loan insurance savings account.
4 NATURE OF TARGET GROUPS IN TERMS OF GENDER AND POVERTY
The bank targets women regarded to be very poor using the size of land ownership as the measure of poverty. As previously highlighted, the bank’s members’ are either non land owners or own half an acre of land. Based on the measure of poverty, these are very poor women. Women are generally seen as moral guardians of the household and there are perceptions that women in Bangladesh have a high repayment rate (a factor necessary for the financial sustainability for a micro lender) because it allows them to retain access to village groups, whereas men have many more opportunities for social contact. Women are more vulnerable to pressure to repay. They are easy to locate, being much less able than men to leave a locality temporarily to evade field workers and they are easier to intimidate into repayment than men who can always threaten violence. Women had limited access to credit and the bank’s model tries to address this limitation in order to strengthen women’s social and economic worth. Access to credit will empower women by improving their bargaining position, both within and outside the family. It provides a visible foundation of economic and social gain and a process that mainstreams their participation at institutional and policy levels.
To successfully empower women, MFI’s must provide services that will lead to economic gains for women and should also enhance their role in economic decision making. Grameen Bank has been able to empower women through the provision of basic loans with an option of switching to a flexi loan if the borrower defaults on repayment. The bank also provides other services such as education loan, housing loan and at the same time encouraging its members to save by deducting 5% of the total loan amount before disbursement. Grameen Bank also offers life insurance product for its customers to manage life risks.
Empowerment must lead to greater leveraging and networking among women in the community. Grameen bank groups its members into cells. Each cell consists of five members and a total of 5-6 cells meet once a week at a centre referred to as kendros to make their weekly loan instalment payment, discuss with each other on new business ideas, help each other in their book keeping of accounts etc. These centres help women to create a sort of social network. MFI’s must also provide a gender sensitive and proactive institutional framework for women where women are providing financial services to women. This will create opportunity for role modelling at all levels of the institution and also caters for the specific needs of women in microfinance and beyond. Unfortunately, most of the Grameen Bank’s staff that organise centre meetings are men.
Access to credit is believed to empower women but there is a variation in the degree to which women borrowers in Bangladesh control their loans directly. A large proportion of women’s loans are directly invested by their male relatives, who then channel the funds towards investment which are generally regarded as men’s work. This problem can be eliminated if Grameen Bank can impose some restrictions on the type of investments the loan can be used for. R. Rahman (1986 Pg.33) discovered a diminishing loan control overtime, with the amount of loan borrowers themselves use falling from 86.6% of the total loan amount in the first year to 66% in the fifth year of membership in the Grameen bank. Women’s high demand for loan and their ability to repay are normally seen as proxy indicators for empowerment. Unfortunately, the method for evaluating empowerment does not reveal patterns of loan controls within the household. In Bangladesh, field workers and women beneficiaries gave evidence of the phenomenon of women transferring control to men within their households. There is also the case where new members of a household in some villages in Bangladesh are forbidden to have contact with strangers, especially when the field worker in question is a male. This strengthens the case why Grameen bank should employ more women to manage these Kendros.
Even though credit is very important, it must be provided with access to market and access to technology which extends beyond the neighbourhood and the community as identified by Montgomery, Bhattacharya and Hulme.
It is true that access to credit will most likely reduce violence against women if channelled through the right path but it can at the same time exacerbate violence against women. According to the staff of Grameen Bank, some women who were unsuccessful in gaining loan access or who have to wait too long for their turn to get a loan are experiencing increases in domestic violence from frustrated husbands. In cases where loans have been managed by the husbands, there is the possibility of the husband refusing to repay, might have invested badly or abscond altogether with the money. The pressure is on the women to find repayment funds from their homestead activities.
5 WIDER IMPACTS
The idea behind the wider impacts of microfinance is to account for the positive externalities on spheres (economic, social, political and cultural) beyond households at the local, regional and national level.
Economic Impact: these types of impacts are mediated primarily through the intervention on markets. The establishment of MFIs have direct impact on individuals, households or enterprises which in turn has an affect on their participation in one or more markets and therefore affecting the outcomes of those markets. For example, if women have access to credit and markets just as men, they will become key players in the market. This will make the domestic market more competitive and eventually have an effect on the relative prices of all goods and services. The funding of small enterprises by microfinance institutions will help increase output growth and in turn create employment opportunities.
Social Impact: social impact refers to changes in the social relations between individuals and between groups of individuals living in the society. Social sector variables are housing quality, education, health and sanitization. Grameen Bank offers the fewest support services for these variables of interest when compared with other leading MFIs in Bangladesh. Beyond the bank’s “sixteen decisions” about how members can manage their household and community and social justice which members are made to recite at the beginning of each group meetings. It has started however, to offer credit on special terms for investments in the quality of household life, like loans for tube wells, latrines and housing. Social relation may be rooted in ownership of tangible assets, such as land. Intervention of MFIs may change social relations either by introducing non land resources, which are now being owned by land-poor households. As explained by Rao (2001), microfinance interventions have been able to change poor people’s way of thinking about social expenses, such as celebrations that are less about showing off and more about maintaining links across families, building bonds and sustaining webs of obligations.
Political Impact: this refers to changes in policy regimes and protection of civil rights. Several rural studies have pointed at the intimidating and coercive role of the state machineries, such as police and the land administration in rural society. MFIs should provide services that seek to address these issues. MFIs can achieve this objective by helping to establish local interest groups similar to that of the self help groups in India, to influence local politics, policies and resource allocation at the local level.
Cultural Impact: MFIs should also provide services that will help address the adverse effects of cultural norms on women which is fuelled by institutionalized religion, or, may be inherited from predecessors. Other issues of interest are attitudes towards cleanliness, perception on the role of daughters, need for religious education for children, perceptions on husband wife relations, attitude toward cultural entertainments and participation of women in such programs etc.
MFI’s have to some extent helped to alleviate poverty even though it is limited by some constraints and problems. It is important that MFIs must be innovative in their credit service delivery in order to completely meet the needs of the poor people. Considerable emphasis has been placed on providing service to women which tends to be widening the gap between financial services to poor women and poor men. MFIs should also include tailored services to poor men. It is also important that MFIs should in the future fit into mainstream financial sector such as listing itself in the capital market as an alternative source of funds to achieving self sufficiency and striking a balance between the welfarist and institutionalist approach to microfinance.
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