Examining Micro Credit And The Grameen Bank Economics Essay

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Grameen Bank (GB) is called the bank of poor people in Bangladesh. It has been established for the welfare of the poor village people of Bangladesh, which becomes a role model of the world of micro credit banking system. At the beginnings of Microcredit, Dr. Muhammed Yunus who is an economist educated in the United States of America, although originally from Bangladesh, introduced the world to the notion of micro-credit in the 1970's.

Counts (1996) said that Muhammed Yunus talked with the poor village people and discover that general local bank never shows interest to provide loan to poor people and does not lend them and they had to borrow money from extortionate moneylenders with high interest rates. As a result, they ended up more-or-less permanently in debt and any money they made went to pay the interest on these high-interest loans. Yunus became conscious at that moment that the poor problems were in some ways no different from anyone else: low interest credit was a necessity of life.

Definition of Micro Credit Auwal (1996):

An extremely small loan given to impoverished people to help them become self employed. Also known as "micro lending." This small loans extension (microloans) to those in poverty designed to spur entrepreneurship. These loans especially given to a poor person to enable him or herself to become self employed. Financial services loaned a small amounts of money usually around $50-$150 to poor people as a capital of a small business to start or extend it. The Grameen Bank in Bangladesh has become a model of successful micro loan provider.

Principles of Microcredit:

General financing or credit.

It emphasizes building capacity of a micro-entrepreneur.

Employment generation.

Trust building.

Socioeconomic development.

Help the micro entrepreneur on during difficult.

Advantage of Microcredit Soeama (2004):

Source and cost of funding: "

In order for the Microfinance institutions to loan they need funding too and a stable microfinance institution might have a competitive advantage of low cost of funds which enables it to provide finance at low cost.

Infrastructure set up:

Microfinance companies must have a required network and infrastructure to deliver these services. The Grameen Bank of Bangladesh creates and implements this structure in rural village area.

Image:

MFI's are many times criticized as money squeezing machines which charge very high cost. Which is not necessarily true considering their cost of funds and risks moreover they have to be sustainable. So here I think having a good name, image and Top management team helps a lot."

Disadvantages of Micro Credit:

Although microcredits are the keystone in terms of development in poor countries, it can also have its difficult. Indeed, the disadvantages of microcredits are:

Some microcredit institutions are often unpredictable.

Refunding problems.

Budget depends on subsidises from the government or NGOs.

Fig 1: Current Microcredit Network of Grameen Bank

History of Grameen Bank:

"The founder of Grameen Bank Muhammad Yunus open up the idea of 'micro-credit'--minuscule loans to the very poor. The bank currently lends more than $500 million a year with a repayment rate of better than 97 percent. Its Group Savings Funds have assets of $186 million. Grameen Bank operates 1,100 branches in half of Bangladesh's nearly 80,000 villages. The program has been successfully replicated in dozens of countries, including the Philippines, Malaysia, Vietnam, South Africa, and Bolivia. It has also been applied to inner city and rural poverty in rich nations in North America and Europe.

The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad Yunus, Head of the Rural Economics Program at the University of Chittagong, launched an action research project to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor. The Grameen Bank Project (Grameen means "rural" or "village" in Bangla language) came into operation with the following objectives:

Extend banking facilities to poor men and women.

Eliminate the exploitation of the poor by money lenders.

Create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh.

Bring the disadvantaged, mostly the women from the poorest households, within the fold of an organizational format which they can understand and manage by themselves.

Reverse the age-old vicious circle of "low income, low saving & low investment", into virtuous circle of "low income, injection of credit, investment, more income, more savings, more investment, more income".

The action research demonstrated its strength in Jobra (a village adjacent to Chittagong University) and some of the neighboring villages during 1976-1979. With the sponsorship of the central bank of the country and support of the nationalized commercial banks, the project was extended to Tangail district (a district north of Dhaka, the capital city of Bangladesh) in 1979. With the success in Tangail, the project was extended to several other districts in  the country. In October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation. Today Grameen Bank is owned by the rural poor whom it serves. Borrowers of the Bank own 90% of its shares, while the remaining 10% is owned by the government."

Current structure of Grameen Bank:

Grameen Bank allowed to operate branches in urban areas. Earlier they could open branches only in the rural areas.

Government stake cut down from 25% to 15%. Note that when the Bank started, Government had a stake of 60%.

Number of Government nominated directors brought down to 2 from 3.

Chairman of the bank will be appointed by the board instead of Government nomination which existed until now.

Fig 2: Current structure of Grameen Bank.

Aims and Objectives of Grameen bank:

The Grameen Bank believes that the best way for participants to learn about how the bank works, is through first hand exposure and observations at the field level. Through these experiences, participants are encouraged to draw their own conclusions about the effectiveness of Grameen Bank's work and the impact it has on the poorest of the poor. The objectives of GB's training programs are to:

Arouse curiosity.

Stimulate interest on the subject of Micro financing.

Encourage responsibility of self-motivated learning.

Learn and share with others.

Discover individual role in the organization and the global community.

Methods of Growth:

The Grameen Bank's Method of action can be illustrated by the following principles:

Start with the problem rather than the solution.

Adopt a progressive attitude.

Make sure that the credit system serves the poor, and not vice-versa.

Establish priorities for action vis-a-vis to the the target population.

Lean on solidarity groups.

Establish priorities for action vis-a-vis to the target population.

Associate savings with credit without it being necessarily a prerequisite.

Do everything possible to ensure the system's financial balance.

Invest in human resources.

There are 16 decisions and 10 indicators in Grameen Bank policy to grow it up. These are:

Decisions: "

Follow the four principles of Grameen Bank- Discipline, Unity, Courage and Hard work.

Bring prosperity to the families.

Work towards to construct new houses.

Grow vegetables all the year round.

During the plantation seasons plant as many seedlings as possible.

Plan to keep families small which will help to minimize expenditures easy to look after every body's health.

Provide education to the children and ensure that they can earn to pay for their education.

Keep the environment clean.

Build and use pit-latrines.

Arrange safe drinking water from tubewells and boil water or use alum when needed. 

Do not take any dowry at our sons' weddings, neither shall give any dowry at any ones daughters wedding.

No body inflict any injustice on anyone.

Will do more collectively undertake bigger investments for higher incomes.

Always be ready to help each other. If anyone is in difficulty, all help him or her.

Come to know of any breach of discipline in any centre, go there and help restore discipline.

Take part in all social activities collectively."

Indicators:

Grameen Bank does staff evaluation of their work every year and check whether the socio-economic situation of GB members is improving. GB evaluates poverty level of the borrowers using ten indicators.

A member is considered to have moved out of poverty if her family fulfils the following criteria:

The family lives in a house worth at least Tk. 25,000 (twenty five thousand) or a house with a tin roof, and each member of the family is able to sleep on bed instead of on the floor.

Family members drink pure water of tube-wells, boiled water or water purified by using alum, arsenic-free, purifying tablets or pitcher filters.

All children in the family over six years of age are all going to school or finished primary school.

Minimum weekly loan instalment of the borrower is Tk. 200 or more.

Family uses sanitary latrine.

Family members have adequate clothing for every day use, warm clothing for winter, such as shawls, sweaters, blankets, etc, and mosquito-nets to protect themselves from mosquitoes.

Family has sources of additional income, such as vegetable garden, fruit-bearing trees, etc, so that they are able to fall back on these sources of income when they need additional money.

The borrower maintains an average annual balance of Tk. 5,000 in her savings accounts.

Family experiences no difficulty in having three square meals a day throughout the year, i.e. no member of the family goes hungry any time of the year.

Family can take care of the health. If any member of the family falls ill, family can afford to take all necessary steps to seek adequate healthcare.

PESTEL Analysis:

There Wahid (1999) are many factors which are affecting the work process and decision making of GB. Tax changes, new laws, trade barriers, demographic change and government policy changes are all examples. To analyse these factors we can categorise them by using the PESTEL analysis. This classification distinguishes between:

Political:

The political condition of Bangladesh is not stable. The opposite part of government never helps their government properly to the welfare of the country. As a result work strike is happening, which affect the working progress of GB.

Economical

Bangladesh is a developing country. Most of the villagers are considering as poor. Lone interest rate, tax, unemployment, inflation has effect to any business. Basically unemployment and low national income are the main problem, that why GB trying to motivate people to become self employed. Though Bangladesh is a poor economic country grameen bank faced this crisis to move forward their journey.

Social

In Bangladesh people's average age is 60 years. A large number of populations of the country are aged and have no activity in the economy. Grameen Bank also working with the working attitude to change it that people can find interest in different job activities.

Technological

'Grameen Phone' is another sister organisation of Grameen bank in Bangladesh. Muhammed Yunus bring the technology to the poor village people and give them an opportunity of phone business by doing cheap rate mobile phone call all over the world.

Environmental

Different environmental issues like global worming have concern in Bangladesh. Grameen bank motivate people to concern about it and also the human health by providing the easy way to make sanitary latrines, pure drinking water which is arsenic free.

Legal

In their different development program Grameen Bank teach people about their legal rights and law, that people can get more knowledge about their and others rights.

SWOT Analysis of Grameen Bank:

Strength

Village people are the main resource.

Trust between bank and customer.

Loan with low interest for poor people.

Modern technology.

Weakness

Loan return is difficult sometime.

Can't give big amount of loan to the poor people.

Sometime face the staff unhappiness.

Opportunities

Grameen bank a role model for the world. So this bank could expand all over the world.

More job field can be created inside and outside of the country.

Threats

Political instability.

Economic inflation.

Environmental threats. e.g. cyclone.

Conclusion:

Grameen Bank is not only for Bangladesh but also a role model for other organisations all over the world. The village poor life style already has been changed by the different activities of this bank. In Bangladesh it has been success in finance and human health sectors. Australia, USA and some African country are trying to follow the Grameen bank.

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