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Comparison Between Grameen Bank and Kiva.org
The following report is presented to discuss different models of microfinance by comparing Grameen bank in Bangladesh and Kiva.org based in USA. Through this report we will briefly discuss about the company itself followed by a brief analysis of their operation, as a potential market. We will then progress to talk about Grameen banks operations in the USA and other Kiva.org operation in the US. After carrying out a thorough financial analysis of both the Institutions, we will proceed to discuss about the different aspects of Impact of these Institutions on its members. Finally, we will conclude the report by providing a suggestion for Improvements.
Microfinance can be defined as a facility of microloans to poor entrepreneurs and small businesses deficient in access to banking and other services. The two main instruments for the delivery of financial services to such customers were: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come composed to apply for loans and other services as a group.
Grameen model of microfinance has grown in Bangladesh and is the most leading model predominant there. Centrally managed, devoted microfinance institution, groups of 5, highly controlled organizational structure – defines Grameen model. The focus is mainly on lending, but every group member must save a certain amount for deposits.
Kiva Microfunds (commonly known by its domain name, Kiva.org) is a non-profit organization that permits people to loan money through the Internet to low-income entrepreneurs and students in over eighty countries. Kiva’s mission is “to connect people through lending to alleviate poverty”.
The Grameen Bank in Bangladesh pioneered the idea of giving out micro-loans between $27 and $500 to poor people so they can start or expand small businesses such a street vending operation, cell telephone rentals or small cottage industries to pull themselves out of poverty. If loans are paid back borrowers qualify for larger loans.
The Grameen Bank has received worldwide attention for providing loans to ultra-poor women to start up “micro-enterprises.” It’s founder Muhammad Younus has been praised at home and abroad by politicians and financiers as the “banker to the poor.” “Grameen” is the Bangla (Bengali) word for “Village” or “Rural.”. With the belief that extending credit to the poor has raised small businesses, helped promote gender equality, lifted incomes, and improved access to food and education for some of the world’s most desperate citizen.
Grameen Bank functions within a well-connected branch situated in the rural areas. These branches have a bank manager and number of centre managers representing between fifteen to twenty-two villages located in rural areas. Normally, small voluntary groups of five individuals who show promise to worthwhile income- generating activities such as rice-husking, sewing, pottery and garment making, weaving, buying of milk from cows, goats etc. The skills hey possess make them choose the nature of their productive or investment activity which provides the borrowers the freewill to choose.
The only way a borrower can borrow money is by forming a group. For Grameen, conviction and peer pressure are regarded as the most important aspects to ensure repayment of loans. The collective responsibility of a group can be used instead of collateral requirements, this gives Grameen bank its strength and vision to support the poor people who are not part of the formal banking. At first, only group of two members obtain an initial loan, for which they are given a one-and-a-half-month period to begin repaying the principal and interest before the rest of the members in the group become qualified for getting loans. Once the members repay the old loans they become qualified for new loans only.
The Grameen Bank purposes to retain interest rates as close as possible to the market interest rates, usually about sixteen percent, while upholding an all-embracing goal of sustainability. Grameen bank entails a repayment scheme grounded on fifty weekly payments and inspires savings by permitting 5 percent of loans to be accredited to a group fund. Grameen Bank obtains maximum of its loanable funds on commercial terms from the money market, the central bank, other financial institutions, and from various aid organisations.
The Bank works to simultaneously address the greater social development agenda of the poor, including housing, education, sanitary water, environmental health, and other basic social and economic needs. The Bank also invests heavily in its human resources, to safeguard staff members are devoted and well-trained equally on the Grameen credit system and the different parts of the rural villages to increase its efficiency.
Kiva.org was founded by Matt and Jessica Flannery which seeks “to connect people through lending for the sake of alleviating poverty.” Kiva.org’s model is described as global, Internet-based, peer-to-peer lending, and as “social lending” because of its 0% interest profit for capital lenders.
Kiva.org Micro funds is a U.S. non-proﬁt organization (since 2006) that permits individuals to loan small amounts of money through the internet to microﬁnance institutions (MFIs) in emerging countries, which in turn give the money to small business and entrepreneurs. Kiva.org lets their partners (Micros finance Institution) worldwide called “Field Partners,” to post proﬁles of eligible local entrepreneurs on their website. Lenders then have the access to see their profiles and pick entrepreneurs they wish to fund. Once the lenders have made their selection, Kiva.org masses the loan amount from individual lenders and assigns the sum to the corresponding Field Partner who oversees distributing the money in the entrepreneur nominated by different lenders. As the entrepreneurs reimburse the loan, the Field Partners wire the funds back to Kiva.org. This completes the lending cycle, and at this point, the individual lenders on Kiva.org can decide to either take out their capital, or to ﬁnd a new entrepreneur to loan it to. This process is illustrated in figure 1.
Kiva.org, give access to internationally based lenders to create and personalize individual profiles. Lenders can act individually or can join a “Lending Teams” to fund their loans to a joint operation or to compare their joint impact with other like-interest, regional or demographic groups. Lenders take advantage of their Kiva.org accounts with personal money, browse the profiles of entrepreneurs located around the world, and choose those to whom they would like to lend money. The platform is additionally made with systemic checks and balances, such as the feature that lenders cannot view or post to message boards until their account is benefit from with at least $25, the minimum lending amount.
Lenders are directed on potential country, Microfinance Institute, and personal loan default potential, described respectively as “Country Risk,” “Field Partner Risk,” and “Entrepreneur Risk.” Loans are provided globally to Kiva.org “Field Partners,” or MFIs, located in 48 countries that then distribute money to individual entrepreneurs. Capital is provided in minimum $25 loans at zero percent-interest, though repayment to the lender comes incrementally, with small cash installments that recapitalize individual accounts.
Field Partner risk is assessed by Kiva.org employees based on financial audits, organizational experience, and existing loan portfolio size and risk. Risk ratings do not specify probability
Kiva.org: Crowd-Sourced Microfinance & Cooperation in Group Lending 15 of default, and exposure at default, but are qualitative 1-5 star ratings that have implications on initial entrepreneur loan requests. Field Partners with a risk rating of one star can post up to $10K in loan requests per month, while a five-star rated MFI can post up to $100K in entrepreneur appeals. In this way Kiva.org additionally helps regional MFIs establish credit histories by allowing even historically poor performers to request loans to build a positive portfolio.
Kiva.org Field Partners are regionally located MFIs and are often guided by the on-site expertise of centrally trained, pro-bono Kiva.org Fellows. Kiva.org has over 120 Field Partners around the world, and it is the responsibility of the MFI to screen entrepreneurs, determine whether entrepreneurs belong to borrowing groups wherein individual default is linked to group outcome, and post loan requests on Kiva.org. Once an entrepreneur has been approved by the MFI, they can create a Kiva.org profile, and specify the loan amount they require. The MFI is furthermore accountable for the distribution and gathering of the loan provided to the entrepreneur, and for recording loan impact.
While Kiva.org is neither the first nor the only web-based peer-to-peer lending institution with global focus, they are the first to pioneer zero-interest entrepreneurial lending. Kiva.org offers an online platform in which lenders collaborate, in various sized open and closed groups, and around various interesting categories, to provide reasonable debt capital to entrepreneurs in need. Kiva.org therefore offers a unique platform in which to observe online harmony –looking at Lending Teams that cohere around various forms of identity, are established as open or closed groups, and vary in size– and how it impacts lending
Why does each organization exist in the U.S. for microfinance and in Bangladesh? What role does it serve?
Grameen in USA:
Grameen America is the fastest growing non-profit microfinance organization in the United States with a proven national solution to advance financial inclusion for women. We provide small loans, training and support to low-income women to help them build businesses, achieve higher family incomes and rejuvenate their communities.
Founded in Queens, NY in 2008, Grameen America builds on the legacy and proven model of Nobel Peace Prize Laureate Professor Muhammad Yunus. His revolutionary but simple idea that all people can lift themselves out of poverty through their own entrepreneurial spirit has dramatically altered how the world views global poverty.
Grameen America provides microloans (averaging $1,500 to $15,000), financial training and support to members. As part of our program, members open free savings accounts with commercial banks and make weekly deposits. We also report microloan repayments to Experian, enabling our members to build their financial identity.
Grameen America is a non-profit organization that is affiliated with, but separate from, Grameen Bank (GB), the latter of which is headquartered in Bangladesh. Grameen bank was founded in 1976 by Professor and Noble Peace Prize recipient, Muhammad Younus.
GA utilizes the same group-lending model made famous by Grameen bank. Women first organize themselves into groups of five and then join a multi-group network in their community of at least 20 women who commit to participate in weekly center meetings, led by a CM. In return, each member, can receive a loan of up to $1,500 initially.
Larger loans are available after each six-month loan cycle, depending on the member’s attendance record and the approval of her lending group (Figure-6). To qualify, each member must have an annual income below the poverty line but does not need to have a bank account, collateral, or a credit score. The strength of Grameen bank’s model is its focus on community lending. While the group members are not financially responsible if another member defaults on her loan, the peer support system serves as a strong motivator to repay each loan. Unlike a more traditional commercial bank, loans are not collateralized. Grameen America has consistently achieved an organization-wide repayment rate of its microloans of 99 percent.
Kiva.org in USA:
The business model is Kiva.org is a lot different from Grameen it is based upon internet peer to peer lending which includes lending to individuals and group and women and men.
Kiva.org U.S. is the United States branch of Kiva.org, a non-profit microlender functioning all over the world. Prior to June of 2016, the program, called Kiva.org Zip, was in a trial phase to test a more direct method of borrowing. The program has been united into Kiva.org’s main website, but the U.S. branch still embraces the similar loaning model.
Kiva.org U.S. varies from the foremost Kiva.org program in one important way: in the non-U.S. programs, funds are dispersed and collected by funding partners, who also collect interest for their services. The United States model eliminates the funding partners, so the interest-free funds go straight from the lending platform to the borrowers.
The result of five years of experimentation is a unique underwriting model. Instead of checking credit scores, going over your most recent cash flow documents, and requiring collateral, Kiva.org U.S. relies on what they call “social underwriting.” That is, they measure one’s character and community standing.
Kiva.org U.S. loans are not without their downsides: like it does with other crowd funders, such as Kickstarter and Indiegogo, the fundraising period can last up to 60 days, which may be too long for some merchants to wait. And with a maximum possible borrowing amount of $10K, some businesses might find they need access to more capital.
On the other hand, merchants looking for the best deal can hardly do better than 0% interest..
Kiva.org witnesses the power and potential of microloans to change lives and lift entire communities every day.
Kiva.org Labs — Funding Innovations for Greater Impact They serve the people who are not include in the formal banking These excluded groups include:
- Smallholder and subsistence farmers
- Innovative businesses and social enterprises
- Students trying to access higher education
- Families in rural and remote areas
Kiva.org is uniquely positioned to push the boundaries of microcredit in the US , foster the development of new loan products and services, scale what works and share knowledge across the sector.
Through Kiva.org Labs, crowd-sourced, risk-tolerant capital is provided to entrepreneurs to accelerate new ideas. We work with partners who are going beyond classic microfinance to provide loans that help real people in the real world – loans with flexible repayment schedules, training, connections to larger markets, and loans for undercapitalized social enterprises.
Kiva.org Labs approach is to test what works and share the results across the sector to start to transform the notion of “too risky” or “unproven.” Eventually, the main aim is to get high-impact products to people and communities who have been deprived and ignored.
The repayment rate of Grameen bank is 97%.
Portfolio growth rate: 22.63%
Return on equity (ROE): 11.82%
Yield on gross portfolio: 19.95%
Cost of funds ratio: 7.52%
Portfolio at risk ratio (PAR): 1.66%
Operating expense ratio: 12.63%
Personnel expense / Loan portfolio: 10.27%
Operating self-sufficiency (OSS): 104.53%
Financial self-sufficiency (FSS): 101.23%
The repayment rate of Kiva.org as per the website is 96.9%
Though the working nature of both Grameen and Kiva.org is a lot different in their organizational model, one is based in Bangladesh and the other in US. Grameen bank focusses on targeting women especially and lends loans in a group while Kiva.org is based on internet peer to peer interaction where an online platform is provided to connect lenders with borrowers. Both Grameen and Kiva.org can be considered to be successful in their own way. Comparing both the organizations wouldn’t be justifiable as both have different objectives to serve.
Grameen Bank’s Financial Impact:
Some key successes achieved by Grameen Bank are:
- The Grameen Bank exhibits an average of 97 percent repayment rates;
- Grameen Bank members enjoy an average household income at least 25 percent higher than non-members;
- The number of Grameen bank members living below the poverty line has sharply decreased; –
- The landless benefit most, followed by marginal landowners;
- There has been a shift from agricultural wage labour to self-employment and petty trading.
- a shift which results in an unintended positive effect on the employment and wages of other agricultural wage labourers, and which has impacted poverty alleviation and economic improvement at a national level;
- Group savings have proven as successful as group lending.
- Over 23 million people have gained better access to microloans, savings accounts and other financial services.
- Our mobile agriculture tools have enabled more than 470,000 poor farmers in Africa and Latin America to increase their productivity and earn more for their families.
- More than 5 million people have received health education and services via the MOTECH mobile health technology we developed. Organizations and governments in more than 15 countries use MOTECH to address multiple needs, from improving HIV treatment to education on reproductive health.
- Nearly 500 organizations in 40 countries have used the Progress out of Poverty Index® to measure their poverty reduction and to improve their strategies for serving disenfranchised communities.
- Our Bankers without Borders® volunteers have provided $20.3 million worth of pro bono services to 213 social enteprises (as of March 2016).
- More than 80 social enterprises have used our TaroWorks™
The Grameen Bank system has a proven track-record in helping the poor become self-reliant, active, and empowered members of society. As a result, it has become a model for microfinance initiatives worldwide.
Grameen Banks’s Social Impact:
Women’s Involvement in Family Decisions:
A first indicator of women’s empowerment is a larger involvement of women in important family decisions. As the wife is now seen rather as a source of income than a load, her standing will rise and with it also her decision-making power. There have been more than convincing factors of the increased decision-making power for Grameen Bank members.
Women’s Exposure to Violence
Domestic violence against women is a serious problem in Bangladesh. In the patriarchal Bangladeshi society this violence is not strongly condemned, and women put up with it, because they lack alternatives. In their study Schuler, Hashemi, Riley and Akhter (1996) explore the possible role of Grameen Bank and BRAC in reducing women’s vulnerability to men’s violence. A regression analysis shows indeed that members are better treated by their husbands. Although we would assume that this positive result can be attributed to the strengthening of the women’s economic role within the household, the researchers come up with a more significant factor. The entrance of women in public life when joining a micro-credit institution turns out to be the most important factor in explaining the reduction in domestic violence. Because members have contact with people outside their family, new social control mechanisms are playing a role and husbands fear the reaction of the village people on their violent acts. Thus, also here, although indirectly, credit plays a role in improving the situation of women. However, if we really want to stop the violence against women, more specific measures will be needed.
Grameen’s bank strategy is to target a special client base- largely rural woman. They also aim to Integrate social and financial goal to create a strong community and at the same time grow the its customer base. They have also been supported by the government which has helped to increase the awareness of microfinance in Bangladesh
A major proportion of loans about 90% are funded by income and deposits. There have no donor funds used to fund the loan operations, which is a strong indicator of its business sustainability.
Grameen bank manages its risk by offering loans to a group of women. Each woman puts pressure on the other because if any member in a group is defaulted it will affect the whole group members ability to get loans. Loan default rates is limited by one of this factor. They also have monitoring system which is done in every quarter which is eventually followed by periodic evaluation. There are also surprise visits to the centers by the branch managers.
Grameen bank is managed and operated by depositors and borrowers. The rating system forces the branches to compete with one another for profit, savings over loans, social Impact and rates of repayment.
Kiva.org Financial Impact:
- Amount lent through $1 billion Kiva.org.
- There are about 1.6 million lenders. There are about 2.6 million borrowers.
- There are about 1,243,847 loans funded through Kiva.org.
- 81 % Female borrowers supported, 19 % male supported.
- 86 Countries where Kiva.org works.
- 219, 435 Borrowers supported in conflict zones,
- 749,149 borrowers supported in least developed countries. 2
- 8, 234 Education loans, 6
- 5k Borrowers gained access to clean energy.
Kiva.org Social Impact:
Many social entrepreneurs have been able establish their businesses which have inturn helped the society
Also, one of the key Impact of Kiva.org’s lending model is bringing refugees and host nationals together—especially in countries like Lebanon and Jordan, where stiffness between the two groups can be mainly differentiating. Field Partners have seen loans stimulate economic cooperation and inspire both personal and professional relationships between refugee and citizen neighbors, who part business ventures or projects together.
I would like to work for Grameen for the following reasons:
Grameen banks social Impact is the main reason why I would choose it over Kiva.org. For me real joy does not always mean investing for personal financial gain. Helping others to find their purpose in life can be the real source of happiness. One prime example of investing leading to social benefit is Grameen Bank. The 2006 Nobel Peace Prize was awarded to Muhammad Yunus and Grameen Bank for fighting poverty through microloans. The bank was founded by Professor Yunus when he was working as a professor in Bangladesh while people were dying outside. Many were victims of bad loans putting them in debt for life. Soon Younus secured funding and started Grameen Bank.
The microloans are small amounts of money used to start businesses by purchasing raw materials or equipment. There are many things that vary from a normal micro finance Institution. Money is lent groups and women to ensure high probability of reimbursement. The bank also charges for instructional courses. By charging for those courses, it forces price to be extracted from those courses. Grameen Bank is anything but a free lunch. As an alternative of giving people a fish, it teaches people how to fish. It plants seeds of entrepreneurial spirit to boost people from poverty. This make Grameen bank stand out from the rest of its competitors.
To conclude both Kiva.org and Grameen bank have made their mark as a successful Microfinance Institutions. However, Kiva currently faces higher demand for its services than it can supply. Kiva currently functions in or could possibly operate in. Cell phone technologies have also shown to boost the overall financial performance of developing countries. By incorporating cell phones into the loans, it delivers to the businesspersons, Kiva forces the entrepreneurs to connect frequently with Kiva, decrease the danger of consuming fraudulent Field Partners, assign the Kiva Fellows and its resources, improve the eﬃciency of its operations, and better organize and unify information on entrepreneurs, and then better guide entrepreneurs.
Grameen bank have established itself as a successful microfinance Institution in Bangladesh. The way ahead for Grameen bank would be to establish its services in other parts of the world.
It would be interesting to see if any of these institutions can combine with government if they can play as central role so that they can reach to far more people so that the financial and social impactful.
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- 3M. (n.d.). Retrieved from https://www.Kiva.org/about.
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- Tyson, J. W. (n.d.). Grameen America: The Pivotal Role of Technology in Scaling. Retrieved from https://hbr.org/product/grameen-america-the-pivotal-role-of-technology-in-scaling/B5918-PDF-ENG
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- Loans that change lives. (n.d.). Retrieved from https://www.Kiva.org/
- Annual Report 2016 of GrameenPhone Limited. (2018, February 10). Retrieved from http://www.assignmentpoint.com/business/finance/annual-report-2016-of-grameenphone-limited.html
- Balance Sheet (1983-2016) in BDT. (n.d.). Retrieved from http://www.grameen.com/data-and-report/balance-sheet-1983-2013-in-bdt/
- Finances. (n.d.). Retrieved from https://www.Kiva.org/cms/Kiva.org_microfunds_financial_statement_12312016.pdf
Figure 1- Hierarchal structure of Grassroots Grameen Bank micro lending
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