Grameen Bank

Background and Objectives

Muhammad Yunus first conceptualized the Grameen Bank originally Bank of the
Poor system in Bangladesh in 1976. Believing that credit is a human right, and
disagreeing with conventional banking systems that exclude the poor from receiving
this right on the assumption that they will not repay loans, he created a methodology
and institution centered around the unique circumstances and needs of the poorest of
the poor. The project was then transformed into an independent bank by government
legislation in 1983, and Mohammad Yunus received a Noble Peace Prize in 2006 for
the Banks successes in alleviating poverty over the past decades.
Recognizing that charity does not solve poverty, The Grameen Bank encourages the
poor to harness their under or unutilized skills by allowing them access to small
collateral-free loans. The group-based microfinance banking system sustains itself on
the basis of mutual trust, accountability, participation and creativity. In the process of
enabling previously disadvantaged borrowers to launch their own enterprises, the
Bank also prioritizes concern for their environment, strengthening education,
encouraging saving, and the provision of technology as necessary factors in the
development of human capital.

Specifically, the Grameen Bank describes its primary objectives as follows:

Extend banking facilities to unbankable poor

Eliminate the exploitation of the poor by moneylenders
Provide self-employment opportunities for the unemployed
Enable the disadvantaged, mostly women from the poorest households, to

participate in a banking system they can understand and manage themselves

Replace the cycle of low income, low saving and low investment with a
proactive cycle of curbing low income with injection of credit, investment,
more income, more savings, more investment, more income

(Source: http://www.grameen-info.org/)
Method of Operation
The mode of operation of Grameen Bank is as follows. A bank unit is set up with a
Field Manager and a number of bank workers who cover an area of about 15 to 22
villages. The manager and the workers start by visiting villages to familiarize
themselves with the local milieu in which they will be operating and identify the
prospective clientele, as well as to explain the purpose, the functions, and the mode of
operation of the bank to the local population. Credit officers visit these villages and
through rigorous selection decide to finance small voluntary groups of five
individuals who show commitment to viable income-generating activities. Borrowers
have freewill to choose the nature of their productive or investment activity based on
the skills they possess.
Figure: General Organizational Structure of Grameen Bank

The Grameen system requires a dedicated special purpose organisation. The success
of the weekly or occasionally fortnightly or monthly meeting routine depends on tight
discipline and adherence to a regular schedule, and it is difficult for a commercial
bank which also has other financial products to integrate the Grameen system into its
own operations. The members make regular savings with the MFI, according to a
fixed compulsory schedule, and they also take regular loans. They each have
individual savings and loan accounts with the MFI, and the main function of the
Groups and Centers are to facilitate the financial intermediation process.
A borrower can only receive loans by forming part of a borrowing group, as trust and
peer pressure are the operational mandates for ensuring the repayment of loans. In this
way, the pressures of collective responsibility replace the need for conventional
collateral requirements and give the Grameen Bank system its strength. Initially, only
two group members receive a first loan, for which they are given a six-week period to
begin repaying the principal and interest (the interest rates charged by Grameen Banks
is high compared to that of traditional banks, about 20%) before the remaining
members in the group become eligible for receiving loans. New loans for any member
are only available once all previous loans have been repaid. Lending is in the order of
2:2:1 (leader usually being the last).
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. To increase its efficiency, the Bank also
invests heavily in its human resources; to ensure staff members are dedicated and well
trained on both the Grameen credit system as well as the particulars of the rural
villages in which the Bank serves.
Successes and Potential Benefits of the Grameen Bank Microcredit System

The Grameen Bank exhibits an average of 97 percent repayment rates

GB members enjoy an average household income at least 25 percent higher

than nonmembers
The number of GB 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 indirect positive effect on the

employment and wages of other agricultural wage laborers, and which has
impacted poverty alleviation and economic improvement at a national level
(Source: PERSGA)
Indian context
Ujjivan Financial Services, Fusion microfinance, SHARE Microfin Limited,
Asmitha Microfin Ltd., etc. are examples of MFIs that have adapted Grameen
model in the Indian context.
However, in India, SHGs are more popular as opposed to Grameen system in
Bangladesh. This may be because Bangladesh has less experience of any form of
democracy than India; its people are used to military governments, and may for
that reason be more less individualist. The Grameen system is often criticized for
being over-disciplined, or even militarist, with its tradition of saluting, of meetings
with imposed seating systems and the necessity for strict adherence to pre-set
schedules, by staff and members alike. It may, for that reason, be more acceptable
in Bangladesh. In India, on the other hand, many NGOs see credit as an entry
point for wider goals. Further, Bangladeshi village communities are generally
more socially and economically homogeneous and less divided by caste, than their
Hindu equivalents in India. It may therefore be easier in Bangladesh to persuade
people to join together in groups and centres which follow a standardised system.
The freer and more flexible SHG system may be more appropriate for the Indian
situation.
Critical issues in the Grameen Bank
The Grameen Bank has not gone without criticism. It has never forgiven a loan,
not even after a flood, or a cyclone (Hussain et al., 2001). A very common
criticism about Grameen is its higher interest rates reaching 20% whereas the
conventional banking charged at 10-15 percent (Hussain et al, 2001). In addition,
the social issue of dowry and the male power attitude of patriarchal power still
exist in rural families and community (Rouf. K.A., 2012). Researchers also claim
that womens larger mobility and visibility often lead to increased exposure to
violence.