Case Study: The Grameen Bank

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Case Study The Grameen Bank

• Lecture 13
• Week 7

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Structure of this class

• Muhammad Yunus and the founding of Bangladeshs
  Grameen Bank
• The group lending methodology re-visited
• Limits to Group Lending
• Grameen Bank II
• Main challenges

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Yunus and the Grameen Bank

• 1970s War against Pakistan, flooding, famine
• 80 of the population living in poverty
• Yunus Economist trained in the US teaching at
  Chittagong University ( southeast Bangladesh)
• 1976 Yunus started a series of experiments
  lending to poor households in nearby Jobra
• Activities financed rice husking, bamboo weaving
• Finding poor borrowers without collateral making
  profits and repaying

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• Financing out of his own pocket could not meet
  growing demand
• Yunus convinced the Bangladesh Central Bank to
  help him set up a special branch that catered the
  poor of Jobra
• Another trial in Tangail (North Central
  Bangladesh) assured success was not
  region-specific
• Grameen went nationwide, village by village,
  thanks to donor agencies IFAD, Ford Foundation,
  and the governments of Bangladesh, Norway, and
  the Netherlands

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--? Rapid growth
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Group lending methodology

• Key to the success of rapid growth
• Group of potential clients form groups (5
  members)
• Loans made to individual participants within the
  group
• Joint responsibility if a member defaults all
  members have to pay for her or else the entire
  group excluded from future loans
• Group lending under joint responsibility gives
  costumers incentives to select responsible
  partners, to (peer) monitor, and repay
• A five-member group is in turn part of a larger
  center composed of eight groups

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Under the the Grameen classic methodology

• Advantages
• Economies of scale
• Agency Costs were reduced as the bank delegated
  screening, monitoring, and loan enforcement onto
  the borrowers via social sanctions
• Efficiency gains borrowers faced lower agency
  costs
• Promotion of mutual assistance and solidarity
  (insurance)

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Disadvantages

• Group lending under joint responsibility
  difficult to replicate in sparsely populated
  areas
• Social sanctions difficult to impose on close
  relatives
• Scarcity of much needed group leaders
• Attending frequent repayment meetings time
  consuming and costly for the borrowers
• Risk aversion
• Scope for collusion undermines the banks ability
  to harness social collateral
• Too harsh on borrowers as member were
  experiencing negative idiosyncratic shocks

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Grameen II

• Foods in the 1990s prompted Grameen to lend for
  rehabilitation
• Amounts lent exceeded capacity to repay
• Widespread defaults and demands for withdrawals
  from group fund
• Rules were too strict, and failure to repay by
  one member triggered group and entire center
  defaults
• The system was redesigned under the name Grameen
  Generalized System or GGS and was launched in
  2001

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Main features

• Sharp reduction in number of financial products
  (family loans, seasonal loans)
• No more compulsory fund
• Relaxation of fixed-size weekly installments
• Flexible loan cycles
• Not repaying in full did not equal default
  anymore
• Recognition that borrowers were heterogeneous and
  subject to idiosyncratic shocks
• Faith on the fact that the poor will eventually
  repay, some over a longer period of time, some
  over a shorter period of time

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• Basic loan accessible to all
• This can however be renegotiated (rescheduled),
  flexibility
• Full repayment of basic loan enable borrowers to
  access (1) housing loans, and (2) higher
  educational loans
• Two-speed system high and low
• Disincentive for borrowers to go from high to low
  because she starts creating a credit history from
  scratch
• Custom-made Credit service
• Group loan replaced
• Pension fund

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• Savings
• Loan insurance
• Growing credit ceilings
• Destitute members program
• Computerization of Grameen accounting and
  monitoring systems

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Main challenges

• Excessive reliance on a charismatic leader
• Governance Pyramidal structure even though a
  coop on paper
• Capacity to cope with aggregate shocks
• And last but not least Social Business
• -? Next class The Case of Financiera
  Compartamos (consult the web site for
  required readings)
• Have a nice weekend -?