The Grameen Bank, established in Bangladesh in the 1970’s by Nobel Prize winner Dr. Muhammad Yunus, is today considered as a legend the world over. The World Bank (WB) had started quoting Grameen Bank in its documents long ago, because of its unique role in poverty alleviation. What was so special about Grameen Bank and what was the secret behind its extra-ordinary success in poverty reduction? One would definitely like to have answers to these questions.
The Grameen Bank started its micro-lending programme from a single village in Bangladesh, in the late 1970’s. A local bank helped reluctantly in financing the programme on the personal guarantee of Dr. Muhammad Yunus. The reluctance of the local bank was because the methodology of this programme was so different from that of the traditional banks. However, the local bank had no cause to complain, as the repayment of loans under this new programme was nearly 100 per cent.
Encouraged by the success achieved so far, the Grameen Bank extended its micro-credit programme now to a full district. This time, the National Bank of Bangladesh agreed to finance the programme. Twenty-five branches of Grameen Bank were opened to cover the entire district. Soon, the number of borrowers went up to 28,000 from 500 – when the programme was confined to a single village. Female borrowers now constituted nearly 50 per cent of the total number of borrowers. The programme achieved remarkable success in this second phase, also.
Towards the end of 1981, a Commission was set up at the instance of the Central Bank in Bangladesh, to evaluate the performance of the Grameen Bank micro-lending programme. The Commission, in its report, attributed the success of the programme to the devotion and dedication of Dr. Yunus and his team. The report pointed out that those who worked for the programme had neither an office nor any fixed duty hours. They worked until midnight and went from door to door, just like Boys Scouts. In view of the foregoing, it was concluded in the Commission’s report that the model could not be replicated by the banking sector in Bangladesh.
Dr. Yunus, however, did not agree with the Commission. He was of the view that the model could be replicated successfully by any individual or group having a sense of duty and a desire to help the poor. To prove his point, he now decided to extend the Grameen Bank micro-lending programme to five districts. Obviously, he or his team could not influence the programme over such a vast area and if the programme still delivered, it would be because of the methodology of the programme rather than the devotion and dedication of a few persons.
By this time, the international institutions had started taking interest in the Grameen Bank micro-lending programme. So, when the programme was extended to five districts, Ford Foundation helped out with a guarantee fund of eight hundred thousand dollars. Besides, a loan of $3.4 million was also negotiated with the International Fund for Agricultural Development. Cumulative loan disbursements under the Grameen micro-lending programme already stood at $13.4 million by the end of 1981. Now, during 1982 alone, loan disbursements increased by an additional $10.5 million.
The Grameen Bank acquired an independent status in September 1983, with Dr. Yunus as its full-time Managing Director. Thereafter, the Grameen Bank expanded at a rapid pace and its branches were opened throughout the length and breadth of the country. During subsequent years, the Grameen Bank had extended its programme to the fishery, apparel and telecom sectors. In this way, the Grameen Bank had not only brought about improvement in the lives of poor families but, also, contributed to the economic progress made by the country in recent decades.
According to latest reports, the Grameen Bank had already provided loans amounting to nearly 6 billion dollars to 7 million families in rural Bangladesh. According to the same reports, more than 250 institutions in nearly 100 countries including Malaysia, Philippines, Vietnam, Bolivia, South Africa and United States had operated micro-credit programmes based on Grameen Bank methodology, in a bid to help the poor in breaking out of their poverty in the above-mentioned countries.
Besides the devotion and dedication of the Grameen Bank team, the success of its micro-lending programme was also attributable to the methodology used in the programme. The borrowers, under this programme, were not asked for any collateral and, at the same time, they were not required to fill in complicated forms and complete legal documents. For this reason, even the poorest of the poor and illiterate persons could borrow from the Grameen Bank.
Second, the loan amount was small and its repayment was simple. Initially, a loan of $25 only was advanced to the borrowers, for one year. The repayment of the loan started one week after the loan disbursement and it was in 50 weekly instalments of 50 cents each. Interest on the loan was 20 per cent and its payment amounted to 2 taka per week only. Payment of such a small amount did not prove a burden to the borrowers.
Third, the workers of the Grameen Bank were regularly in contact with the borrowers and offered them advice for the resolution of their day to day problems. The borrowers were asked to form a group of five, in the first instance, so that if one or two members of the group faltered, other members of the group would come to their support. The borrowers knew that the Grameen Bank loan was the only chance for them to break out of their poverty. For these reasons, the repayment percentage of Grameen Bank loans nearly always remained close to 100 per cent.
In Pakistan, the micro-credit programmes could not take off as yet. Small loans advanced by Khushali Bank went up from Rs0.2 billion in 2001-02 to Rs2.59 billion in 2007-08 (July-March), while the loans advanced by other microfinance institutions moved up from nil in 2001-02 to Rs2.3 billion in 2007-08 (July-March). Roughly, one million people in the country had availed the microfinance facilities so far.
In a bid to expand microfinance access to around 3 million borrowers by 2010, a strategy for expanding the microfinance outreach had been prepared by the State Bank of Pakistan (SBP) which was approved by the Government in February 2007. According to the Pakistan Microfinance Network, the total credit disbursement to the microfinance borrowers in Pakistan had been Rs19.65 billion only so far. An estimated 10 per cent of the prospective borrowers only had so far been covered, while the remaining 90 per cent had not been able to avail the microfinance facility so far.
At least, one of the reasons for the inability of our microfinance institutions to increase their outreach is that the majority of the poor living in the remote rural areas of the country is illiterate. They can neither offer collaterals to support their loans nor can they fill the cumbersome forms and complete legal documents.
Such people can benefit from the microfinance facility only if our microfinance banks do away with the collaterals and legal documents, following the Grameen Bank model.
An increase in the outreach of microfinance facilities can help not only in poverty reduction but, also, in developing those sectors of the economy which have remained under-developed so far due to lack of adequate credit facilities, such as livestock and dairy farming, small agricultural land and small and medium enterprises (SME). The SME employ 80 per cent of the non-agricultural labour force and have a significant share in the export earnings. Still, credit to this sector had decreased in FY-08 to Rs18 billion from Rs30 billion in FY-07. Microfinance institutions could fill this gap, because there are thousands of small manufacturers who feel shy to approach commercial banks, being illiterate and unable to offer collaterals to support their borrowings.
Another difficulty faced by our microfinance institutions is that most of them are donor-dependent and lack capital/fund base, in order to carry out their microfinance operations in a full-fledged manner.
According to Pakistan Microfinance Network, the microfinance institutions had so far been able to mobilise deposits of Rs4.69 billion only against cumulative loan disbursements of Rs19.65 billion.
Only if the microfinance institutions were able to increase repayment percentage of their loans to nearly 100 per cent, following the Grameen Bank model, no commercial bank would be reluctant in providing the financing facility to these microfinance institutions. As a lender of the last resort, however, the SBP can offer to guarantee the small loans advanced by the microfinance banks, up to a certain amount, at a time when the global banking is hard-hit by credit crunch and the effects of the global financial crisis. By doing so, the SBP would be helping in achieving the twin objectives of poverty reduction and economic development. By Aftab Ahmad