Munich Personal RePEc Archive
Aspects of microfinance system of Grameen Bank of Bangladesh
Islam, Jamal and Mohajan, Haradhan and Datta, Rajib
International Journal of Economics and Research
16 February 2012
Online at https://mpra.ub.uni-muenchen.de/50691/ MPRA Paper No. 50691, posted 16 Oct 2013 08:08 UTC Jamal Nazrul Islam, Haradhan Kumar Mohajan, Rajib Datta, Int. J. Eco. Res., 2012, v3i4, 76-96 ISSN: 2229-6158
ASPECTS OF MICROFINANCE SYSTEM OF GRAMEEN BANK OF BANGLADESH Jamal Nazrul Islam Emeritus Professor, Research Centre for Mathematical and Physical Sciences, University of Chittagong, Bangladesh Haradhan Kumar Mohajan Premier University, Chittagong, Bangladesh. E-mail: [email protected] Rajib Datta Department of Finance, Faculty of Business Studies, Premier University, Chittagong, Bangladesh. E-mail: [email protected] ______
Abstract The microfinance system of Grameen Bank is a revolutionary tool to eradicate poverty of the rural people especially the women of Bangladesh. At present GB is the largest microfinance bank in Bangladesh and probably the biggest microcredit organization in the world. It provides loans to assetless and landless poor people whom no commercial bank give loan. Microcredit is the most useful and popular financial system in the world to face financial crisis of the poor people. Grameen Bank loan distribution has risk of default and sometimes the loans are used even dowry which is crime against women right. The rate of interest in Grameen Bank is very high and due to high interest rate the poor women can not use the loan in a high profitable business to bear this burden, so some of the borrowers lose lands and assets to pay the loan. The paper discusses both advantages and drawbacks of Grameen Bank with mathematical calculations in some details. Keywords: Grameen Bank, Microfinance, Joint liability, Loan, Risk of default ______
INTRODUCTION is a difference between them. The aim of Grameen Bank (GB) is to Microcredit refers to the act of providing reduce poverty in both rich and poor the loan. On the other hand microfinance countries. It gives loan to those people is the act of providing these same whom the government or any borrowers with financial services, such commercial bank will not give loan as savings institutions and insurance facility. Both rich and poor countries of policies (Sengupta and Aubuchon 2008). the world microfinance tries to improve Bangladesh is a developing country with access to loans and to saving services for a vast rural society which is about 90% low-income, low-wealth people which is of the total population. The majority of the fastest-growing and best-known tool the rural population, particularly women, to combat poverty. The Nobel Prize is subjected to severe poverty, gender committee awarded the 2006 Nobel inequalities and unemployment. Due to Peace Prize to Dr. Muhammad Yunus negligence of the rural development by and the Grameen Bank for their efforts the government and rich population the to reduce poverty in Bangladesh. In the financial condition of the poor in the USA the number of microfinance villages remain unchanged after the organizations and their budgets has independence of the country in 1971. grown exponentially in the past decade The GB is a well-known institutional (US Newswire 1999, Meyerhoff 1997). framework that has achieved The terms microcredit and microfinance considerable success in improving the are often used interchangeably but there socioeconomic conditions of the rural
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poor, particularly women, in Bangladesh 1994a,b). At first GB was extended to (Sarker 2001). whole of Tangail district (a district of Dr. Muhammad Yunus, a Professor in Dhaka division) in 1979 with the Economics of the University of financial support of Bangladesh Bank Chittagong, Bangladesh, has founded the (Central bank of the country) and some GB. The country was slowly recovering other nationalized commercial banks. In from a vicious war of independent in 1981 Yunus was preparing to test the 1971 which had destroyed its new lending model on a large scale and infrastructure and its productivity and wanted to open dozens of branch offices murdered much of its intelligentsia. The in five rural districts in addition with damage caused by the war had been previous branches. The commercial amplified by the famine of 1974 and banks declined Yunus’ initial request for suffering of human on a vast scale could capital. So that he went to Ford be witnessed in any town or village of Foundation’s office in Dhaka and asked Bangladesh (Hulme 2008). He watched for an $800,000 loan guarantee fund as the people of Bangladesh to starve in the security against commercial bank famine of 1974 (Yunus 1998). He lent an lending. After careful appraisal by senior average of $0.64 to a bamboo weaver staff, in 1981 Ford agreed to the request and to 41 others in various purposes. The and deposited the requested funds in a borrowers repaid their loans and GB account at London as a framework improved their lots. After this success he for offering reflections on current gave loan to some other persons but few debates within US philanthropy on of them did not repay the loan. He accountability, support for innovation, thought that this was because they had risk taking and impact. Ford’s loan either used the money unwisely or were guarantee fund leveraged commercial not trustworthy. He began to experiment bank lending to GB (Lawry 2008). with ways of (i) approving and After that success in Tangail, the project supervising loans, to ensure they would was further extended to several other be used for productive investments, and districts of Bangladesh such as (ii) selecting trustworthy clients and Chittagong, Dhaka, Rangpur and managing them, so that they would Patuakhali. In 1983 it was transformed repay their loans (Hulme 2008). He into an independent bank by a made a brilliant idea for the best solution government ordinance, with the name to help the poor out of their poverty, Grameen Bank. In 1983, the government which then grows over the world. It provided 60% of the initial paid up share initially began in the village Jobra near capital of the bank and the rest 40% the University of Chittagong, procured by the borrowers of the bank. Bangladesh and some of the neighboring In 1986, the government share capital villages during 1976-79. was reduced to 25% and the rest was Dr. Yunus has observed that commercial from the borrowers. In 29 June 2012, Dr. banks had in-built constraints and are Yunus expresses that the share capital of aimed only at those who are already well government is only 3% and major 97% off. He contemplated an alternative from the members of GB (The Prothom institutional framework that could be Alo, 29 June 2012).GB is the only an used to raise the wellbeing of organization that provides interest free impoverished sections of society (Yunus loans to the beggars.
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At present GB is the largest micro- The sectoral share of general loans in finance bank in Bangladesh and 1994 was 35% for agriculture, 16% for probably the biggest micro credit processing and manufacturing, 26% for organization in the world. In the livestock and fisheries, and 23% for commercial bank the clients have to other activities such as trade, commerce, come for services in banks but GB and peddling. officials go the clients which is a new Successes and potential benefits of the system in microfinance banking sector. GB micro credit system are as follows: It is known worldwide for its innovative • it exhibits an average of 97% credit delivery to the rural poor (95% are repayment rates, women). It selects assetless, landless • the members of GB enjoy an average poor people of Bangladesh, focuses on household income at least 25% the poor women, and provides credit higher than nonmembers, delivery system to meet the diverse • the number of GB members living socio-economic development needs of below the poverty line has rapidly the poor. Many believe that GB’s decreased, lending has been successful because of • the landless benefit most, followed its joint liability loans have induced by marginal landowners, borrowers to provide mutual assistance • there has been a shift from in hard times (Besley and Coate 1995). agricultural wage labor to self- But Rai and Sjöström (2001) argue that employment and petty trading a shift joint liability is not enough to efficiently which results in an indirect positive induce borrowers to help each other; it is effect on the employment and wages also necessary to ask borrowers to make of other agricultural wage laborers, reports about each other. and which has impacted poverty GB adopted some social beneficial alleviation and economic works such as group based lending, the improvement at a national level, and collateral free lending system, and peer • group savings have proven as group monitoring system. The successful as group lending. adaptation and learning practice such as flexibility of obtaining a loan, a housing THE MODEL OF GB loan with lower interest rate, mandatory GB is purely a bank that provides and voluntary savings were the most banking services only to the poor. It significant issue. GB has computerized extends credit to the poor to invest in accounting and monitoring system with productive sectors such as processing its 2,552 branches out of 2,558 and manufacturing, agriculture and (Grameen Bank 2009). By integrating forestry, livestock and fisheries, services group-based lending, mandatory savings and trade. It is exclusively for poor and insurance, repayment rescheduling people and it is directly owned by them in case of disasters, and similar other as well. The government of owns 10% of schemes, it has been able to minimize GB and has three nominated members both behavioral and material risks of on the Board of Directors. It enjoys full lending. Among the four major types of autonomy in discharging both its policy loans, the general loan dominated and operational responsibilities. GB lending, followed by housing loans, members’ contribution to net household technology loans, and collective loans. income is more than 50% and more than
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half of the women surveyed have been 3. We shall not live in dilapidated able to pull their families out of poverty houses. We shall repair our houses (Hossain 1988, Todd 1996). The status and work toward constructing new of women has been improved through houses at the earliest. their fruitful participation in GB 4. We shall grow vegetables all the activities. If a woman can escape out of year round. We shall eat plenty of the poverty cycle, then the woman them and sell the surplus. focused on asset building. Ahmed (1985) 5. During the plantation seasons, we observed that physical violence and shall plant as many seedlings as other verbal abuse against women possible. decreased as a result of GB activities. 6. We shall plan to keep our families The main objectives of GB are as small. We shall minimize our follows (Barua 2006, Sarker 2001): expenditures. We shall look after • to extend the banking facilities to the our health. poor people, 7. We shall educate our children and • to eliminate the exploitation of the ensure that they can earn to pay for money lenders who pay loan with their education. high interest, 8. We shall always keep our children • to create opportunities for self- and environment clean. employment for the vast unutilized 9. We shall build and use pit-latrines. and underutilized manpower resource 10. We shall drink tube-well water. If of rural areas of Bangladesh, it is not available, we shall boil • to bring the deprived people within water or use alum. the folds of some organizational 11. We shall not take any dowry in our format which they can understand and sons’ weddings, nor shall we give operate, and can find socio-political any dowry in our daughters’ and economic strength in it through weddings. We shall keep the centre mutual support, and free from the curse of dowry. We • to reverse the vicious circle of ‘low shall not practice child marriage. income, low savings, low investment, 12. We shall not inflict any injustice low income’, hanging it into an on anyone, nor shall we allow expanding system of ‘low income, anyone to do so. credit, investment, more income, 13. For higher income, we shall more credit, more investment, more collectively undertake bigger income’ (Rahman 1993). investments. 14. We shall always be ready to help The sixteen decisions of GB are as each other. If anyone is in follows (Shams 1995): difficulty, we shall all help him. 1. We shall follow and advance the 15. If we come to know of any breach four principles of Grameen Bank: of discipline in any centre, we shall Discipline, Unity, Courage, and all go there and help restore Hard Work in all walks of our discipline. lives. 16. We shall introduce physical 2. We shall bring prosperity to our exercise in all our centers. We shall families. take part in all social activities collectively.
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organizations. Various activities of the GB’s organizational structure is highly bank are organized and implemented by decentralized. The field officers are four tiers of administrative set-up such encouraged to send monthly reports as branch office, area office, zonal office directly to the Managing Director. He and head office. The branch offices are reviews these and publishes significant the lowest operation units of GB which issues, concerns, and suggestions are located in the villages. One branch identified by the officers in GB’s serves a cluster of 120–150 centers and internal monthly magazine, which it has a manager, six or seven workers, reaches all bank officials and workers two to three trainee workers and an (Auwal 1996). About GB Dr. Yunus accountant. The branch offices select expresses that the “most distinctive and organize the target clienteles, feature of Grameencredit is that it is not supervise credit operations, and based on any collateral, or legally recommend sanction of loans. An area enforceable contracts. It is based on office supervises about 10 to 15 branch trust, not on legal procedures and offices which are assisted by program system.” officers. The area manager works under the supervision of the zonal office that is MICROCREDIT SYSTEM OF GB located in the district headquarter which Microcredit is a very effective is at the top of the hierarchy at the field instrument to empower the poor level. A zonal manager supervises about (especially to women). It is cost- 8 to 10 area offices. The zonal manager effective and sustainable, creates self- is responsible for handling accounts, employment for the most poor and managing funds, and monitoring, opportunity to move out of poverty, evaluating and supervising the social builds on trust and mutual co-operation, development programmes. The head dedicates to establish credit as a human office of GB is situated in the capital city right, and the poor do not have to come Dhaka. It is responsible for monitoring to the bank but the bank goes to the and evaluation, research and poor. Grassroots organizational development, supervision of training, development is an integral part of GB’s and similar activities which are benefited credit program which helps in building from access to information from up viable grassroots units in the form of different operational areas. The Chief groups and centers to promote strong Executive of GB is the Managing group solidarity. Director. He is responsible for the overall implementation of the policies of STRUCTURE AND CAPITAL OF GB and has to maintain close contact GB with various departmental heads in the The Board of Directors of GB consists head office and zonal managers to assist of 13 members of whom 9 are elected in formulation and change of policies. from among the borrower shareholders The features of GB are as follows and the rest 4 are appointed by the (Hulme 2008): government of Bangladesh. This board • lend to poor rural women, as they approves bank policies and serves as the were less likely than men to use link between the bank, the Ministry of loans badly and were more reliable Finance, and other government for repayment,
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• organize women into cells of five million) and the balance of deposits is which took collective responsibility Tk.35.49 billion ($506.66 million) for each other’s loans, (Barua 2006). By the end of February • establish centers where six cells 2008 GB had 7.4 million clients and consists of 30 women met at a set outstanding loans of $545 million time each week, to apply for loans (Hulme 2008). and make repayments, • charge a higher rate of interest than WORKING SYSTEM OF GB government schemes and NGO loans Five new members form a group and 5 programmes, to 8 groups form a centre, and all • require clients to make compulsory members in the centre meet with a loan micro savings each week and to officer weekly and members must sit in make promises about their social straight rows, salute, chant, and conduct, sometimes perform exercises (Hashemi • simple, standardized products that 1997). The chant related to praise small required regular, small repayments, families, prohibit dowry and child and marriage, promote gardens, admire • recruiting and training bright, young education, and encourage members to graduates to administer services to drink clean water and to use sanitary minimize corruption. latrines. Each borrower has learned to GB has started from one village in 1976 sign their names, and memorize a set of and at present it is covering to 68 vows to self-improvement and save thousand villages (all the villages of $0.02 a week. A group can have only Bangladesh). It has provided services to one person from any particular 42 poorest borrowers in 1976. In 1983 household and relatives must not be in GB had established as a bank with the same group. Groups have either male 36,000 borrowers and a portfolio of $3.1 or female members but not both. Each million. In 1997 GB had a portfolio of group elects a chair, and each centre $260 million and 2.3 million members, elects a chief. New members must also most of them were very poor, more than buy a share of stock in GB for 100 taka 90% of them were women, and all of ($1= Tk.48.5 in December 1998). them from rural areas. In December The group members select a chairperson 1999 the branches of GB became about and a secretary, and these positions 1,149 which were operating in 39,706 rotate cyclically among the members on villages with 67,691 centers. Also there a yearly basis so that all members can were 2,357,083 members, of which learn the responsibility of these 2,234,181 were female and 122,902 positions. The chairperson’s work is to male (Grameen Bank 1999). maintain discipline in the group and for The first disbursement was Tk.856 ($27) supervision of loan utilization by the and in 2006, it covers 6.23 million members. All members in the centre borrowers through 2,121 branches of meet with a loan officer weekly. The whom 96.52% are women and the group chairpersons elect the chief and cumulative disbursement is Tk.276.54 the deputy chief of the centre for a one- billion ($5.52 billion). The recovery rate year term. They are required to ensure of the bank is 98.55%. The outstanding attendance at the general meetings, amount is Tk.31.13 billion ($444.39 payment of installments, and overall
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discipline of the centre members. The sizes are modest, ranging from Tk.3,000 members promise to repay but some ($75) to Tk.10,000 ($250) and no break their promises. If any member collateral is required for a loan, and the fails to repay the loan then other borrowers invest the loan in the area of members of the group must pay the their choice. The group chairperson and amount of the defaulter and the group is bank workers monitor borrowers to see banish if they fail to repay the full loan whether they are utilizing the money at the end of the year and will not find properly (Sarker 2001). Borrowers who loan in future which is called joint have paid most of their debts have liability by the GB rule. The safe incentives to make sure that their peers borrowers who repay the loan regularly also repay on time. If the GB fails to have to subsidize risky borrowers of the collect the entire loan with interest group who are default. But the GB never within one year it may suspend all safe a sincere borrower from a risky one disbursement at a centre until all debts and end of the week the GB officer takes are up-to-date. Then the officers may repayment from the chairperson. also scold the women or detain them in Sometimes the chairperson has to pay the centre longer than normal which full repayment. If the subsidize rates are shames women and may subject them to sufficiently high, safe borrowers are the wrath of their husbands when they unlikely to apply for a loan, because they finally are released (Rahman 1999b). face heavy loss by taking loan from GB. The new borrowers get very small loans Joint liability at GB is more subtle than and the amount increases gradually the popular perception and more depending on creditworthiness. After complex than the theory. But Rai and returning previous loan GB offers bigger Sjöström (2001) show that joint liability loans such as housing loans with bigger is not enough to efficiently induce disbursements, longer terms, and lower borrowers to help each other (discusses interest rates. But housing loans provide later). Such cross-reporting is used by women with legal rights to the land and the GB at village meetings where loan the house (Islam et al. 1989). Later GB repayments are collected (Rahman made a quantum leap to loans for 1999a). education expenses and for cell phones Most formal lenders require assets such (Zwingle 1998). GB provides loans to as land, houses, or bank balances to the poor women for buying Grameen avoid risks which also help to take loan mobile phone and women do business by in future. As a result most borrowers offering mobile services in the rural repay because they want to preserve areas that have not been linked to the their future access to loans (Schreiner nationwide telecommunication schemes, 1999). To avoid risk GB applies as so the poorest women are able to raise techniques such as 2 members get loans income and savings (Mair and Schoen first, if they pay the installments 2007). regularly during the observation period GB has four types of forced savings, of 6–8 weeks, 2 more members get loans where saving is compulsory and one month later and after one more withdrawals are restricted but members month, the last member, the chairperson can borrow against in emergencies and receives a loan. Loans have to repay GB calls it emergency fund (Morduch within one year (Hashemi 1997). Loan 1999a, Khandker, Khalily and Khan
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1995). The first two types are not really strengthen their support networks for savings at all but rather fees which when various troubles strike. members will never get back. After As the clienteles GB are from the taking their first loan each member must impoverished part of society, it intends pay $0.01 each week to support schools to provide training on health and (where members learn rules of loans and nourishment and creates consciousness payments of GB) run by the centre. They among its borrowers regarding the tree must also pay 0.5% of disbursements in plantations and clean environments. It excess of $20 into a fund used to cover offers seeds of vegetables and fruits to losses from default. The last two types of its borrowers and motivates the forced savings are real savings. borrowers for making and developing a Members must deposit 4 cents each kitchen garden in order to increase the week into personal savings with interest daily basis income of borrowers 8.5%, and withdrawals are unrestricted. (Hossain et al. 2001). In addition, 5% of each disbursement GB realizes that besides income and goes to the group fund with same production risk, lack of financial and interest 8.5% and makes loans from the social discipline is an important source group fund after floods and other natural of poverty. It encouraged planting trees, calamities. Members cannot withdraw growing kitchen gardens, raising small their savings in the group fund until they families, and building houses and leave GB or until they have ten years of sanitary latrines. It mobilizes the poor membership. But a member can borrow into groups for training and from the group fund for consumption at disseminating information about times of sickness or social ceremony. contraceptives, children’s education, GB manages the emergency fund for use health and nutrition, and other as insurance against potential default socioeconomic indicators of because of death, disability, or other development. Its objective has become misfortunes. This fund is also used to to empower women by enabling them to provide life accident insurance to all undertake independent income-earning group members, repay bad debts, and activities (Khandker 1996). GB undertake activities that improve the intervention has helped develop happy health, skills, education, and investment partnerships between husband and wife opportunities of group members. in terms of decision making regarding GB wanted to change the social and family affairs (Todd 1996). GB economic structure of rural Bangladesh development programmes have given and it supplies loans and insurance, what many women a sense of empowerment it calls discipline (Montgomery 1996). in the society. The most important non-financial service of GB is social intermediation Management System of GB (Bennett 1998) where membership in The staff and clients of GB have the GB gives women a socially accepted strong management system to devolve excuse to gather and to talk (Larance basic decision making and all work 1998). The impacts are both efficiently. All the works are done in psychological and economic and not grassroots level and the head office bears only women feel less isolated but also little responsibility except for strategic issues such as basic policies and research
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and development (Jain 1996, Holcombe million in subsidies, including both 1995). The GB has developed by a direct donations and soft donations such unique management system based on as soft loans, implicit subsidies through people’s capacities, learning and equity holdings, and delayed loan loss innovation, transparency and openness, provision (Sengupta and Aubuchon honesty and so forth (Holcombe 1995). 2008). Trust between staff and client is an SOCIAL BENEFITS OF GB important management system of GB There are six distinct but linked aspects and all banking transactions are carried of the social benefits of microfinance as out in front of the clients and bank staff. follows: worth to users, cost to users, Efficient field-based training is given depth, breadth, length, and scope both staffs and clients. Democratic (Schreiner 1999). leadership practices are given by the Worth to users is defined as their rotation among members of centre and willingness to pay. If a woman is willing group leadership. The most important to bear costs of up to $500 to get a year factors behind the successes of the GB of membership in GB then she would be are its unique decentralized just as well off with $500 more income organizational structure, client-centered as with a costless year of membership. delivery system, vision, management Theoretical models often assume that culture, and human resources worth to users is equal to the increase in management. No meaningful business profits due to access to finance development can take place in any but microfinance may improve well- country unless the standard of living of being even if it does not increase the poor is raised and GB takes a business profits. The most important constructive step to develop the poor effect of microfinance is to help society as well as the development of the households to diversify their sources of country. Due to efficient management income (Mosley and Hulme 1998, system more than 60 countries of the Schreiner 1999). world started GB types microcredit Cost to users is defined as the sum of banking. price costs and transaction costs. Price Management processes, such as decision costs are defined as direct cash payments making, communication and leadership to a microfinance organization. Price are all practiced contingently, costs borne by users are revenue for the disregarding conventional wisdom. The organization. Transaction costs are GB’s managerial personnel are fresh defined as non-price costs. They include graduates without any work experience. both non-cash opportunity costs such as Its managers at different levels have the time to meet each week and indirect demonstrated that they are capable of cash expenses for such things as planning, organizing and implementing transport and documents linked to the bank’s development activities use of microfinance. In GB non-cash independently. opportunity costs probably exceed In 1995, the GB decided not to request indirect cash expenses (Bhatt and Tang any more funds from donors and instead 1998). It wants to hide costs to users and began to fund the bank from collected shows low profits; because the deposits. Armendáriz and Morduch government imposes more taxes. Net (2005) calculated that GB accepted $175 gain to users is defined as worth minus
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cost, the change in well-being due to length is important in microfinance microfinance. because society cares about the well- Depth is defined as the social value of being of the poor both now and in the net gains that accrue to a given user. In future. A common proxy for length is the welfare theory, depth corresponds to the ability to attract grants or soft loans from weight of a user in the social welfare government or donors or, in the absence function. If society has a preference for of perpetual subsidies, the ability to earn the poor, then poverty is a good proxy enough profit to maintain the real value for depth (Schreiner 1999). The person of equity (Schreiner 1999). who has assets less than an acre of land Scope is defined as the number of types can join in GB but in real life some of services supplied. A microfinance members have more wealth than this organization which offers both loans and (Matin 1998). Some members are with savings services has greater scope than an income less than half the poverty line one that offers only loans. Of course and most are still very poor, and almost scope increases with the variety and all are women (Hashemi 1997). flexibility of the terms of a given type of Breadth is defined as the number of financial contract; a one-year loan for users. Breadth is important in $500 is a different product than a two- microfinance because the poor are many year loan for $500 (Adams 1994). GB but the development dollars are few. has great scope in some ways and weak With more than 2.3 million members, scope in others. It supplies savings more than 2.1 million borrowers, and services, but almost all savings are centers in more than half of the villages forced, and withdrawal is often in Bangladesh, GB has extensive breadth impossible. GB provides loans in (Schreiner 1999). different techniques which are Length is defined as the time frame of recoverable with interest. the supply of microfinance. Expected
Let, t = 1 to T be the index length of time,
st = index scope for time t,
nst = each user’s index,
Nts = breadth in time t for a given service st ,
Wtsn = worth in year t of products st to user nst , and
Ctsn = cost to users. Hence we can express the net gain as follows:
NG = Wtsn − Ctsn . (1)
The depth function Dtsn ()Wtsn − Ctsn gives the social value of the net gain from contract st
for client nst in year t. The general social welfare function W(.) returns the total social benefits B of net gains users, services and time. Now the social benefits are given by;
B = W ()Dtsn ()Wtsn − Ctsn . (2)
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Let δ > 0 be a distant factor and the assumption that W(.) is additively separable across users, services and time. Hence social benefits B, can be expressed as;
T St Nts t Social Benefits, B = ∑∑∑δ Dtsn ()Wtsn − Ctsn . (3) t =1s = 1n = 1
Let C be the social cost and if B > C, then a project passes the benefit-cost test and is
deemed a good social investment. If tsn be the number of outputs of type st for user nst in year t, then the number of outputs being as follows:
T St Nts t O = ∑∑∑δ otsn . (4) t=1s = 1n = 1
T If Ot be the total output one type of service in a year then;
St N st T Ot = ∑∑otsn . (5) s=1n = 1 Hence (4) becomes as follows: T t T The number of outputs, O = ∑δ Ot . (6) t =1 B C Now let B = be the unmeasured social benefit per unit of output and C = be O O measured social cost per unit of output. Obviously B > C implies for O ≥ 0 , we find B C > i.e., B > C . Hence a project passes the cost effectiveness test if unmeasured O O average social benefits B are judged to exceed measured average social costs C . 1 Let r > 0 be a choice of social discount rate such that δ = . In real life the World 1+ r Bank and the US government set r = 10% p.a. (Belli 1996, US Office of Management
and Budget 1972). Let the microfinance organization’s reports stocks only at the start st −1
and end of a year st . With linear change between the two end points, the daily average 1 discount weighted stock is not simply δ t − 5.0 ()s − s because the discount is a non- 2 t t −1 linear function of time (Schreiner 1999). Again from Schreiner (1997) we get;
* ** Discount average stock = δ ()st − t.∆st + δ ∆st , (7)
δ t − δ t −1 where δ * = , lnδ
∆st = st − st −1 ,
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1 δ ** = {} δ t ()()t lnδ −1 − δ t −1()t −1 lnδ −1 . ()lnδ 2
For r = 10% in the period 1983-97, GB produced about 5.4 million discounted person- years of membership and produced about 0.5 billion discounted dollar-years of borrowed purchasing power.
Let, E0 = initial equity of the simplest expression of social cost,
Ft = the discounted fresh flows of funds between public entities get back from the end of the time frame. Hence we can write; T t t Social Cost = E0 + ∑δ Ft − δ Et . (8) t =1
In (8), the measurement of first and third terms is simple but that of second term is complex. Public entities are defined as those funded voluntarily by taxpayers and private entities are funded voluntarily. The government of Bangladesh bought stock and bonds of GB and GB borrowed from the public International Fund for Agricultural Development and from the public development agencies of Norway and Sweden. All cash flows between GB and its members are private. Members choose to join because they expect that their benefits will exceed their costs.
Let, E = liabilities as part of grants, Gt R = gifts as revenue grants, Gt D = discounts an expenses, X t
Dt = average public debt,
Ct = the average interest rate paid for public debt, and
mt = the market interest rate for private debt of like risk.
The discount on public debt is the savings that come from borrowing from a public
source rather than from a private source. Hence the discount on public debt= Dt ()mt − Ct . The choice of the market interest rate m is as difficult as the choice of the social discount rate r. R True profit Pt is defined as what reported profits Pt would be without the arbitrary choice to count some grants not as injections to equity but rather as revenue grants R , Gt discounts on public debt D ()m − C , or discounts on expenses D as follows (Schreiner t t t X t 1999): P = PR − ()R + D ()m − c + D . (9) t t Gt t t t X t
Every year true profit of GB is much smaller than reported profit due to large discounts on public debt. In 1997 reported profit was $300,000 but the true profit was − $ ,23 000,000 .
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GB SHOULD FOLLOW EFFICIENT LENDING GB loan distribution has risk of default. To induce repayment GB must punish borrowers who default such as by denying future loans. It must choose successful borrowers to help repay the loans of unsuccessful borrowers to avoid punishment. Joint liability scheme is an inefficient system of GB.
For simplicity let us consider two individual borrowers of GB. Let ci ≥ 0 denotes
individual i’s consumption and qi ≥ 0 be the amount of punishment imposed on i by GB. Then individual i’s utility is given by (Rai and Sjöström 2001);
U ()c ,qii = ci − qi . (10)
Punishments are a deadweight loss. Let the maximum feasible punishment is denoted by
M, so that 0 ≤ qi ≤ M . Let the individuals’ output is denoted by xi ∈{},0 h where
xi = h > 0 is i’s success and xi = 0 for failure. Let x = (){}{}x1, x2 ∈ X = ,0 h × ,0 h be a stable state and the probability of state x is denoted by ()xp . The individuals are symmetric at the time of investment, so that;
()()hp 0, = p ,0 h . (11)
Let K be the cost of capital of GB. We assume that;
∑ ()()xp x1 + x2 ≥ 2K , (12) ∈Xx
so that projects are feasible. Let bi ()x denotes the payment from individual i to the bank in state x, then GB’s break-even constraint if it finances both projects is given by;
∑ ()()()xp ()b1 x + b2 x ≥ 2K . (13) ∈Xx
GB must impose lowest punishment on default to repay the loan. Let the GB demands a repayment of R* , where R* ≤ h ≤ M , when a project succeeds, and threaten a punishment of M if a project succeeds but no repayment is made. Let R* be chosen so that the GB breaks even be as follows (Rai and Sjöström 2001):
K R* = (14) ()(),hhp + p ,0 h
If the project fails, the GB observes it and does not punish the individuals for defaulting. If there is no defaulter then the GB will not punish any individual. To protect project from fail GB should decrease rate of interest in loans.
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FAULTS OF GB from patching together earnings from The rate of interest is higher which 31% casual employment, self-employment, is roughly and due to this higher interest remittances and a variety of loans from rate charges GB has criticized (The New other sources. The severe floods of 1998 Nation 2010). The interest of all and the collapse of the bank’s recently national and commercial banks in introduced agriculture loans, exacerbated Bangladesh is 10-15% (Hossain et al. the repayment problem. The crisis in 2001). Fernando (2006) has argued that 2000 when Daniel Pearl, a journalist on there have been existing borrowers of the New York Times, published an article GB who face obstacles to pay the loan saying that GB was virtually bankrupt on particular time for having higher (Hulme 2008). interest charges. Borrowers only get the advantages of using the loan for their RECONSTRUCTION OF GB survival but they do not involve in By the early 2001 the irregularities had generating profit, so they fails to pay been consolidated and professor Yunus higher interest rate on their loan announced the launch of Grameen II, the (Hossain et al. 2001). Obviously the high replacement of the bank’s earlier interest rate becomes burden to the poor products by a new range on different women who can not use the loan in a terms. Its new model Grameen II, takes high profitable business to bear this it much closer to a financial systems burden. As a result some of the approach. The GB made dramatic borrowers lose lands and assets to pay changes to its services around 2001 and the loan which cause them serious 2002. The main elements of Grameen II miseries and they face serious problems are as follows (Hulme 2008): due to the loan system of GB. The GB • A major focus on savings from loan distribution has risk of default and members and the public. This sometimes the loans are used even includes voluntary savings, term dowry which is crime against women deposits and the Grameen Pension right. Scheme (GPS) which are a long-term savings programme. TEMPORARY IRREGULARITIES • The provision of flexible basic loans IN GB to members rather than the In 2000s Yunus propounded that every standardized Grameen I, 12-month GB loan being used for microenterprise, loans. These are for variable amounts, and every microenterprise being can be repaid over three to 36 months, successful. This independent fieldwork have negotiable repayment schedules showed that GB clients used their loans and interest rates are determined by for many different purposes such as loan type (size, length, grace period, business, food consumption, health, etc.). education and even dowry. GB loans did • The abandonment of joint liability not go to microfirms for a single, and the idea of social collateral. specific investment but they went into • A poverty-focused struggling the complex financial portfolios of low- members’ programme, which income households. GB clients paid the provides small, subsidized loans to kisti (weekly repayments) on their loans beggars and encourages them to join not from a single microenterprise, but GB centers.
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in Europe until 2002 (Hulme 2008). In New to Grameen II is a pension fund, the USA the GB model has been which allows clients with loans greater suggested for the homeless and for the than 8,000 taka ($138) to contribute at ghetto (Banerjee 1998 and Soloman least 50 taka ($0.86) per month. The 1992). It indicates the successful of GB client receives 12% per year in as poverty alleviation program and has compound interest, earning a 187% been internationally accepted by return after the mandatory 10-year wait. different countries of the world. It This scheme allows Grameen II to earn improves the quality of life provide more money in the present and expand better food, better education, as well as services, while delaying payment in the better housing to the poorer community near future. Grameen II serves as a good (Wall Street Journal 1998, Thomas example of a second innovation in 1995). GB model has been duplicated microfinance: flexible loan repayment extensively in Bolivia, Chile, China, (Sengupta and Aubuchon 2008). Ethiopia, Honduras, India, Malaysia, Over the period 2002 to 2005 the bank Mali, the Philippines, Sri Lanka, tripled the deposits it held ($478 million) Tanzania, Thailand, the USA and and doubled its portfolio of outstanding Vietnam (Sengupta and Aubuchon loans. The bank’s loans portfolio became 2008). smaller than its savings portfolio. It built No doubt the microfinance revolution up a large fund for bad loan provision has recorded success in most developing and profits rose from Tk.60 million in nations of the world; but it has provided 2002 to Tk.442 million ($7 million) in little success in some developed 2005. GB opened 500 new branches, so countries. Schreiner and Woller (2003) that it had more than 1,700 branches by show the characteristics of the poor are late 2005. It now plays an important role different in the two regions. In the as a substantial MFI that meets client developing world, jobs are relatively needs and helps to promote competition scarce and hence the unemployed are within the financial markets. At present more likely on average to include is a very different organization from individuals that are highly skilled or what it was 20 years ago, but it still better motivated to become serves as an inspiration for those trying entrepreneurs. In the developing country to help poor and low-income people in like Bangladesh 60 to 80% of jobs their own efforts to improve their lives. supplied by micro-enterprise but microfinance beneficiaries in the GB MODEL AROUND THE developed country like USA are WORLD substantially smaller. The GB of Bangladesh holds an iconic Although microfinance is benefited to position in the world of microfinance. It the poor of the USA, but group is credited with proving that the poor are formation as like Bangladesh is difficult. bankable, the GB model has been copied Hence Bangladeshi pure GB style of in more than 60 countries; it is the most microfinance is not applicable widely cited development success story successfully in the USA. in the world. GB model has been followed in 22 countries of Africa, 19 in GRAMEEN FAMILY OF Asia, 3 in Oceania, 15 in America, and 7 ENTERPRISES
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Grameen Family enterprises are as employment and income-generation follows (Grameen Family of Enterprises opportunities in rural Bangladesh. 2005, Grameen Bank 2005):
Grameen Trust Grameen Shikkha/Education As a result of the success of GB in Grameen Shikkha is a company in the reaching and serving the poor with family of Grameen companies. credit, many people and organizations Established in 1997 its main objectives began to think in GB’s way, and wanted are to promote mass education in rural to learn more about GB and follow its areas, provide financial support in the principles in their own sphere of work. It form of loans and grants for the purpose is primarily to meet this demand that the of education, use IT for alleviation of Grameen Trust (GT) came into being in illiteracy and development of education, 1989. Now more countries worldwide promote new technologies and innovate follow the activities of the GB. ideas and methods for development of education, etc. Grameen Shikkha has Grameen Fund been conducting the Life Oriented Grameen Fund was incorporated on 17 Education Program, Pre-school/Child January 1994 as a not-for-profit Development Program, Early Childhood company and started operations on 1 Development Program and Arsenic February 1994. Its emphasis is on Mitigation Program in various districts providing finance to ventures that are of Bangladesh. risky, technology-oriented and otherwise deprived of financing from existing Grameen Telecom formal lending institutions. Grameen Telecom is a company dedicated to bringing the information Grameen Communications revolution to the rural people of Grameen Communications, a member of Bangladesh. Grameen Telecom is Grameen family of enterprises, is a not- planning, over the next four years, to for-profit Information Technology provide GSM 900/1100 cellular mobile company. It has been providing phone service to 100 million rural complete systems solution through inhabitants in 68,000 villages of developing software products and Bangladesh by; services, internet services, hardware and (1) financing 60,000 members of GB to networking services and IT education provide village pay phone service and services since its inception in 1997 under (2) providing direct phones to potential the Companies Act, 1994. subscribers.
Grameen Shakti/Energy Grameen Knitwear Limited Grameen Shakti (GS) is a not-for-profit The company is a 100% export oriented rural power company whose purpose is composite knitwear factory, located in to supply renewable energy to the Export Processing Zone in Savar in unelectrified villages in Bangladesh. GS the vicinity of Dhaka, the capital of expects not only to supply renewable Bangladesh. It has knitting, dyeing, energy services, but also to create finishing and garments production facilities. Most of the machinery and
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equipment have been sourced from condition. Some borrowers could not Europe. The factory is capable of escape from poverty due to high interest producing a very high quality of rate. As they can not invest their loan in different knit fabrics and garments for profitable sector, whose profit exceeds children, men and women. The fabrics the rate of interest of the loan of GB. and garments are fabric and yarn dyed The beggars can not take loan from GB, 100% cotton, TC, CVC, Polyester with because they can not form group, and lycra (attachment) etc., of various nobody take risk of their repayment. counts. The goods are currently exported Same conditions arose for the very poor mostly to Europe. Exports are made people. So that GB loans goes to rich or against confirmed irrevocable letters of non-poor people who can repay in due credit. time and the amount of next loan increases continually. Morduch (1999b) Grameen Cybernet Ltd suggests that a dollar increase in income Grameen Cybernet Ltd. has been for the very poor borrower has a five Bangladesh’s leader in Internet service times greater impact than the same dollar provision since it commenced operation for the marginally poor borrower. in July 1996. Its chief executive has had According to this suggestion for the an extensive career in education and poverty alleviation, GB should focus on information technology in the USA and the poorest borrowers first, but this is not is assisted by a team of bright, young always the case. executives. CONCLUDING REMARKS CAN MICROFINANCE In this paper we have tried to describe ERADICATE POVERTY? briefly ins and outs of GB of We have shown that microfinance of GB Bangladesh. It is the largest helps the poorest of the poor to escape microfinance organization of the country from poverty. GB is working in 68,000 which provides loans the poor. villages of Bangladesh. But the situation Inequality in the ownership of the means of villages worsens continuously and of production, unequal access to public there are beggars, extremely poor people resources, subordination of women, in the villages. Some have lost their dominance of usury capital and assets to repay the loan. complicated power relations between the The World Bank estimates that in 2001, rich and poor are the features of life in some 1.1 billion people of the world had rural Bangladesh. So that GB takes consumption levels below $1 and rigorous steps to remove the poverty another 2.7 billion lived on less than $2 from the rural society of Bangladesh. It per day (World Bank 2001). As is a decentralized participatory microfinance continues to grow, organization where both the staffs of the questions have arisen to focus on who is bank and the members are actively the optimal client. Should microfinance involved in different types of activities. target the marginally poor or the It is credited with proving that the poor extremely poor? (Sengupta and are bankable and its model has been Aubuchon 2008). Some clients had to copied in more than 60 countries of the pay a subsidized microfinance program world and has found success in poverty and could not improve their financial alleviation program. Some limited poor
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