GRAMEEN II: the first five years 2001-2005 A ‘grounded view’ of Grameen’s new initiative Researched and written for MicroSave by Stuart Rutherford Senior Visiting Fellow, Institute for Development Policy and Management, University of Manchester with Md Maniruzzaman, S K Sinha, and Acnabin & Co Dedicated to the clients and staff of Grameen Bank, for showing the world that poverty-focused market-led microfinance continues to evolve and prosper Dhaka, Bangladesh February 2006 Introduction hen The Economist published its survey of microfinance in November 2005, the cover photograph Wfeatured a woman in a sari anxiously grasping a passbook. The newspaper neglected to title the picture, but not surprisingly it shows a client of the world’s best known microfinance pioneer, the Grameen Bank of Bangladesh. As the survey went on to say, Grameen Bank started in 1976 and soon became extraordinarily famous for offering "microcredit" to women in small groups It still does, and in increasing numbers. But recent years have been dramatic ones for Grameen Bank, its thousands of employees and its millions of clients. After two decades of breathtaking expansion it ran into trouble in the late 1990s. Arrears on loan repayments began to grow, and more and more clients stopped attending the village-level weekly meetings where bank business is conducted. Then in 1998 Bangladesh suffered its worst floods in living memory, disrupting the bank’s work in almost two thirds of the country and dealing its balance sheet another severe blow. At the same time, its public image began to look tarnished. Critics took it to task for what they saw as inadequate accounting practices, and challenged its claim to be profitable and sustainable. Internationally, Grameen fell out of fashion as industry observers, particularly in North America, shifted their attention to other forms of microfinance. Throughout the crisis Grameen's management had been pilot-testing ways of dealing with the problems. A key moment came in early 2000, when the bank saw the need to consolidate its experiments and to empower them by expressing them as a single body of ideas. This became ‘Grameen II’, a title implying radical changes from earlier ‘classic’ Grameen. A year later there was enough substance to Grameen II to launch a bank-wide training programme for all 12,000 staff members. Between March 2001 and August 2002 the Grameen II ‘methodology’ replaced classic Grameen in all of the 1200 or so branches. MicroSave, an industry body working to improve microfinance practice, was quick to see that such major changes in Grameen need to be properly understood, not least by the thousands of microfinance organisations in dozens of countries who have adopted, adapted or been influenced by Grameen's work. In 2002 MicroSave commissioned Stuart Rutherford to undertake a long-term field-based study of Grameen II. That study ended at the close of 2005 and what you are reading is its final Report. Assisting Stuart Rutherford were senior researcher Dr Md Maniruzzaman, principal interviewer Mr S K Sinha, assistants to the principal interviewer Mrs Shamima Sultana, Ms Kabita Pal and Mrs Rabeya Sultana (no relation), and rural assistants Ms Parul Akhtar, Mrs Purnima Barua, Mrs Provati Akhter (no relation) Ms Jharna Rani Majumder, Mrs Nilufa Sultana (no relation) and Ms Shilpi Akhter (no relation). Ms Nazmun Ritu was employed as a translator. The Dhaka-based accountancy firm Acnabin and Co carried out the accounts research, overseen by partner Iftekhar Hossain and led by Mohammad Mia. Dr David Hulme of Manchester University kindly acted as adviser and made several field visits. The report is arranged in three sections, whose contents are summed up in the ‘Guide to this Report’ which immediately follows the contents page. The research that underlies this Report could not have been carried out without the encouragement and support of Grameen Bank, nor without the patience and good humour of its staff and clients. MicroSave, and Stuart Rutherford and his team, offer sincere thanks to all of them. Particular thanks are due to the founding managing director Muhammad Yunus, his deputy Dipal Chandra Barua, and the managers, staff and clients of the branches in our three intensive study areas. 2 Contents INTRODUCTION 2 FOREWORD BY MICROSAVE 4 A GUIDE TO THE REPORT 6 SECTION 1: THE OVERVIEW 7 Grameen Bank under Grameen II, 2001-2005 7 Member numbers: doubled 7 Deposits: tripled in value 8 The loan portfolio: more than doubled since 2002 8 Expenditure under control, income growing, and profits soaring 9 Loan portfolio quality: better measured, and on the mend 9 What is Grameen II? 11 Public deposit services 12 Member deposit services 13 Member loan services 15 Other innovations 19 SECTION 2: CLOSE-UPS 22 The Field Staff: unveiling Grameen II 23 Rolling out Grameen II 23 The Grameen way 23 The field staff filter 25 The position in early 2006 27 The Members: unpacking Grameen II 29 Not much debt 29 Poor people, rich portfolios 31 Using Grameen’s services 32 A comprehensive service? 34 Coming and going 37 Borrowing to lend 40 Working with the poor 41 New in Grameen II 41 SECTION 3: PERSPECTIVES 45 Making the bigger loans perform 45 Maintaining the poverty focus 46 New challenges in fund management 47 An unfinished revolution 47 The next ten years: Grameen’s view ahead 49 Grameen and the world of microfinance 49 APPENDICES 50 I: Product terms and conditions 50 II: The new member selection rules 55 References: 57 3 Foreword by MicroSave The Grameen II Revolution: A Few Comments From MicroSave’s Perspective The Grameen II system represents a revolution in the way that Grameen Bank does business. It is the culmination of years of hard work to assess the aspirations and needs of the poor in Bangladesh and re- design the “classical” Grameen system to respond to those needs. Grameen Bank was born out of market research conducted by Professor Yunus in Jobra in 1975. The bank’s success (and the success of the many Bangladeshi MFIs who copied it) reflects how well the basic working capital loan repayable over one year met one of the core requirements of the poor in Bangladesh. But those requirements have been evolving and there has been a growing recognition that credit alone does not meet the needs of the poor. With its new range of products, the Grameen II system reflects and meets many of the diverse needs of Grameen’s target market. The Grameen II system is therefore “market-led”. And, as a consequence, the results have been extraordinary. After a difficult period of stagnation and compromised portfolio quality, the bank has grown significantly both in terms of the number of customers served and in terms of its profitability. “Grameen took 27 years to reach 2.5 million members – and then doubled that number in the three years following the full establishment of Grameen II.” Even in Bangladesh’s fiercely competitive environment Grameen continues to grow at a remarkable rate attracting around 140,000 new members every month – a staggering 1.7 million new members every year. In the three years to December 2005, Grameen’s deposit base tripled and its loans outstanding doubled. In the same period the bank has introduced a much more conservative provisioning policy and built up a formidable loan provision for its troubled housing loan portfolio. At the same time the quality of the loan portfolio has improved very significantly. As did profitability: “… despite much heavier loan loss provisioning, profits soared from around 60 million taka in 2001 to 442 million taka (about $7 million) in 2004”. Drop-outs are returning, defaulters are repaying and re-joining. Market-led Grameen II is yielding exceptional results. Rutherford et al.’s work shows that the Grameen customers are using the Grameen II products in a wide variety of ways, to meet a wide variety of needs and challenges that face them. The introduction of current account and contractual or programmed savings products allows them to save “up” as well as “down”1, and increases the range of financial instruments and options that they have to manage their complex household budgets. The top-up loans allow members to maintain the capital in their businesses or to manage unforeseen challenges/shortfalls and extend repayment periods in a structured (and carefully tracked) manner where necessary. Indeed, there seems to be increasing evidence that Grameen is meeting most of the needs of some of its members, to such an extent that they are using the services of the informal sector and other MFIs less and less. In short, “Grameen II shows that as the breadth of products on offer increases, the utility to the users increases dramatically2.” It is this increased utility that is encouraging drop-outs to return and defaulters to repay and rejoin Grameen – access to a range of market-responsive products is a valuable asset. It is not unfair to surmise that with the increased utility and ability of the poor to manage their meagre financial resources, the developmental impact will be higher too. In short, Grameen II’s sensitivity to the market has created an astonishingly positive response – both the clients and the institution have benefited enormously from the change. The challenge for classical “Grameen replicators” across the globe will be to develop the systems, front- line staff and management capability to take the next step … and where they wish to offer the savings services, to obtain the licences from the regulatory authorities. The move from the “plain vanilla”, classical Grameen model with its relative simplicity, and associated limited options for clients, to a more market-led approach, is likely to be immensely challenging for most.