is Economist Bruce Thornton's project to apply the Grameen Bank
philosophy and systems in Latin America
|The Grameen Bank
is based on the voluntary formation of small groups of about five
to provide a mutual, morally binding group guarantees in lieu of the
collateral required by conventional banks. At first only two members
of a group are allowed to apply for a loan. Depending on their performance
in repayment the next two borrowers can apply and, subsequently, the
fifth member as well.
The assumption is that if individual borrowers are given access to
creit, they will be able to identify and engage in viable income-generating
activities - simple processing such as lime-making, manufacturing
such as pottery, weaving, and garment sewing, storage and marketing
and transport services. WOmen were given equal access to the schemes,
and proved not only reliable borrowers but astute enterpreneurs. As
a result, they have raised their status, lessened their dependency
on their husbands and improved their homes and the nutritional standards
of their children. Today over 90 percent of borrowers are women.
Intensive discipline, supervision, and servicing characterize the
operations of the Grameen Bank, which are carried out by "Bicycle
bankers" in branch units with considerable delegated authority. The
rigorous selection of borrowers and tehir projects by these bank workers,
the powerful peer pressure exerted on these individuals by the groups,
and the repayment scheme based on 50 weekly instalments2, contribute
to viability. Savings have also been encouraged. Under the scheme,
there is provision for 5 percent of loans to be credited to a group
find, and a quarter of the active interest is credited and used in
an emergency fund as an insurance against default; in addition, members
save one taka every week which is credited to a savings fund. The
borrowers save, in all, about 25 percent of the income generated.
The success of this approach shows that a number of objections to
lending to the poor can be overcome if careful supervision and management
are provided. For example, it had earlier been thought that the poor
wuld not be able to find renumerative occupations.In fact, Grameen
borrowers have successfully done so. It was thought that the poor
would not be able to repay; in fact, repayment rates reached 97 percent.
It was thought that poor rural women in particular were not bankable;
in fact, they account for 93 percent of borrowers in early 1992. It
was also thought that the poor cannot save; in fact, group savings
have proven as successful as group lending. It was thought that rural
power structures would make sure that such a bank failed; but the
Grameen Bank has been able to expand rapidly. Indeed, from fewer than
15,000 borrowers in 1980, the membership had grown to nearly 100,000
by mid-1984. BY March 1991, the number of branches in operation was
854, with 910,842 members (832,782 of them women) in 21,114 villages.
There are 36,300 centres of groups, of which 33,126 are women. Group
savings have reached 698 million taka (approximately USD 23 million),
out of which 570 million taka (approximately USD 19 million) are saved
It is estimated that the average household income of Grameen Bank
members is about 50 percent higher than the target group in the control
village and 25 percent higher than the target group non-members in
Grameen Bank villages. The landless have benefited most, followed
by marginal landowners. This has resulted in a sharp reduction inthe
number of Grameen Bank members living below the poverty line, 20 percent
compared to 56 percent for comparable non-Grameen Bank members. There
has also been a shift from agricultural waged labout (considered to
be socially inferior) to self-employment in petty trading. Such a
shift in occupational patterns has an indirect positive effect on
the employment and wages of other agricultural waged labourers. What
started as an innovative local initiative, "a smal bubble of hope",
has thus grown to the point where it has made an impact on poverty
alleviation at the national level.
The Grameen Bank's
method of action can be illustrated by the following principles:
1. Start with the problem rather than the solution: a credit system
must be based on a survey of the social background rather than on
a pre-established banking technique.
2. Adopt a progressive attitude: development is a long-term process
which depends on the aspirations and committment of the economic operators.
3. Make sure that the credit system serves the peasants, and not vice-versa:
credit officers visit the villages, enabling them to get to know the
4. Establish priorities for action vis-a-vis to the the target population:
the most poverty-stricken peasants needing production resources, who
have no access to credit.
5. At the begining, restrict credit to income-generating production
operations, freely selected by the borrower. Make it possible for
the borrower to be able to repay the loan.
6. Lean on solidarity groups: small informal groups consisting of
co-opted members coming from the same background and trusting each
7. Associate savings with credit without it being necessarily a prerequisite.
8. Combine close monitoring of borrowers with procedures which are
simple and standardised as possible.
9. Do everything possible to ensure the system's financial balance.
10. Invest in human resources: training leaders will provide them
with real development ethics based on rigour, creativity, understanding
and respect for the rural environment.
Poverty Reduction Strategy
Profitable and sustainable financial intermediation is possible with
the poor, who are otherwise excluded from the formal credit system
because of lack of collateral, and poverty reduction is possible through
targeted credit. This is the key finding of an ongoing study of the
Grameen Bank conducted jointly by the World Bank and the Bangladesh
Institute of Development Studies. This study uses aggregate and branch-
level data of Grameen Bank for 1985 through 1993 to determine how
the Bank operates, at what cost, and whether its program is sustainable
and replicable. The study uses village-level data to examine macro-level
effects, such as the Bank's impact on rural wages. The study also
uses household survey data to examine household and intrahousehold
impacts on income, employment, asset accumulation, nutrition, health,
and education. Some of the findings of this study are reported below.
Grameen Bank believes that lack of access to credit is the biggest
constraint for the rural poor. If the poor are provided credit on
reasonable terms, they themselves best know how to increase their
incomes. Grameen Bank targets and mobilizes the poor and creates social
and financial conditions so that they receive credit by identifying
a source of self-employment in familiar rural non-farm activities.
The Bank's method of targeting the poor is effective as it mobilizes
only those who are willing to bear the costs of group formation, training,
and monitoring each other's activities, and those who are satisfied
with the relatively small sums they can borrow and repay. To better
meet its ultimate goal of social and economic development, Grameen
Bank targets women more than men. By doing so, it directly channels
credit to the poorest and the least empowered and helps improve the
living standards of their families. Along with providing credit, Grameen
Bank offers guidelines to members for codes of conduct and activities
aimed at improving their social and financial conditions. It also
provides training to women in maternal health, nutrition, and childcare
to generate greater demand for basic health care services.
Lending entails high risk of loan default due to adverse selection
of borrowers and disability of lenders to enforce the loan contracts.
Contrary to the practice of formal finance, Grameen Bank lends (in
small amounts) to the poor based on group responsibility where individual
access to credit depends on group repayment behavior. Group lending
uses peer pressure to monitor and enforce contracts and helps screen
good borrowers from bad ones. Unlike other development banks, Grameen
Bank mobilizes savings as an integral part of lending. Each member
is required to save Taka 1 each week and buy a Grameen Bank share
worth Taka 100. In addition, each borrower contributes 5 percent of
the loan amount to a group fund and Taka 5 for every 1,000 Takas above
loan size greater than Taka 1,000 to an emergency fund. These savings
mobilization schemes provide protection of loans against default,
an internal source of finance, and a stake for the members in Bank
Delivering Credit to the Poorest
1. There is an exclusive focus on the poorest of the poor - exclusivity
is ensured by - a. establishing clearly the eligibility criteria for
selection of targeted clientele and adopting practical measures to
screen out those who do not meet them. b. in delivering credit, priority
has been increasingly assigned to women. c. the delivery system is
geared to meet the diverse socio-economic development needs of the
2. Borrowers are organized into small homogeneous groups. Such characteristics
facilitate group solidarity as well as participatory interaction.
Organiing the primary groups of five members and federating them into
centres, has been the building blocks of Grameen bank's receiving
system. Emphasis from the very outset is to organisationally strengthen
the Grameen clientele, so that they can acquire the capacity for planning
and implementing micro level development deecisions. The Centres are
functionally linked to the Grameen Bank, whose field workers have
to attend Centre meetings every week.
3. Special loan conditionalities which are particularly suitable for
the poor. These include: a. very small amounts of loans given without
any collateral b. loans repayable in weekly instalments spread over
a year c. eligibility for a subsequent loan depends upon repayment
of first loan d. individual, self chosen, quick income generating
activities which employ the skills that borrowers already posses e.
close supervision of credit by the group as well as the bank staff
f. stress on credit discipline and collective borrower responsibility
or peer pressure g. special safegaurds through compulsory and voluntary
savings to minimise the risks that the poor confront h. transparency
in all bank transactions most of which take place at centre meetings.
4. Simultaneous undertaking of social development agenda addressing
basic needs of the clientele. This is reflected in the "sixteen decisions"
adopted by Grameen borrowers. There is a need to: a. raise the social
and political consciousness of the newly organized groups b. focus
increasingly on women from the poorest households, whose urge for
survival has a far greater bearing on the iveral development of the
family. c. encourage their monitoring social and physical infrastructure
projects - housing, sanitation, drinking water, education, family
5. Design and development of organization and management systems capable
of deivering programme resources to targeted clientele. The system
has evolved gradually through a structured learning process, that
involves trials, errors and continuous adjustments. A major requirement
to operationalize the system is the special training needed for development
of a highly motivated staff, so that the decision making and operational
authority is gradually decentralized and administrative functions
delegated at the zonal levels downwards.
6. Expansion of loan portfolio to meet diverse development needs of
the poor. As the general credit programme gathers momentum and the
borrowers become familiar with credit discipline, other loan programmes
are introduced to meet growing social and economic development needs
of the clientele. Besides housing, such programmes included: a. credit
for building sanitary laterines b. credit for installation of tubewells
that supply drinking water and irrigation for kitchen gardens c. credit
for seasonal cultivation to buy agricultural inputs d. credit for
joint enterprises undertaken by the group and the centre e. finance
projects undertaken by the entire family of a seasoned borrower.
The underlying premise of Grameen is that, in order ro emerge from
poverty and remove themselves from the clutches of usurers and middlemen,
landless peasants most need access to credit, without which they cannot
be expected to launch their own enterprises, however small these may
be. In defiance of the traditional rural banking postulate whereby
"no collateral (in this case, land) means no credit", the Grameen
Bank experiment set out to prove - successfully - that lending to
the poor is not an impossible proposition; on the contrary, it gives
landless peasants the opportunity to purchase their own tools, equipment,
or other necessary means of production and embark on income-generating
ventures which will allow them escape from the vicious cycle of "low
income, low savings, low investment, low income". In other words,
the banker's confidence rests upon the will and capacity of the borrowers
to succeed in their undertakings.
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 and covers
an area of about 15 to 22 villages. The manager and the workers start
by visiting villages to familiarise themeselves 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 tot he local population. Groups of five prospective
borrowers are formed; in the first stage, only two of them are eligible
for, and receive, a loan. The group is observed for a month to see
it the members are conforming to the rules of the bank. Only if the
first two borrowers repay the principal plus interest over a period
of fifty weeks do the other members of the group become eligible themselves
for a loan. Because of these restrictions, there is substantial group
pressure to keep individual records clear. In this sense , the collective
responsibility of the group serves as the collateral on the loan.
Loans are small, but sufficient to finance the micro-projects undertaken
by borrowers: garlic-husking, small macine repairing, purchase of
portabl kitchen/restaurants, of guinypigs, knitting, leather &
silver work etc. The rate on all loans is 12 per cent. The repayment
rate on loans is said to be high - 98 per cent - for reasons of group
pressure and self-interest evoked earlier, as well as motivation of
Although mobilization of savings is alos being pursued alongside the
lending activities of the Grameen Bank, most of the latter's loanable
funds are obtained from the central bank, on capital markets, and
from bilateral and multilateral aid organizations.