M i c r o f i n a n c e
El Bank 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 by women.
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 borrowers.
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 other.
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.

Financial Intermediation
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 operations.

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 poor.
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 planning, etc
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 borrowers.
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.