Basic Operational TOP FEATURES OF Grameen Loan company Economics Essay

I will like to focus my survey on Grameen loan provider in Bangladesh. The patriarch culture in Bangladesh where women are cured as inferior compared to men restricts them from seeking wage work. Their only source of income is self job and they face difficulty in accessing individual loaning programs. The labour force has been growing by 2. 4% each year, while the agricultural, professional and service sector can only just accommodate 1. 7% total annual progress of the labour push. The agricultural sector which provides 78% of career is saturated and limited credited to technological constraints. The modern metropolitan sector is too small to absorb additional labour, increasing efficiency and income through home employment in the informal sector and improving human capital are the only practical ways to ease poverty and promote economic growth (World Loan provider 1997). The poverty in Bangladesh is mainly as a result of landlessness, high unemployment, low literacy and high inhabitants growth. The main determinants of interpersonal category in the rural areas are land possession and control of financial resources.

The Grameen loan company was formally founded in 1983 by Dr Muhammad Yunus, a teacher in economics at the Chittagong University or college in Bangladesh, who instead of teaching economics decided to do something sensible about it. Predicated on the school of thought that everyone gets the right to credit, however the poor are excluded from normal banking system.


Lending is principally directed towards rural poor women (97% of regular membership are women) with a maximum landholding of half an acre of land because the average farm size in Bangladesh is 2. 4 acres (1984 statistics) or non land owners. Only one member is allowed per household. These women are grouped into skin cells of five plus they take collective responsibility for each others' loan (no joint liability). This helps to replace physical guarantee with social security as it gets rid of information asymmetry. These groupings are separated matching to gender, 5 to 8 groupings come together to form a centre known as Kendros (between 25 to 40 women) organised by the bank's staff. Weekly meetings are placed at these centres where users of each communities attend to pay their weekly loan instalments, learn, practice, and discuss the rules of the program and other group activities.

Members must save TK1 to TK2 weekly (to generate financial self-control). It is only of recent that the bank increased its weekly personal savings to TK5. A new member will need to have successfully saved for just two consecutive weeks before qualifying for financing and a first deposit of 5% of the loan amount into a group finance (i. e. group duty). It includes rates of interest for debris between 8% and 12% and will not allow participants to withdraw their cost savings from the group finance. However, customers can acquire from at no interest from the group account provided that the rest of the users of the group approve of the amount and its use and that the loan will not exceed 50 percent of the fund's total. When a borrower has been a member for a decade, the bank will transfer total cost savings with interest to the savings account and the member can withdraw at will. You can argue that having less quick access to savings may very well be a short term additional payment for being a member and cannot be grouped as a financial service but a down payment on financing and a verification device. By the end of Oct 2009, total deposits in Grameen loan provider stood at TK74. 55 million (US$ 1079. 47 million). Deposits from its participants constituted 54% of the bank's total deposits. Balance of member deposits has increased at a every month average rate of 2. 29% during the last 12 months. The poor people in Bangladesh save between 2% and 12% with their annual income mainly to acquire land followed by providing family securities against unforeseen circumstances. Children's education and their marriage and buy of agricultural inputs are other factors.

Collateral is not required to obtain a loan from the bank and the loan is repayable over 50 week's instalment. Interest is payable by the end of the loan circuit. 20% interest for income generating loan, 8% for cover lending options, 5% for student loans and 0% (interest free) for attempting members (beggars). In case the loan is repaid on time, the borrower will be recharged a 10% level rate rather than 20% for money generating loan at the end of the loan circuit. The interest charged is low in comparison to other government maintained micro credit programs charging a fixed interest of 11% at flat rate which sums to 22% on declining basis.

The loan provider realised from the actions of BRAC that procedures of credit to the indegent is not sufficient to alleviate poverty. Furthermore to credit provision, it also trains its borrowers to improve their skills and provision of other organizational inputs.

All credit deals are clear and are openly conducted at the centre meetings. The virtue of the openness is to mitigate vested interest and constellations of electricity as well as deterring people from taking anti group actions. This peer monitoring device works both within the group with the centre, reducing the threat of group collusion when the communities are self elected.


The target of microfinance agenda is now significantly client or market driven because of this of the industry's focus on competition and dropouts. Competition, as well as MFIs policies of encouraging clients to consider larger lending options each routine has enticed some clients to obtain multiple loans, far more than it surpasses their repayment capacity and they wrap up defaulting. The defaults were related to the fact that the poor do not always want to neither borrow nor automatically increase their loan size and the failure of MFIs to have interaction and keep connection with their clients in order to provide innovative products. Loans lent for microenterprise development, are mainly used to meet a multiple needs i. e. the fungibility of credit (Sebstad and Cohen, 2001) and this plainly shows the industry had not been in tune using its clients. Borrowers exhibited the imperfect characteristics of the products by withdrawing from this program. The high rate of drop out lifted the operational cost for MFIs. Competition and consumer dissatisfaction was adding pressure on corporations to be innovative in their service delivery.

Citing from what of Hulme and Mosley (1997), they observed that the designers of the financial services for poor people need to acknowledge that "the indegent" is not a homogenous group with broadly similar needs and the one size fits all approach will not work. However, recognising the heterogeneity of the indegent clearly complicates things for plan designers. Homogeneity may be best for keeping the delivery cost low, but could it be not necessarily best for institutional sustainability if dropout rates were placed low. Adopting the client-product nexus methodology and increasing the institutional-client linkages through the management information system to gather information from bottom up will broaden and deepen the outreach, and knowing the financial scenery of clients for better evaluation of client's debt obligations will aid better diagnosis of loan repayment capacity for clients to be able to lessen drop out rates.

The bank has to some extent recognized the importance of product diversification to its clients as its financial composition and product diversification were subjected to questioning when the bank almost collapsed during the 1998 overflow in Bangladesh. It decided to take up an enormous rehabilitation programme giving new loans start new income producing activities and repair or restore their residences. Borrowers started to feel the pressure of gathered loans as the new instalments sizes exceeded their capacity to repay. Another major factor unknown to donor organizations was that prior to the flood, some branch professionals at the lender were giving out loans to customers who experienced defaulted on weekly repayments so the new lending options could be utilized to make obligations. This resulted to gathered debts by the clients and the total amount sheet statements did not reflect the true financial position of the lender. This led to the introduction of the Grameen Generalised System (GGS) commonly referred to as Grameen II. Under this new system, many rules that existed under the Grameen Basic System (GCS) were abolished or altered. The major inventions under the Grameen Generalised System (GGS) are explained below.

3. 1 Basic Loan

The basic loan was introduced to give other unforeseen circumstances the customer might face along the loan pattern. It provided an leave option for the borrowers. That is known as a flexi loan which provides an alternative route to any borrower who needs it without making her feel guilty about failing to fulfil the necessity of the essential loan. The basic loan is normally referred to as the Grameen Microcredit Highway. The logic behind the basic loan is the fact that if a customer keeps up with payments (stays on the road) throughout the loan circuit, she can borrow a larger total (change products and accelerate faster) on another loan circuit and she understands ahead of time how much augmentation in loan size is arriving, and can plan her activities appropriately. If the borrower should experience some complications (such as natural catastrophe, sickness etc) during the loan pattern, she can renegotiate the loan (first detour) by lowering the instalment size that she can afford to pay by stretching the loan period. The essence is to help the customer overcome the challenge to be able to make contact with the basic loan. Even if the customer defaults further (second detour), the flexi loan will be renegotiated to another flexi loan before borrower can pleasantly keep up with the instalment repayment. This overall flexibility was absent under the Grameen Classic System. It's important to note that once a customer renegotiates to a flexi loan, she'll loose the loan ceiling she will need to have accumulated over time and can only just re-enter the basic loan structure with a loan size equivalent to a new entrant and so long as she's on the flexi loan, the borrower can only acquire the same amount for each loan cycle.

Fig. 3. 1: The interlink between basic loan and flexi loan

Source: http://www. grameen-info. org

3. 2 Custom-made Credit Service

The GGS has generated a methodology which can provide custom-made credit to a poor debtor. It allows a staff to be creative. He is able to design his loan product to make it a best fit for his client in conditions of duration with the versatility of variant from a variety of calendar months and years, timing of the loan and how big is each week instalments can be mixed. A borrower pays more each week when the business does well, and pay less during difficult times. Within an extreme circumstance, each instalment can be of different size. Inside the other extreme, all instalments can be exactly equal, like in GCS.

3. 3 Group Account Replaced

Every new member is obliged to save lots of 5% of the total loan amount in to the obligatory checking account formally known as group tax. But now, fifty percent of the 5% is deposited into an individual savings account and the remaining half would go to a special checking account. A customer can withdraw any amount from her personal savings account any time she desires. There is no restriction on her behalf withdrawal. Weekly keeping still goes on and it goes to personal savings account. Special checking account is non withdrawable for the first 3 years. Then drawback is allowed generally once in 3 years keeping the very least balance of TK2000 or half the amount in the bill, whichever is much larger. Under special circumstances the entire amount in the special savings account can be withdrawn. Some money from this account will be used to buy stocks of the Bank.

3. 4 Pension fund-Leading to Financial Self-Reliance

Grameen Bank requires all borrowers with lending options above TK8, 000 (All of us$ 138) to contribute a minimum of TK50 (US$0. 86) each month in a pension deposit account. After a decade a borrower will receive a guaranteed amount which is nearly double the amount she has put in for 120 calendar months. The pension fund generates about TK 100 million ($1. 75 million) per month. I find this very interesting because homeowners in Bangladesh are large in size and it is customary for many generations to have together within a household. In such homeowners, there is no need for retirement cutting down, and it can internalize lots of the insurance activities that would require saving. For example members of the household can make sure against health risk and later years. But it has not been the situation with Grameen Bank or investment company because the benefit for the insurance bundle is appealing to its customers and the pension container also serves as a way of financial balance for the lender.

3. 5 Other Savings

The bank accepts debris from non borrowers as well by adding a number of personal savings products into the system. Total amount of deposits account for 67% of the full total outstanding loans of Grameen Loan provider in July, 2002, after paying back again TK3. 3 million (US $ 60 million) of its lending options to the central standard bank, local commercial finance institutions and foreign lenders, fell as a consequence the same period.

3. 6 Loan Damage Provisioning and Write-off Policy

If a borrower does not pay her instalment for ten consecutive weeks or if she does not repay the quantity she is required to pay in a six month period and she will not move into adaptable loan, she becomes a defaulter. If she becomes a defaulter, 100 % provisioning must be made for the unpaid primary and interest. Exactly one year later, the amount must be written off. Writing off will be done monthly, rather than at a time of annual account closing. If the borrower is on versatile loan, usually the same plan will hold. Fifty percent provision must be produced for the full total balance amount of versatile loan and accrued interest on the annual closing particular date, even if the repayment rate of adaptable loan is 100% of the whole bank

Fig. 3. 2: Provisioning insurance plan in Grameen Lender II

Source: http://www. grameen-info. org

3. 7 Loan Insurance

Once yearly, on the last day of the entire year, the borrower is required to put in a tiny sum of money in financing insurance checking account. It is calculated based on the fantastic loan and interest of the customer on that day. She deposits 2. 5% of the spectacular amount. If a borrower dies any time during the year, her entire outstanding debt is paid off by the insurance account which is created by the eye income of the loan insurance savings account. Furthermore, her family gets back the total amount she preserved in the loan insurance savings account.


The bank focuses on women considered to be very poor using how big is land possession as the way of measuring poverty. As previously outlined, the bank's people' are either non land owners or own fifty percent an acre of land. Based on the measure of poverty, these are incredibly poor women. Women are usually seen as moral guardians of the household and there are perceptions that ladies in Bangladesh have a higher repayment rate (one factor necessary for the financial sustainability for a micro lender) since it allows those to retain access to village communities, whereas men have a lot more opportunities for social contact. Women tend to be vulnerable to pressure to settle. They are easy to locate, being much less able than men to leave a vicinity temporarily to evade field staff and they are much easier to intimidate into repayment than men who are able to always threaten violence. Women experienced limited usage of credit and the bank's model tries to handle this limitation to be able to fortify women's public and economic price. Access to credit will enable women by bettering their bargaining position, both within and beyond your family. It offers a visible groundwork of monetary and sociable gain and an activity that mainstreams their contribution at institutional and policy levels.

To effectively empower women, MFI's must provide services that will lead to economical gains for females and should also improve their role in economic decision making. Grameen Lender has had the opportunity to empower women through the provision of basic lending options with an option of switching to a flexi loan if the borrower defaults on repayment. The bank also provides other services such as education loan, enclosure loan and at the same time encouraging its associates to save by deducting 5% of the full total loan amount before disbursement. Grameen Bank or investment company also offers life insurance coverage product because of its customers to manage life hazards.

Empowerment must lead to greater leveraging and networking among women in the community. Grameen bank categories its participants into skin cells. Each cell involves five associates and a complete of 5-6 skin cells meet once a week at a centre referred to as kendros to make their every week loan instalment payment, discuss with each other on new business ideas, help one another in their publication keeping of accounts etc. These centres help women to make a sort of communal network. MFI's must give a gender very sensitive and proactive institutional platform for ladies where women are providing financial services to women. This will create chance for role modelling whatsoever degrees of the institution and also caters for the specific needs of ladies in microfinance and beyond. Unfortunately, most of the Grameen Bank's personnel that organise centre conferences are men.

Access to credit is believed to enable women but there is a variation in the degree to which women borrowers in Bangladesh control their loans directly. A big percentage of women's loans are directly invested by their male relatives, who then route the cash towards investment which can be thought to be men's work. This issue can be taken away if Grameen Bank can impose some limitations on the sort of investment funds the loan can be utilized for. R. Rahman (1986 Pg. 33) learned a diminishing loan control overtime, with the quantity of loan borrowers themselves use dropping from 86. 6% of the full total loan amount in the first year to 66% in the fifth yr of regular membership in the Grameen loan company. Women's popular for loan and their capacity to repay are typically seen as proxy signals for empowerment. Sadly, the technique for analyzing empowerment will not reveal patterns of loan control buttons within the household. In Bangladesh, field staff and women beneficiaries provided proof the trend of women transferring control to men within their households. There is also the situation where new users of a household in a few villages in Bangladesh are forbidden to obtain contact with strangers, particularly when the field worker involved is a guy. This strengthens the situation why Grameen bank or investment company should utilize more women to manage these Kendros.

Even though credit is very important, it must discover access to market and usage of technology which extends beyond the neighbourhood and the city as recognized by Montgomery, Bhattacharya and Hulme.

It is true that access to credit will most likely reduce assault against women if channelled through the right path but it can at the same time exacerbate violence against women. According to the personnel of Grameen Loan provider, some women who were unsuccessful in increasing loan gain access to or who've to wait too much time for their convert to get a loan are experiencing rises in domestic violence from frustrated husbands. In cases where loans have been supervised by the husbands, there is the possibility of the husband refusing to settle, might have invested badly or abscond altogether with the money. The pressure is on the women to find repayment funds off their homestead activities.


The idea behind the wider impacts of microfinance is to take into account the positive externalities on spheres (monetary, social, politics and cultural) beyond households at the neighborhood, regional and countrywide level.

Economic Impact: these types of impacts are mediated mainly through the intervention on market segments. The establishment of MFIs have immediate impact on individuals, homeowners or enterprises which has an influence on their involvement in one or even more markets and therefore affecting the outcomes of those markets. For example, if women have access to credit and markets just like men, they'll become key players on the market. This will make the local market more competitive and eventually have an effect on the comparative prices of most goods and services. The funding of small companies by microfinance companies can help increase output development and in turn create occupations.

Social Impact: cultural impact identifies changes in the cultural relationships between individuals and between groups of individuals living in the society. Social sector parameters are casing quality, education, health and sanitization. Grameen Bank supplies the fewest support services for these factors of interest in comparison to other leading MFIs in Bangladesh. Beyond the bank's "sixteen decisions" about how precisely members can take care of their home and community and public justice which people are created to recite at the start of each conferences. It has began however, to provide credit on special terms for opportunities in the grade of home life, like lending options for pipe wells, latrines and casing. Social relationship may be rooted in possession of tangible investments, such as land. Treatment of MFIs may change interpersonal relations either by introducing non land resources, which are now being owned or operated by land-poor households. As explained by Rao (2001), microfinance interventions have been able to improve poor people's way of thinking about social expenditures, such as celebrations that are less about showing off and much more about keeping links across young families, building bonds and sustaining webs of commitments.

Political Impact: this identifies changes in policy regimes and security of civil privileges. Several rural studies have directed at the intimidating and coercive role of their state machineries, such as police force and the land supervision in rural society. MFIs should provide services that seek to address these issues. MFIs can perform this goal by assisting to set up local interest groupings similar compared to that of the home help communities in India, to effect local politics, guidelines and reference allocation at the local level.

Cultural Impact: MFIs also needs to provide services that will help address the adverse effects of ethnic norms on women which is fuelled by institutionalized faith, or, may be inherited from predecessors. Other issues of interest are attitudes towards cleanliness, perception on the role of daughters, need for spiritual education for children, perceptions on spouse wife relations, frame of mind toward cultural entertainments and contribution of ladies in such programs etc.


MFI's have somewhat helped to ease poverty even though it is limited by some constraints and problems. It is important that MFIs must be innovative in their credit service delivery in order to completely meet up with the needs of the poor people. Extensive emphasis has been positioned on providing service to women which tends to be widening the space between financial services to poor women and poor men. MFIs also needs to include personalized services to poor men. Additionally it is important that MFIs should in the foreseeable future match mainstream financial sector such as list itself in the capital market as a substitute source of cash to achieving self applied sufficiency and dazzling a balance between your welfarist and institutionalist approach to microfinance.

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