Introduction: The idea of microcredit can be traced back to the 50s when Akhter Hamid Khan, a social scientist and development practitioner tried the Comilla model that included lending group loan as a community-based development initiative planned to help the rural population. However, the initiative failed to get any significant success due to involvement of Pakistani government and some other social issues. The idea of modern microcredit was first used by Grameen Bank of Bangladesh established in 1983 and after its success in Bangladesh, the idea was practiced in many countries in South America, Africa, Asia Pacific and even in some developed countries but it was not very successful in developed countries.
Microcredit organizations were initially created as alternatives to the “loan-sharks” known to take advantage of clients. Indeed, many microlenders began as non-profit organizations and operated with government funds or private subsidies. The main goal of Microcredit, that funds microenterprises is to rid people of rural areas from extreme poverty making it a great community development initiative when executed properly as done by Grameen Bank. This initiative of Grameen Bank has become a model for other organizations around the world.
Summary of Microenterprise Credit Scheme by Grameen Bank
In short, the founder of Grameen Bank, Economist Dr. Muhammad Yunus began the project in a small town called Jobra, using his own money to deliver small loans at low-interest rates to the rural poor. This initiative was successful for the town of Jobra and soon Grameen Bank started countrywide operation to help the poor and eradicate extreme poverty. Grameen Bank is founded on the principle that loans are better than charity to interrupt poverty: they offer people the opportunity to take initiatives in business or agriculture, which provide earnings and enable them to pay off the debt. Grameen’s objective has been to promote financial independence among the poor. Yunus encourages all borrowers to become savers, so that their local capital can be converted into new loans to others. Since 1995, Grameen has funded 90 percent of its loans with interest income and deposits collected, aligning the interests of its new borrowers and depositor-shareholders. Grameen converts deposits made in villages into loans for the more needy in the villages.
Grameen Bank is owned by the borrowers of the bank, most of whom are poor women. Of the total equity of the bank, the borrowers own 94%, and the remaining 6% is owned by the Bangladesh government. The bank grew significantly between 2003 and 2007. As of January 2011, the total borrowers of the bank number 8.4 million, and 97% of those are women. The number of borrowers has more than doubled since 2003, when the bank had 3.12 million members. Similar growth can be observed in the number of villages covered. As of October 2007, the Bank has a staff of more than 24,703 employees; its 2,468 branches provide services to 80,257 villages, up from the 43,681 villages covered in 2003. The bank has distributed BDT 1.437 trillion (US$20.92 billion) in loans, out of which BDT 1.317 trillion (US$19.02 billion) has been repaid. The bank claims a loan recovery rate of 96.67%, up from the 95% recovery rate claimed in 1998.
The statistics shows how successful the initiative was and its impact is visible in the countries overall economic and social development rate. According to Grameen Bank, they have designed the loans to help the poor. Their credit delivery system has the following features.
There is an exclusive focus on the poorest of the poor.
Exclusivity is ensured by:
- Clearly establishing the eligibility criteria for selection of targeted clientele and adopting practical measures to screen out those who do not meet them
- In delivering credit, priority has been increasingly assigned to women
- The delivery system is geared to meet the diverse socio-economic development needs of the poor
Borrowers are organized into small homogeneous groups. Such characteristics facilitate group solidarity as well as participatory interaction. Organizing the primary groups of five members and federating them into centers has been the foundation of Grameen Bank’s system. The emphasis from the very outset is to organizationally strengthen the Grameen clientele, so that they can acquire the capacity for planning and implementing micro level development decisions. The Centers are functionally linked to the Grameen Bank, whose field workers have to attend Centre meetings every week.
Special loan conditionalities which are particularly suitable for the poor.
These include:
- Loans given without any collateral
- Loans repayable in weekly instalments spread over a year
- Eligibility for a subsequent loan depends upon repayment of first loan
- Individual, self-chosen, quick income generating activities which employ the skills that borrowers already posses
- Close supervision of credit by the group as well as the bank staff
- Stress on credit discipline and peer support solidarity.
- Special safe-guards through savings to minimize the risks that the poor confront
- Transparency in all bank transactions most of which take place at center meetings.
Simultaneous undertaking of a social development agenda addressing basic needs of the clientele.
This is reflected in the “sixteen decisions” adopted by Grameen borrowers. This helps to:
- Raise the social and political consciousness of the newly organized groups
- Focus increasingly on women from the poorest households, whose urge for survival has a far greater bearing on the development of the family
- Encourage their monitoring of social and physical infrastructure projects – housing, sanitation, drinking water, education, family planning, etc.
Design and development of organization and management systems capable of delivering program 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 are delegated at the zonal levels downwards.
Expansion of loan portfolio to meet diverse development needs of the poor. As the general credit program gathers momentum and the borrowers become familiar with credit discipline, other loan programs are introduced to meet growing social and economic development needs of the clientele. Besides housing, such programs include:
- Credit for building sanitary latrines
- Credit for installation of tube-wells that supply drinking water and irrigation for kitchen gardens
- Credit for seasonal cultivation to buy agricultural inputs
- Loan for leasing equipment / machinery, such as, cell phones purchased by Grameen Bank members
- Finance projects undertaken by the entire family of a seasoned borrower.
The mode of operation of Grameen Bank is as follows. A bank branch is set up with a branch manager and a number of center managers and covers an area of about 15 to 22 villages. The manager and the workers start by visiting villages to familiarize themselves with the local milieu in which they will be operating and identify the prospective clientele, as well as explain the purpose, the functions, and the mode of operation of the bank to the 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 if the members are conforming to the rules of the bank. Only if the first two borrowers begin to repay the principal plus interest over a period of six 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.
Conclusion: The organization thinks, for an individual with no formal education and no access to the banking services microcredit can be life changing as the bank gives them the necessary credit required for entrepreneurship. This initiative will help anyone with a certain talent to open small business despite their financial background. The success of this community development initiative by Grameen bank is recognized worldwide as the Bank has won the Nobel Peace prize for it. The government have to make sure that other organization that uses the microcredit model, does not work as loan shark and prey upon already vulnerable rural population as Dr. Muhammed Yunus himself have shared concern about it.