The Grameen Bank (GB) is based on the voluntary formation of slight groups of five people to provide mutual, morally necessary group guarantees in lieu of the collateral required by conventional banks. Women were initially given equal access to the schemes, and proved to be not only reliable borrowers but also intelligent entrepreneurs as well. GB has successfully reversed conventional banking practices by removing collateral requirements and has developed a banking system based on mutual trust, accountability, participation and creativity.
According to Professor Yunus the founder of the Grameen Bank, credit is seen as a cutting edge tool for affecting those inequalities that confine the poor to a poverty cycle and for liberating the intrinsic capacities in people. Therefore, it restores some sort of social power which has been denied to the poor because they lack collateral. Professor Muhammad Yunus argued that the conventional banking system is anti-poor, anti-women and anti-illiterate and thus, has contributed to maintaining the status quo between the rich and poor. Consequently, microcredit issued to small groups, is supposed to enable them the chance to purchase tools and other inputs and engage in micro enterprises of their choice.
Methodologies of the Grameen Bank Model
As mentioned before, the GB is based on the voluntary formation of small groups of five people to provide joint, morally binding group guarantees in lieu of the collateral required by conventional banks. Women were initially given equal access to the schemes and contrary to what was thought of, they proved to be not only reliable borrowers but also sharp entrepreneurs. Intensive discipline, supervision and servicing, characterize the operations of the GB, which are carried out by bicycle bankers in branch units with considerable delegated authority.
Group based lending is one of the most novel approaches of lending small amounts of Money to a large number of clients who cannot offer collateral. The size of the group can vary, but most groups have between four to eight members. The group self-selects its Members before acquiring a loan. Loans are granted to selected member(s) of the group first and then to the rest of the members. A percentage of the loan is required to be saved in advance, which points out the ability to make regular payments and serve as collateral. Group members are jointly accountable for the repayment of each other’s loans and usually meet weekly to collect repayments. To ensure repayment, peer pressure and joint liability works very well. The entire group will be disqualified and will not be eligible for further loans, even if one member of the group becomes a defaulter.
Feebleness of the Grameen Bank Model
One of the most successful models simulated and discussed around the world is the Grameen model. The bank has successfully served the rural poor in Bangladesh with no physical collateral relying on group responsibility to substitute the collateral requirements. However, the model has the succeeding limitations:
- Setting up a Grameen bank requires putting up a gigantic mega structure that involves enormous costs. In fact, most of the funds obtained from external sources to finance micro projects end up being used to pay operational costs and salaries of personnel working in the mega structure.
- The Grameen Bank Model has collapsed into a level where, the poor are being pushed into a cycle of several borrowings through the rolling of cash. That is, the poor keep on borrowing to pay previous engagement that is “robbing Peter to pay Paul”. This in addition to its usurious lending rates and high-handed collection mechanisms pushes the poor further below the poverty line[1]. What ought to be a bank-aided socially purposive activity is now a private equity driven business with profits and valuations as the goal.
- It involves too much of external aid which is not replicable as the bank has not oriented itself towards mobilizing peoples’ resources. Thus, in the absence of donors funded programs financial self-sufficiency becomes questionable.
- The repayment system (weekly meeting) is not practical because the poor do not have a stable job. Moreover, for a typical agrarian community, during thin seasons it will become almost impossible for them to repay the loan.
- Pressure for high repayment drives members to money lenders. Credit alone cannot alleviate poverty and the Grameen model is based only on credit. Consequently, speed can lead to wrong selection of activities and beneficiaries.
- The interest rate charged by the Grameen bank is by far higher than those charged by conventional banks. They charge more than 7% monthly, with the credit terms remaining inflexible and ill adapted to the activities of the poor clients. Grameen Bank defends it high interest rates in relation to money lenders rather than low cost bank finance providers.
- Again, agriculture which in most developing countries is the principal activity of the poor is mistreated. The Grameen model requests for the dynamics of joint This mean that groups monitor and self-select their members to form a relatively uniform group and consequently members typically share similar probability of defaulting on a loan. The poor are again left out due to negative insight of poor people in a community, with no social groups willing to accept the poor.
[1] Poverty lines vary in time and place, and each country uses lines which are appropriate to its level of development, societal norms and values. The Poverty Line project (The World Bank, Poverty Analysis Overview) is an attempt to show what it means to be poor, by taking photos of daily amounts of food you can buy if your income lies at the poverty line.
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Author: Ulrich D’POLA KAMDEM
