MODELS OF MICROFINANCE INTERVENTIONS: THE GRAMEEN BANK MODEL

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 Bankcredit  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 KAMDEMGrameen-Bank-1

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