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Case Study: The Grameen Bank Lecture # 13 Week 7 Structure of this class Muhammad Yunus and the founding of Bangladesh’s Grameen Bank The group lending methodology re-visited Limits to Group Lending Grameen Bank II Main challenges Yunus and the Grameen Bank

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Case Study: The Grameen Bank

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Case Study: The Grameen Bank

Lecture # 13

Week 7


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Structure of this class

  • Muhammad Yunus and the founding of Bangladesh’s Grameen Bank

  • The group lending methodology re-visited

  • Limits to Group Lending

  • Grameen Bank II

  • Main challenges


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Yunus and the Grameen Bank

  • 1970s: War against Pakistan, flooding, famine

  • 80% of the population living in poverty

  • Yunus: Economist trained in the US teaching at Chittagong University ( southeast Bangladesh)

  • 1976: Yunus started a series of experiments lending to poor households in nearby Jobra

  • Activities financed: rice husking, bamboo weaving

  • Finding: poor borrowers without collateral making profits and repaying


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  • Financing out of his own pocket could not meet growing demand

  • Yunus convinced the Bangladesh Central Bank to help him set up a special branch that catered the poor of Jobra

  • Another trial in Tangail (North Central Bangladesh) assured success was not region-specific

  • Grameen went nationwide, village by village, thanks to donor agencies: IFAD, Ford Foundation, and the governments of Bangladesh, Norway, and the Netherlands


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-- Rapid growth


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Group lending methodology

  • Key to the success of rapid growth

  • Group of potential clients form groups (5 members)

  • Loans made to individual participants within the group

  • Joint responsibility: if a member defaults all members have to pay for her or else the entire group excluded from future loans

  • Group lending under joint responsibility gives costumers incentives to select responsible partners, to (peer) monitor, and repay

  • A five-member group is in turn part of a larger “center” composed of eight groups


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Under the the Grameen “classic” methodology

Advantages:

  • Economies of scale

  • “Agency Costs” were reduced as the bank delegated screening, monitoring, and loan enforcement onto the borrowers via “social sanctions”

  • Efficiency gains: borrowers faced lower agency costs

  • Promotion of mutual assistance and solidarity (insurance)


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Disadvantages

  • Group lending under joint responsibility difficult to replicate in sparsely populated areas

  • “Social sanctions” difficult to impose on close relatives

  • Scarcity of much needed “group leaders”

  • Attending frequent repayment meetings time – consuming and costly for the borrowers

  • Risk aversion

  • Scope for collusion undermines the bank’s ability to harness “social collateral”

  • Too harsh on borrowers as member were experiencing negative idiosyncratic shocks


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Grameen II

  • Foods in the 1990s prompted Grameen to lend for rehabilitation

  • Amounts lent exceeded capacity to repay

  • Widespread defaults and demands for withdrawals from “group fund”

  • Rules were too strict, and failure to repay by one member triggered group and entire center defaults

  • The system was redesigned under the name Grameen Generalized System or GGS and was launched in 2001


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Main features

  • Sharp reduction in number of financial products (family loans, seasonal loans…)

  • No more “compulsory fund”

  • Relaxation of fixed-size weekly installments

  • Flexible “loan cycles”

  • Not repaying in full did not equal “default” anymore

  • Recognition that borrowers were heterogeneous and subject to idiosyncratic shocks

  • Faith on the fact that the poor will eventually repay, some over a longer period of time, some over a shorter period of time


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  • Basic loan accessible to all

  • This can however be renegotiated (rescheduled), “flexibility”

  • Full repayment of basic loan enable borrowers to access (1) housing loans, and (2) higher educational loans

  • Two-speed system: high and low

  • Disincentive for borrowers to go from high to low because she starts creating a credit history from scratch

  • Custom-made Credit service

  • Group loan replaced

  • Pension fund


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  • Savings

  • Loan insurance

  • Growing credit ceilings

  • Destitute members program

  • Computerization of Grameen accounting and monitoring systems


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Main challenges

  • Excessive reliance on a charismatic leader

  • Governance: Pyramidal structure even though a coop on paper

  • Capacity to cope with aggregate shocks

    And last but not least: “Social Business”

    - Next class: The Case of Financiera Compartamos (consult the web site for required readings)

    Have a nice weekend -


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