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Case Study: The Grameen Bank

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  1. Case Study: The Grameen Bank Lecture # 13 Week 7

  2. 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

  3. 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

  4. 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

  5. -- Rapid growth

  6. 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

  7. 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)

  8. 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

  9. 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

  10. 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

  11. 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

  12. Savings • Loan insurance • Growing credit ceilings • Destitute members program • Computerization of Grameen accounting and monitoring systems

  13. 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 -