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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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structure of this class
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
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

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
group lending methodology
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
under the the grameen classic methodology
Under the the Grameen “classic” methodology


  • 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)
  • 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
grameen ii
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
main features
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

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


  • Loan insurance
  • Growing credit ceilings
  • Destitute members program
  • Computerization of Grameen accounting and monitoring systems
main challenges
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 -