The Grameen Bank in Bangladesh is the world’s oldest microfinance institution. With the accumulated experience of 22 years, can it offer answers to any of the problems facing the microfinance institutions that now exist in many countries throughout the world? Caroline Hartnell talked to founder Muhammad Yunus.
Lifetime Achievement Award for founder of Grameen Bank
In 1976, in the village of Jobra in Bangladesh, a university lecturer called Muhammad Yunus made a list of 42 local people who needed small amounts of working capital and lent each of them US$27 out of his own pocket. Although the money was paid back with no problem, and the work expanded to many other villages, the local bank refused to get involved in lending money to poor people, considered uncreditworthy.
In 1983 the Grameen Bank was established. It works in 38,000 out of 68,000 villages in Bangladesh and lends to 2.3 million borrowers, 94 per cent of whom are women. These borrowers own the bank. The recovery rate for loans is 98 per cent. In June 1997 the figure for cumulative loans passed the $2 billion mark; average loan size is now $160. Loans are made exclusively for income-generating activities such as buying and selling, raising livestock and embroidery.
On 3 June Muhammad Yunus received a Lifetime Achievement Award for his work in establishing the world’s first microfinance institution. He received the award, sponsored by Save the Children, from UK International Development Secretary Clare Short at a media awards event in London organized by the One World Broadcasting Trust.
‘I am a firm believer in a poverty-free world, not in a too distant future but in a future that we can really touch,’ he said after receiving his award. On an earlier occasion, he had named the year 2025 as a feasible date to create a poverty-free world if we do the right things now.
One problem faced by many microfinance institutions (MFIs) is money being diverted to pay for family expenses, for example children’s education and health care. The Grameen answer to this lies in savings groups. Loans are made to individuals, but each loan recipient must belong to a five-member savings group – either an existing group or one set up by the loan applicant – and save weekly into a common fund. If a member needs money for personal reasons, she can draw on this fund. All members must pay in the same amount to keep accounting simple. Five per cent of each loan must go into the common fund.
Adapting terms to borrowers’ needs
Another problem in some countries is MFIs’ inflexible weekly repayment systems, which can make loans unsuitable for people like farmers whose income does not come in regularly. According to Yunus, Grameen tackles this by allowing borrowers to negotiate special terms. The standard system for repaying a loan of, say, 1,000 takas is that the borrower pays back each week 20 takas principal and 2 takas interest; at the end of 50 weeks 1,100 will have been paid back. Someone who receives most of their income after the harvest can arrange to make the bulk of the repayment then. But everyone must pay a token amount, say 1 taka a week; ‘borrowers must always remember that they have a loan’.
Making sure loans reach the very poor
Targeting is a key issue for all MFIs. Some do not feel their loans reach, say, the poorest 25 per cent. Yunus commented that 50 per cent of the Bangladeshi population are landless poor and would qualify for loans, but Grameen probably does not reach the poorest 5 or 10 per cent – after all, ‘people have to approach us and ask for a loan and some will not be “together” enough to do that’.
But Grameen does have detailed eligibility criteria to ensure that loans do go only to the poor. There is a checklist of what qualifies a person as very poor. ‘Someone whose house has a thatched roof might qualify, but not a tin roof. The number of pots and pans you have is another criterion.’
What problems does Grameen face?
Asked what problems the Grameen Bank does face, Yunus volunteered two. The first is the stagnant economy, which means the income-generating activities supported are slow to take off. The second is health. ‘Poor people tend to have poor health. As their incomes improve, they spend more money on health, and this absorbs a lot of their increased income. Unfortunately, the money is often spent in the wrong way – on quacks and traditional healers – so people’s health is not improved.’ Grameen actively encourages people to live healthily: ‘to grow and eat vegetables throughout the year’ is one of 16 ‘Decisions’ developed over the years by Bank members (borrowers) which all agree to adhere to.
Should MFIs become banks?
Despite having established Grameen as a bank in 1983, surprisingly Yunus would not advise other MFIs to take this route because the laws regulating banks are likely to be too restrictive. The Grameen Bank was established under a separate law; it doesn’t have to take any collateral on loans, nor does it have any legal instrument governing the relationship with borrowers.
What to do if someone doesn’t repay their loan is not a big issue given the 98 per cent repayment rate, but it is Grameen policy never to sue: ‘For such small loans it isn’t worth it. People tend to pay for other reasons – group pressure and self-respect. “Other people pay back their loans, so why aren’t you paying back yours?”’
However, contrary to some other views, Yunus feels that commercial banks entering the field will be good from the point of view of NGOs. The banks will subcontract NGOs to offer microfinance services for them as they won’t themselves want to employ all those people near the ground to do it.
Lending to women
The very high proportion of women borrowers has its origins in Grameen’s earliest days. Even before Grameen was established, Yunus noticed that not even 1 per cent of borrowers from other banks were women. So his aim was to have 50 per cent women borrowers. ‘Initially this was very difficult to achieve. Women were reluctant to take out loans; they said ask our husbands.’ But six years on the ratio was 50:50.
‘At this stage we began to notice that where the loan went to the woman the money brought more benefit to the family. Women are more cautious, concerned to build up for their future, naturally more efficient. Men are impatient, they take the future for granted; they cannot wait for tomorrow to enjoy the fruits of their earnings.’ So staff were offered greater incentives to attract women borrowers. Now 94 per cent of borrowers are women and some staff members would like to see a figure of 100 per cent. But Yunus discourages this.
Other bank directors have asked him why he doesn’t rename it the Grameen Women’s Bank. His response: ‘You don’t have even 1 per cent of women borrowers. I’ll change the name if you change your bank’s name to … Men’s Bank.’ Now they don’t bother him with the question any more!