Microfinance- the grameen bank model in Bangladesh

‘’Sustainable societies are more important than sustainable construction.

Sustainable humans can provide for themselves, stand on their own two feet.

But there are many people today who live in extreme poverty, with no opportunity

to lead sustainable lives. These people we must help first.’’

Background-

Bangladesh covers 144,000 square kilometers. Most of this tropical and very flat country lies in the deltas
of large rivers originating in the
Himalayas. Every year over a third of the land is flooded during the monsoon season. Other natural
catastrophes that regularly plague
Bangladesh and hinder the economic development of the country are droughts and cyclones.

Bangladesh is one of the poorest countries in the world. A third of the people live in poverty.
Unemployment – including under-employment 65
– measures 40 percent. Two thirds of the people who have jobs work in the agriculture industry.
In 2000 Bangladesh received 1.5 billion
dollars in international economic aid. Economic growth is encouraging, at a low level of 5
percent per year.

“People are not poor because they are stupid or lazy. People are
poor because they
have no financial structures to help them! Poverty is a structural
problem, not a personal problem.”

“Grameen” means “rural,” and that is the bank’s strategy:

the 12,000 employees today work in 48,000 villages throughout
Bangladesh, serving a local clientele of 4.1 million families.

The bank
goes to its customers. Grameen discusses loans in huts or under open skies.
Muhammad Yunus explains the unusual business model: “Most of our
clients have nothing. They are fighting for bare survival and often don’t know how they and their
family are
going to make it through to the
evening. They would never dare set
foot in a conventional bank.”

Conventional
banks lend money only to people who have money. At Grameen we do the
opposite. We lend only to people who truly have nothing.
Small loans are easier to repay
At the Grameen Bank the loan repayment rate is better than 98 percent.

The system functions well for several reasons. Credit applicants must
form groups of five, attend several orientations, and pass a test proving
that they understand the fundamentals of their loan.

If one of the five applicants fails the test, no one in the group gets a loan. The whole procedure is so
involved that only the truly desperate apply for a microcredit –
better-off people avoid the laborious effort.

When the entire group passes the test, only two of the five get a loan. If
they pay their installments faithfully, the next members of the group get
loans.

Muhammad Yunus says the payment period is the key to getting

paid back. Many conventional loans must simply be paid in full, including
interest, by a set date. “That’s often a big hurdle.” In contrast, microcredits
are paid down weekly – the installments remain minuscule. The borrowers
do not feel burdened by the loan, and the bank stays in regular
contact with the borrowers – a good chance to offer advice and support.

The bank does everything its own way

Most employees of the Grameen Bank are young recent graduates with
no work experience – particularly not at a bank – because “our managers
must not look like or act like bankers.” They conduct our business in open
public, even money transfers – and that prevents corruption. There are no
application forms or written agreements; most Grameen applicants are
illiterate. Each month Grameen shifts millions without written contracts.
“We have a relationship with people, not paper,” says Yunus, pointing out
that the word “credit” has to do with “trust.”
The conditions of Yunus’ microcredit are straightforward: the term of
each loan is generally one year; weekly payments begin after the first
week; the interest rate is 20 percent. Only so can the labor-intensive
Grameen concept be financed. Muhammad Yunus knows that “if
Grameen would not make a profit, if our employees were not motivated
and would not work hard, we would soon be out of business.”
Only if all five members of a group fulfill the terms will a second loan be discussed
after a year. Thus the group applies pressure on each member. But
the group also provides support – it gives a feeling of safety and strength.

Through his personal dedication and monetary commitment Yunus

proved in practice that microcredit can be something other than a losing
proposition for banks. Only after doing this was he able to finally convince
the first few bankers of the microcredit. In 1979 he took a sabbatical from
the university when a bank agreed to support a large-scale trial of microcredit.
In 1983 the state approved the founding of the Grameen Bank.
Today the bank belongs to its borrowers – the poorest people in the country.

Microcredits finance primarily self employment – something that seems

almost out of place in an economy shaped by multinational corporations.
Yunus is convinced that the self-employed comprise an important economic
sector that will endure. Self employment plays an important role
particularly in poorer countries and for women because it allows the combination
of work and family. “With self employment we can eradicate
poverty – throughout the whole world, and not just sometime but during
our lifetime. We only need the political will.”

Grameen is often criticized for trying to change the foundations of society.

Yunus retorts: “What’s so bad about that? I am not advocating that
we abandon the old ways that are good and serve the people … but other
ways? We want to bring about not only economic change but also social
change. For example, we want women, who have long suffered as secondclass
citizens, to be allowed to make their own decisions.”
Because Grameen wants to change economic and social realities, the
bank has an unusual clientele profile: 94 percent of the members of
Grameen are women. In a Muslim country like Bangladesh where women
in rural villages are hardly allowed to leave the house, this is not just
amazing – it is tantamount to revolution.

Architects of their own future

Grameen pursues international expansion as well as the steady broadening
of the services it offers to members. In 1984 Grameen started a program
for financing low-cost houses (see page 80). The program was so
successful that with it Yunus won the Aga Khan International Award

for Architecture in 1989. “At the

awards ceremony I was asked many
times which architect designed our beautiful 300-dollar house,” Yunus
recounts with pleasure. “But no architect designed these houses. Our loan
customers designed and built them themselves – with loving care. They
are the architects of their own houses, just as they are the architects of
their own future.”

The Grameen House is a particularly successful project of the Grameen Bank. It is the
model for a sturdy,
practical, and economical dwelling that borrowers can build mostly themselves. The
concept received the Aga
Khan International Award for Architecture in 1989.

In response Grameen Bank initiated the “Housing Loan Project” in 1984.

The objective: to give the bank’s borrowers the possibility of adequate
shelter – a stabile and watertight house that offers good living conditions
and protects the equipment needed to generate income. An engineer
and architect employed by the bank sketched a basic structure for the
single-storey “Grameen House”: The ground on which the house stands is
elevated against flooding, a rectangular floor plan of at least 20 square
meters is laid out, a reinforced concrete post is set 50 centimeters deep
into the ground at each corner, eighteen sheets of corrugated sheet metal
cover the roof, a simple latrine is installed – and the basis is in place.
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The strong and durable skeleton of the Grameen model has been in use
for over twenty years. The owners add individually to their houses; the
loan recipients are the actual designers. They decide what material to
use for the walls that fill in between the corner posts. They often choose
bamboo or jute mats, sometimes masonry. They decide the flooring, the
number of windows, the location of the doors, and the orientation of the
house. More than 600,000 Grameen Houses have been built. Although
most owners use common locally available materials, no two houses
look the same. The owners also lay out the interiors to suit their needs
and wishes. Some build partition walls to make several rooms, keep animals,
or create special workrooms.