Grameen Bank

Microfinance
and

Roles in Creating Small Scale

Enterprises

Credit Markets
Credit A private good both
excludable and rival
Problem of information asymmetry >
high cost of credit
High interest rate -> Less surplus to pay
back to the lender
Rationing of credit
Small and marginal farmers left out
Market failure

Rural Credit Market

Lack of collateral
Bad crop season all borrowers
default
Enforcement problem
Conventional money lenders
Vicious cycle of investment, low
productivity and poverty, consumer
surplus vanishes
Need for third sector intervention ->
creation of SHGs, Microfinance

GRAMEEN BANK
Nobel Peace prize wining microfinance
organization founded by Mohammad Yunus in
Bangladesh.
Principle-Loans are better than charity.
Loans offer people opportunity to invest in
agriculture and small businesses.
Objective-to promote financial independence
among the poor
Provides microfinance to the poor people in rural
areas.
Gives uncollateralized loans.
GB targets poorest of the poor, Women receive
95% of bank loans
A study of the World Bank says 5% of GB account

WORKING MODEL OF GRAMEEN

BANK

LOAN TYPES

Four interest rates for loansfrom Grameen Bank :

20%(declining basis) for income generating loans,
8%for housing loans
5%for student loans
0% (interest-free) loans for Struggling Members (beggars).
All interests are simple interest, calculated on declining
balance method.
This means, if a borrower takes an income-generating loan
of say, Tk 1,000, and pays back the entire amount within a
year in weekly installments, shell pay a total amount of Tk
1,100, i.e. Tk 1,000 as principal, plus Tk 100 as interest for
the year, equivalent to 10% flat rate.

LOAN LENDING SYSTEM

Solidarity lending system
It selects asset less, landless poor people of
Bangladesh, focuses on the poor women
Aims to provide credit delivery system to meet
the diverse socio-economic development needs of
the poor.
Works on joint liability system, if a member fails to
pay loan his/her group helps by paying on behalf.
If a group fails to payback the loan of any
defaulter, the group is banished and will not be
offered loan in future.

Success Stories: 1. Village phone

program
Wireless payphone services in rural
areas
Market information, agricultural
information, personal communication
made possible.
Won 2004 Petersburg Prize worth EUR
100,000, for its contribution of
Technology to Development

2. Struggling Members Program

Interest free loans to beggars.
Arbitrarily long repayment period.
Life insurance of borrowers covered,
free of cost.
100 taka loan demands 2 taka
installment payment per week.
Beggars start independent ventures.

Challenges faced:
1995 boycott
- Problems by male chauvinists and
political groups
- Repayments were slow to recover as no
significant consequences
1998 floods
- Old loans repayment affected and
defaults.
- Loans were not written off, additional
burden

Failures of Microcredit
Institutions
70 people in Andhra Pradesh, Indias fifth-most populous
state, committed suicide in 2010 to escape payments.
Micro lending was also blamed for riots, breaking up
communities.
An oversupply of credit made lenders less selective about
their borrowers, giving loans to people who used the
money for unproductive purchases and defaulted later.
A large part of the decline can be attributed to strict
regulations that took effect after the slew of suicides.
Group model of microlending, which provides a lump sum
for a cluster of people, has lost credibility; leaving it to the
borrowers to decide how the loan will be distributed
among the members and hence, causing distortions.

Thank You