Grameen Bank and Microcredit

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Introduction It is often contended that the monetary sector in low-income nations has failed to serve the impoverished. Considering the formal sector, financial institutions as well as banks generally necessitate significant collateral, have bureaucratic and lengthy application process and have a preference for high loan and high-income clients. For the informal sector, usurers often charge extremely high-interest rates, often permit sexist or racist attitudes to direct their lending decisions and tend to undervalue collateral (Kuhinur & Rokonuzzaman, 2010). Accordingly, the failure of informal and formal financial sectors to offer affordable credit to the deprived is usually perceived as a factor among others that reinforces the social, demographic and economic structures that eventually cause poverty. Consequently, "micro-credit" was developed to address this failure and decades has seen a significant growth in this sector. Microfinance over the years has received several donor endorsement to be the most viable anti-poverty initiative. This is because it targets and reaches the impoverished, especially women, and also small entrepreneurs and producers who more often than not have a limited formal access to traditional banking systems. Micro-credit is, in essence, the dispersion of diminutive collateral-free loans to equally liable groups so as to foster income creation as well as the reduction of poverty through enhancing self-employment. It provides credit, in addition to insurance, savings, as well as other fundamental financial services to the underserved. Conceivably, the most renowned micro-credit organization is the pioneering Grameen Bank in Bangladesh and has been cited as the most successful institution in this form of business. As such, many other organizations have emerged replicating the Grameen Model in several countries. However, the Grameen Bank and similar microcredit lenders are not charities, but businesses that provide a much-needed service to a market of the economy underserved by traditional banks. In this respect, this current paper based on the Grameen Banks fiscal success as a testament to the feasibility of the micro credit model.
Advent and History of Microcredit Muhammad Yunus, a Bangladeshi social entrepreneur, and economist was born on June 28, 1940 in a village known as Bathua located in Hathazari, Chittagong. He was the third born of fourteen children, and his father was a prosperous goldsmith who held higher education in high esteem. However, it is said that Yunus' greatest influence was Sufia, his mother who always assisted the poor who asked them for help. As a result, this inspired Yunus to commit himself to poverty eradication. Professor Yunus attained his Bachelor's degree as well as his Masters degree at the University of Dhaka. In 1971, he achieved his Ph.D. in Economics at the Vanderbilt University USA. In 1974, while on a field trip with his students to a poor village, they had the opportune to interview a woman who made bamboo stools. From this encounter, they learned that the woman had to borrow about 15p to purchase raw bamboo for every stool made. However, she was usually with just a penny as her profit margin after repaying the local traders. Determined to devise a viable solution, Dr. Yunus started visiting more local villages. It is during these visits that he came across 42 women in Jorba who also made bamboo stools. And since they were tied into a series of debt with middlemen who obliged them in agreements to sell the stools at lower price points barely higher than the cost of raw materials (Grameen Bank, 2015). The professor would later find in shock that the group of 47 women borrowing needs amounted to only US $27. He lent them the money from his pocket without collateral and zeros interest thereby enabling the women to sell their bamboo stools at reasonable prices and also break out of the series of debt. Against the advice of the government and banks, the professor continued to give out micro-loans. Subsequently, in 1983, from this concept, the Grameen Bank project was born founded on the premise of solidarity and trust. It presently has 2,564 branches in Bangladesh with 19,800 staff who serve over 8.29 million borrowers in 81,367 villages. 97% of the borrowers are women and more than 97% of the loans are repaid, a recovery rate greater than any other banking system (Grameen Bank, 2015). Each year, millions of people all over the globe change out of poverty in several ways by either adopting new farming technologies, finding new jobs or investing in new trade opportunities for example. Erstwhile, enormous numbers of individuals fall back into impoverished states as a result of financial setbacks, health issues and other societal shocks. Compounding this conditions is the verity that a majority of people living near or in poverty lack or cannot access even the fundamental banking services. Moreover, about 2.5 billion of the adult population do not own a bank account at any financial institution according to the World Bank’s Global Financial Inclusion Database. In addition, WBGFID indicates that only 41% of the adult populace in developing economies own an account, and this number drops to over 20% of adults in extreme poverty. However, the most affected are women who are largely excluded from this formal financial institutions. In developing nations, only 37% of women own accounts compared to their counterpart men at 46% (Demirguc-Kunt, Klapper, Singer & Oudheusden, 2015). Most poor families operate almost totally in the cash economy, predominantly in the developing countries. This insinuates that they utilize physical assets, informal providers or cash to meet their fiscal needs - from getting wages to money saving. However, these informal modes can be expensive, insecure and complicated to use, and they provide limited recourse when significant issues arise such as a poor harvest or a serious ill health in the household. In spite of these setbacks the "bricks and mortar," formal financial systems do not work for the impoverished in the society, in part because most transactions are performed in cash. In addition, these institutions necessitate significant collateral, have bureaucratic and lengthy application process and have a preference for high loan and high-income clients (Khavul, 2010). In view of these reasons, the poor are left out as both the formal and informal financial institutions do not fit their needs. Effective tools for borrowing, receiving and saving money and also mitigating financial risks can help undeserved people weather setbacks and attain greater financial freedom and stability over a long period. It is on this basis that there was an opportunity for banking services for the poor which "Micro-credit" fits to serve this group of people. Grameen Bank is the first ever organized micro credit institution started in 1976 to provide small loans to this group of people - the poor and women - at low-interest rates. Four main principles guide the bank: discipline, unity, courage, and workers. These principles are what guide its staff, borrowers and investors. However, Grameen Bank has the following microcredit principles as well (Esty, 2011): Poverty is not generated by the unfortunate individuals. It is made by the policies and institutions that surround them. Giving loans to the people afford them the opportunity to take up initiatives in agriculture or businesses to create earnings that allow them to repay debt. Poor individuals have skills and knowledge that remain under-utilized or all together unutilized. Hence, it is not the lacking of skills that make people poor. Charity is not the answer to poverty. Charity only helps to sustain poverty. By and of itself, fashions dependency and takes away a person's initiative to break through the poverty wall. Utilizing the creativity and energy in each person is the answer to poverty. Self-employment is the most reliable (quick and easy) way to create employment opportunities for the poor, and it is only through credit that this can happen almost instantaneously. Women are the most affected by poverty and suffer its consequences the most as well. However, they also hold the most direct impact on their families. For this reasons, Grameen illustrates that poor women, compared to poor men, can better fight and manage poverty so long as they are afforded the chance. If women are empowered through microcredit, they can meaningfully impact the quality of life of households living in poverty.
Grameen Bank’s Objectives and Basic Tenants With these principles in place, the Grameen Bank enables disadvantaged borrowers to start their own businesses. In addition to the principles, Grameen prioritizes environmental concerns, strengthening of education, provision of technology as well as encouraging saving among other factors in human capital development. These priorities together with the bank's principles guide Grameen Bank's objectives which include: to extend banking facilities to men and women who are living in poverty, to eradicate exploitation of the impoverished by moneylenders and to provide opportunities for self-employment for the poor. Additionally, they aim to enable the poor, mostly women from the poorest family, to be part of a banking system that they understand and manage on their own. Finally, the bank seeks to replace the sequence of 'low-income, low investment and also low investment' with a hands-on sequence of controlling low-income with the provision of credit, more savings, more income and more investment (Grameen Bank, 2015). From the banks very outset, it was designed to serve the poorest individuals and its control and ownership to remain in the hands of its clients. These poor borrowers are mostly women hence the bank exclusively works for and directs their services towards them. Presently, Grameen Bank has 8.67 million tenants, 97 per cent of this tenants are women (Grameen Bank, 2015). In addition, the bank has also taken up beggars through their special programs known as the Struggling Members Programme. As of 2012, the program's cumulative members were approximately 110, 188 with 108,833 being women (Grameen Bank, 2015). Women are the preferred tenants as the bank feels that they are far more effective change agents as women put household welfares first. Also, women are to a large extent better credit risk compared to men as well as more responsible in managing meager resources. However, the most compelling rationale as to why women are a priority is the fact that women have been identified as the most marginalized grouping among the worst of the worst hit by poverty.
New Programs Founded on Microcredit Philosophy To foster its microcredit principles, objectives, and its mandate, Grameen Bank developed new programs that are based on microcredit philosophy. For example the Struggling Members program, Grameen Housing Loans and the Village Phone Program. These are described below: Firstly, the Struggling Members Program enables 'struggling members' to utilize their entrepreneurial skills to attain a better life. It is an initiative confronting the continued campaign that individuals at the lowest level of poverty cannot use microcredit. The program is also used to reinforce GB's campaign that credit ought to be acknowledged as a human right (Esty, 2011). A beggar member receives a collateral-free and also interest-free typical loan that amounts to US $9.00. The repayment plan is lithe, decided by the beggar member in accordance with her/his convenience and earning ability. The program aims to not only economically empower its members, but also boost their dignity and morale. The program is based on accountability, mutual trust, creativity, and participation. Hence, financially 'struggling members' of the society part of the banking orbit. Secondly, Grameen housing loans program was set up to enable poor rural households to own cyclone-proof and permanent homes. Members get a loan of US $350, payable within a period of 5years with a 8 percent interest rate attached to it (Grameen Bank, 2015). The woman is vested with the home's title who thereby gets financial security plus enhanced status within the household and society. To qualify for a housing loan one has to be an existing Grameen borrower with a 100% repayment record and also must have completely paid back their first two loans (Grameen Bank, 2015). GB perceives housing loan as an investment and not consumption because a well-constructed and secure house abets the health plus well-being of the home thereby breaking the vicious cycle of poverty. Essentially, GB has two housing designs, a smaller one, and larger version each costing $300 and $625 respectively. In addition to the $350, each loanee receives a prefabricated sanitary slab, four concrete columns, and twenty-six corrugated iron sheets (Grameen Bank, 2015). Families can construct the houses themselves with or without the help of neighbors and friends. The program is based on a peer support collateral system, and borrowers pay back their loans through weekly installments. As of April 2015, the cumulative number of houses constructed with housing loans is 696,917 (Grameen Bank, 2015). Another program established by GB together with Grameen Phone and Grameen Telecommunication is the village phone program with an aggregate membership of 1,469,605 as of April 2015. The program enables the rural poor to own a mobile phone and turn the phone into a profit making undertaking. Grameen Phone came up with the program on the basis that a cellphone can act as a source of income creation (Khavul, 2010). By itself, the program offers modern telecommunication services to the rural poor in Bangladesh. The cell-phones are given from GB on easy loans, and they also have discounted billing rates (Alam, Yusuf & Coghill, 2010). Once a member has been given a mobile phone, he or she is encouraged to offer phone services to people within their area, including incoming and outgoing calls. In so doing, the borrower can earn money to make loan repayments to the bank while making profit as well. This gain allows them to meet their basic needs like shelter, food, health and also entertainment need. The village phone program has managed to change the lives of many Bangladesh rural inhabitants, especially underprivileged women. The Village Phone initiative has created tremendous economic and social impact on the lives of the rural poor by generating a 'significant consumer surplus' for the service users. The VP has empowered women socially and economically by lessening their dependence on other family members and permitting them increased responsibilities and roles in household decision-making (Alam, Yusuf & Coghill, 2010). Furthermore, the program acts as a change agent by transforming the socio-economic situation of disadvantaged women thus making poor women more self-reliant and affording them entrepreneurial qualities and skills in managing small to medium businesses in an innovative way.
Impact And Success of Grameen Bank Strikingly against all odds, GB has had unimaginable impact and success in Bangladesh as well as all over the world. GB has managed to reverse the conventional banking knowledge through removal of collateral requirement and formed a banking system founded on the premise of trust, accountability, strict supervision, creativity, and participation (Kuhinur & Rokonuzzaman, 2010). Since its modest beginnings, the bank has grown to a financial institution that presently has more than 21,851 employees serving 81,390 villages (Grameen Bank, 2015). The borrowers save up to 5% of their loan amount plus 3 cents on a weekly basis. The accumulated savings have grown tremendously over the years with a current balance of deposits of Tk 168273.44 as of April 2015 (Grameen Bank, 2015). The bank's borrowers own and control it. Once a borrower has accumulated enough savings; she is allowed to buy one - and only one - share in GB, which costs about $3. Presently, borrowers hold a 96.71% stake in the bank, the other 3.29% is owned by the Bangladeshi government, Bangladesh Krishi Bank, and Sonali Bank Ltd. Since inception, GB has distributed Tk 1117,792.86 Million (USD 16, 844.16 Million) cumulatively in loans. Out of this amount, Tk 1027,538.42 Million (USD 15,389.74 Million) has been paid back. As per the bank's monthly report, their outstanding loan totals to Tk 90254.44 with an overdue loan of only Tk 1463.80 (Grameen Bank, 2015). The bank declares a rate of 98.28% in loan recovery that has attracted immense criticism. Experience has it that it takes a completely destitute 6 to 10 successive loans annually plus plenty of hard work to transcend the poverty line. The bank's initial loan is usually as low as USD 50 and their average loan size in a month is slightly over USD 100. For example, in March 2015 the amount of loan disbursed was US $164.25 (Grameen Bank, 2015). In the process, loanees create a secure self-employment for themselves and their families. Econometric analysis put forward that GB has managed to create opportunities at the village and household echelon. At the family level, the advantages of being a member of the bank include employment, change in income, assets accumulation, increase in net worth and also other family welfare indicators such as health and school enrollment among children. The brank's programs have enabled members to improve their net worth and assets. For instance, a participating household owns about 51% more net worth and 56% more resources than a non-participating family (Kuhinur & Rokonuzzaman, 2010). Poverty incidence has thus been reduced significantly among the members and participation in the workforce, especially among women, has increased tremendously. The women's workforce participation is at 66% among the members of GB compared to a 52% for non-participants (Kuhinur & Rokonuzzaman, 2010). The program has 53,270 students in institutions of higher learning which is a significant improvement since the project was initiated (Grameen Bank, 2015). The program has also recorded an increase in the use of contraceptives, establishment of better toilet facilities as well as better drinking water. Hence, the Grameen Bank has managed to reduce poverty in the country. The bank's focus on excellence, transparency and accountability has earned them numerous awards and recognition from the philanthropic society. Some of the awards GB has received include the Aga Khan Award For Architecture (1989), the 1993 King Baudouin International Development Prize award and the Independence Day Award (1994) which is the highest award in Bangladesh. They also received the Tun Abdul Razak Award in 1994, the World Habitat Award in 1997, the Gandhi Peace Prize in 2000, Petersberg Prize (2004) and the Nobel Peace Prize in 2006 (Khavul, 2010). GB stands to be the only business corporation to be awarded a Nobel Prize. In addition, the bank has received worldwide recognitions and honors. The US recognized Dr. Yunus with their two highest civilian honors. These are the Presidential Medal of Freedom and the Congressional Gold Medal. Also, GB's achievements have resulted in its many replications in over 40 nations, and the World Bank has adopted initiatives to fund Grameen-type schemes in a bid to alleviate poverty (Demirguc-Kunt, Klapper, Singer & Oudheusden, 2015).
Criticism of Grameen Bank and the Microcredit Model Even though, GB has seen numerous successes, received philanthropic awards as well as worldwide recognitions, just like any other venture it has received its fair share of criticism. Critics have used several strategies in an attempt to undermine the Grameen Microcredit Model as a tool for poverty alleviation. Critics claim that microcredit institutions like the Grameen Bank impose a debt burden on those individuals who are not capable to shoulder such debts. These critics contend that poor people usually apply for loans yet they do not understand the consequences involved with such commitments. Melik (2010) writes that the rural poor do not know that it "might take them 10 or 20 years to pay back their loan." What's more, apart from the repayments that borrowers have to make on a weekly basis, some microcredit models deduct 10% out of those payments for mandatory saving schemes. The same deductions are again used to loan other poor people. As well, interest rates are flat starting at approximately 15%, but can rise to 40% or 100% states Melik (2010). Furthermore, the loans are usually due on the first week after the approval of loans, which does not afford the borrowers ample time to set up any form of business to earn them income. The alternative is to take up other loans from different institutions to start repaying these loans. Even though this criticism is not without merit, there have not been any complaints against the bank. However, without GB and other microfinance institutions, the rural poor and women would not have had any access to financial institutions. They would have mainly left at the mercy of "village sharks" who have exorbitant interest rates. To that end, the rural poor would have remained in extreme poverty. It is correct that not all borrowers will be successful, and no strategy or model is perfect. There are those that will fail hence be caught in the "debt trap" as Melik (2010) terms it. But this does not mean that GB burdens its borrowers. On the contrary, millions of lives have been rebuilt, and countless lives changed. What's more, GB reschedules loans borrowed by its members so that they are not classified as 'loan defaulters' which is part of the bank's primary philosophy. The Grameen Bank holds people's dignity highly, especially that of the disadvantaged. Based on this, GB reschedules or provides new loans to get back the lost capital. Besides, members are usually regular depositors and therefore at any time they usually have enough money in their savings to repay the weekly installments. For these reasons, there is no way that GB borrowers are debt burdened. Secondly, other critics assert that microcredit facilities depend highly on government subsidies to operate. The GB alongside other institutions founded on the Grameen approach has been criticized to be economically unviable and depends highly on government subsidies for them to remain operational. In this respect, microcredit institutions have, in essence, become other forms of welfare programs. However, this line of thought is untrue as GB works against the funded economy by giving the poor chances to start their own businesses. Unlike GB, which is highly self-sufficient financially, commercial banks in the country are unendingly in need of government subsidies (Bornstein, 2011). In fact, state-owned banks in Bangladesh record higher rates of loan defaulters compared to GB or other microfinance institutions in the country. The Grameen Bank does not run on government funds, and it has never received foreign grants or loans since 1998. Additionally, the bank has never taken any loan or grant from the Bangladeshi government. Thirdly, several commentators put forward that microcredit is an avenue that uplifts corruption by venture capitalists. The former Bangladeshi Prime Minister is quoted saying that there is no dissimilarity between corrupt people and usurers (Yunus). There were suggestions that GB evaded taxation in the Norwegian documentary and the Spanish documentary. The basis of the accusation was that there was an unauthorized transfer of funds between two Grameen entities summing up to USD 100million donated by NORAD (Bornstein, 2011). However, as Yunus stated, this is not corruption as governments have provided corporations with opportunities which GB is just utilizing. Moreover, in Bangladesh, GB is renowned to be a corruption free organization. Annually the bank is audited by the Bangladesh Bank and other two internationally renowned audit firms. There has not been any corruption allegations brought forth by the audit firms since GB's inception.
Conclusion
Grameen Bank holds an extensive client base, comprising over eight million members in Bangladesh. The banks immediate mission is to see to it that they are successful in overcoming poverty and achieve further growth in a sustainable manner. GB's modulus Operandi has lucidly illustrated that poverty can be lessened within a short period and new opportunities generated for self-employment, improved housing, higher incomes, children's schooling, improved nutrition and health and overall improved quality of life. Through Grameen and other microcredit institutions based on Grameen's model, more and more poor people are crossing beyond the poverty line.

References
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Ang, M. (2004). Empowering the poor through microcredit. IJEIM, 4(5), 485. doi:10.1504/ijeim.2004.005756
Bornstein, D. (2011). Microfinance Under Fire. Opinionator. Retrieved 24 April 2015, from http://opinionator.blogs.nytimes.com/2011/03/21/microfinance-under-fire/?_r=0
Demirguc-Kunt, Asli, Leora Klapper, Dorothe Singer, and Peter Van Oudheusden. 2015. “The Global Findex Database 2014: Measuring Financial Inclusion around the World.” Policy Research Working Paper 7255, World Bank, Washington, DC.
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Kuhinur, S., & Rokonuzzaman, M. (2010). Impact of Grameen Bank micro credit on change in livelihood status of women beneficiaries. Journal Of The Bangladesh Agricultural University, 7(2). doi:10.3329/jbau.v7i2.4750
Melik, J. (2010). Microcredit 'death trap' for Bangladesh's poor - BBC News. BBC News. Retrieved 24 April 2015, from http://www.bbc.com/news/business-11664632