Grameen bank

Grameen Bank Microfinanceand Roles in Creating Small Scale EnterprisesCredit MarketsCredit A private good both excludable and rivalProblem of information asymmetry > high cost of creditHigh interest rate -> Less surplus to pay back to the lender Rationing of creditSmall and marginal farmers left outMarket failure

Rural Credit MarketLack of collateralBad crop season all borrowers defaultEnforcement problemConventional money lenders Vicious cycle of investment, low productivity and poverty, consumer surplus vanishesNeed 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 poorProvides 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 holders come out of poverty every year.

WORKING MODEL OF GRAMEEN BANK

LOAN TYPESFour interest rates for loansfrom Grameen Bank :20%(declining basis) for income generating loans,8%for housing loans5%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 SYSTEMSolidarity lending systemIt 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 programWireless payphone services in rural areasMarket 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 ProgramInterest 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 floodsOld loans repayment affected and defaults.Loans were not written off, additional burden

Failures of Microcredit Institutions70 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