The Story of the Grameen Bank:
From Subsidised Microcredit to Market-based
Microfinance
David Hulme1
1
University of Manchester
November 2008
David.Hulme@manchester.ac.uk
BWPI Working Paper 60
Brooks World Poverty Institute
ISBN : 978-1-906518-59-2
Creating and sharing knowledge to help end poverty
www.manchester.ac.uk/bwpi
Electronic copy available at: http://ssrn.com/abstract=1300930
Abstract
This paper looks at the establishment and evolution of the iconic Grameen Bank of
Bangladesh. It traces the development of the Bank from its origins, providing microcredit
to poor, rural women in Bangladesh, through a period of national expansion and
institutionalisation, to the replication around the world of the Grameen model. In the late
1990s the Bank faced repayment problems and a developing financial crisis, and
strategies were put in place to stabilise and reshape the Bank. This led in 2001 to the
launch of Grameen II, which is analysed in terms of its main components and its results.
Finally, the paper looks at Grameen Bank’s future role as a major player in the
microfinance market, and as an inspiration for those helping poor people improve their
own lives.
Keywords: Microfinance, Bangladesh
David Hulme is Associate Director, Brooks World Poverty Institute, University of
Manchester; Associate Director, Chronic Poverty Research Centre; Leverhulme
Research Professor.
2
Electronic copy available at: http://ssrn.com/abstract=1300930
Introduction
The Grameen Bank of Bangladesh holds an iconic position in the world of microfinance.
It is credited with proving that ‘the poor are bankable’; the Grameen ‘model’ has been
copied in more than 40 countries; it is the most widely cited development success story
in the world; and its charismatic Founder-Director, Professor Muhammad Yunus, was
awarded the Nobel Peace Prize in 2006. By the end of February 2008 it had 7.4 million
clients and outstanding loans of $545 million. By any measure it is an organisation that
has impacted greatly on the lives of many poor people and on ideas about microfinance,
poverty reduction and international development.
The group-based lending model, targeted at poor, rural women, that is synonymous with
the Grameen Bank contrasts markedly with the two other iconic microfinance institutions,
Bank Rakyat Indonesia and BancoSol of Bolivia (see Hulme and Arun 2009). The
original Grameen Bank model comes out of what Robinson calls a ‘poverty lending’
approach, rather than the ‘financial systems’ approach that she, the Consultative Group
to Assist the Poor (CGAP), and many US microfinance specialists prefer. However,
unnoticed by many observers, the Grameen Bank made dramatic changes to its services
around 2001 and 2002. Its new model (Grameen II), takes it much closer to a financial
systems approach. Although Professor Yunus continues to champion the idea of
microfinance for poor women, most obviously through the annual Microcredit Summit,
the Bank he directs increasingly lends to non-poor clients, has moved aggressively into
savings mobilisation, and is very much concerned with the overall profitability of the mix
of its products. Grameen II reflects not so much a reform as a revolution in the
Grameen’s strategy. Rather than challenging the market-based ‘financial systems
approach’ the contemporary Grameen Bank vindicates it. But, let us start at the
beginning.
Early days
As Professor Yunus reports in his autobiography (Yunus, 1999), and as Fuglesang and
Chandler (1986) record, the origins of the Grameen Bank lie in the dilemma that the
young Yunus found himself facing in the mid-1970s. Having completed his PhD in the
USA, he had returned to Bangladesh to lecture in economics at Chittagong University.
However, he found himself wondering what relevance the economic theory he taught
had to the immediate needs of the thousands of hungry and deprived people he saw in
rural Bangladesh. The country was slowly recovering from a vicious war of
independence that had destroyed its infrastructure and its productivity and murdered
much of its intelligentsia. The damage caused by the war had been amplified by the
famine of 1974, and the country was dependent on food aid. Human suffering on a vast
scale could be witnessed in any town or village.
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Yunus could try to help people by giving them charity, but he wondered whether some of
his economic theory could be applied in the field. His training postulated that if people
got access to credit they could increase their profitability, or diversify their economic
activities, in ways that would allow them to raise their incomes. So, if he could lend some
poor people his money they could improve their lives and pay him back. Then, he could
lend the money to other poor people and thus assist many more people than could be
achieved by simply giving his money away.
It was an interesting theory, but his initial experiments seemed to show it was invalid.
Quite a few of the men and women he lent to did not repay their small loans (sums of
US$10 or 20). He thought that this was because they had either used the money
unwisely (for consumption or poorly planned microenterprises) or were not trustworthy.
As a result, he began to experiment with ways of (i) approving and supervising loans, to
ensure they would be used for productive investments, and (ii) selecting trustworthy
clients and managing them, so that they would repay their loans.
Eventually he came up with a model that worked. This had a number of features:
•
•
•
•
•
•
•
Lending to poor, rural women (as they were less likely than men to use loans
badly and were more reliable for repayment).
Organising women into cells of five, that took collective responsibility for each
other’s loans (creating social collateral and a peer screening process).
Establishing Kendro (centres) where six cells (i.e. 30 women) met, at a set time
each week, to apply for loans and make repayments.
Charging a higher rate of interest than government schemes and NGO loans
programmes.
Requiring clients to make compulsory microsavings each week (to create
financial discipline and generate financial collateral for groups), and to make
promises about their social conduct.
Simple, standardised products that required regular, small repayments.
Recruiting and training bright, young graduates to administer services (to
minimise corruption).
There were many other carefully designed elements of this ‘Grameen model’ (see
Fuglesang and Chandler (1986) for details). It certainly appeared to work, and Yunus
was able to persuade the state-run Bangladesh Krishi Bank (BKB) to finance and house
the experiment. Donor agencies, such as the Ford Foundation, became involved.
Expansion and institutionalisation
The early success of the Grameen model was matched by Professor Yunus’s personal
energy and enthusiasm. But, to expand the Bank he needed more finance and a robust
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organisational structure. The finance was not too much of a problem. In the early 1980s
there were many foreign aid agencies in Bangladesh facing a big problem: most of the
grants they made to government agencies were only weakly accounted for and they
appeared to achieve little development impact. A bright, young social entrepreneur, who
was gaining a reputation for assisting the poor and who monitored his programme’s
impacts, was just what they needed. For the next decade or so, Yunus would be able to
rely on the financial support of the Grameen Bank Donor Consortium.
Achieving an effective organisational structure was, perhaps, more challenging. If he
stayed with BKB, then as the Grameen Bank expanded it would be likely to take on the
characteristics of the country’s nationalised commercial banks: nepotistic staff
recruitment and promotion, financial corruption, the politicisation of the loan portfolio,
and an offhand attitude towards clients. The alternatives – registering as a Bank or as a
cooperative – were not attractive. So, with great insight and careful politicking, Professor
Yunus negotiated the passing of a Grameen Bank Ordinance in 1983. Quite how this
was done has never been fully explained, but Yunus was a well connected member of
the country’s small elite and General Ershad, the country’s new military dictator, was
looking for ways of promoting a more popular image of his regime. The Ordinance
established the Bank as a parastatal agency, overseen by a Board comprised of Yunus,
a small number of state officials and a larger group of Bank clients. This gave Yunus firm
personal control of the organisation, and the flexibility to modify its services and staffing
as the Bank evolved.
Over the 1980s and early 1990s the Grameen Bank steadily expanded, with large
inflows of donor funding. By 1991it had more than one million clients and a growing
range of products – housing loans, agricultural loans and others. Alongside this, both the
profiles of the Bank and of Yunus became increasingly international. The Bank was able
to accommodate to the ascendancy of neo-liberal ideas of this era and to criticisms of
those ideas. Yunus’s eloquent narrative presented the poor as ‘micro-entrepreneurs’,
who could seize market-based opportunities once they had access to microcredit (then
seen as loans of around $50 to $200). But this was moderated: the Bank promoted
women’s empowerment (sometimes Yunus presented this as the poor’s empowerment),
collective action by groups, and social development. In effect, the Bank’s narrative
allowed it to present itself as extending the benefits of capitalism down to the poor whilst,
at the same time, being an alternative to orthodox capitalism.
International transfer replication
As the 1980s progressed, an increasing amount of Grameen Bank senior management
time was devoted to exporting the Grameen Bank model. I first became acquainted with
the Grameen model in 1987, while researching rural finance in Sri Lanka. At the time it
seemed that almost every NGO and donor project I visited had staff who had recently
5
returned from a visit to the Grameen Bank. Most of these staff were very impressed with
what they had seen and talked of ‘replicating’ the model. The Asian Development Bank,
desperate to approve loans to Sri Lanka, dressed up its rural finance proposals as
building on the Grameen Bank’s success – even though they were not using the
Grameen model!
The Bank moved from mounting ad hoc visitor programmes to regular programmes for
replicators. It targeted not only developing countries and was proud to announce
Grameen transfers to the USA and Canada. By the mid-1990s Yunus was increasingly
spending his time travelling overseas, sitting on the boards of Grameen replicas (such as
Amanah Ikhtar Malaysia), visiting aid donors, and addressing academic, policy and
public audiences. He energetically promoted microenterprise credit as a panacea for
poverty reduction (something that intensely annoyed me, as it was so wrong) and
eloquently spoke of the agency and energy of the poor (something I deeply appreciated,
given that many analysts fail to point out that most poverty reduction is done by the poor
themselves).
The idea of replicating the Grameen Bank around the world crystallised when the USbased group RESULTS (which runs campaigns promoting microcredit) and its Director,
an experienced lobbyist, came up with the idea of a Microcredit Summit. Since 1990, the
UN had convened a set of global summits that had set goals for poverty reduction,
education, gender equality and other issues. The 1997 Microcredit Summit was not a UN
event – it was organised by RESULTS – but it presented as a global summit, with claims
of ‘microcredit is a human right’ and speeches from heads of state. It set a goal of
mobilising US$21.6 billion, so that 150 million households would be able to access
Grameen Bank-type loans by 2005. Some within the Microcredit Summit movement
pushed for a focus on microfinance and a broader range of services but that did not suit
RESULTS’ campaigning style. It needed a simple message. The Grameen Bank was a
panacea, the world should replicate it!
Can the Grameen Bank go bust?
As the Grameen model was ‘exported’ overseas during the 1990s, the Bank continued to
grow in Bangladesh. Client numbers grew steadily, but the portfolio grew more quickly as
clients took bigger ordinary loans and new types of loans (especially housing). Those of
us working in Bangladesh increasingly heard that repayment rates were falling, but that
branch managers were massaging their performance figures by issuing new loans to
defaulters. These were immediately used to pay off the outstanding loan and hide the
problem of non-repayment. There were also criticisms of the gender achievements of the
Bank: did it merely get women to take loans that they gave straight to their husbands?
Then, there were criticisms of the idea that Yunus propounded, of every Grameen Bank
loan being used for microenterprise, and every microenterprise being successful.
6
Independent fieldwork showed that Grameen Bank clients used their loans for many
different purposes – business, food consumption, health, education and even dowry.
Grameen loans did not go to microfirms for a single, specific investment; rather, they
went into the complex financial portfolios of low-income households.
Long-time researcher on microfinance in Bangladesh, Stuart Rutherford, was one of
those able to see what was going on. Grameen Bank clients paid the kisti (weekly
repayments) on their loans not from a single microenterprise, but from patching together
earnings from casual employment, self-employment, remittances and a variety of loans
from other sources. But, as clients stayed with Grameen Bank, they were under pressure
to take bigger, ordinary loans alongside new housing loans. As a result, they took on
levels of debt they could not service from their income. To stop them from defaulting,
they were issued with larger loans by Grameen branch managers to repay earlier loans.
In Dhaka, rumours circulated of a meeting at which Professor Yunus asked his senior
staff to tell him the true level of repayment and the scale of the ‘hole’ in the Bank’s
finances. The severe floods of 1998, and the collapse of the Bank’s recently introduced
agriculture loans, exacerbated the repayment problem.
Things moved from being a problem to being a crisis in 2000 when Daniel Pearl, a
journalist on the New York Times, published an article saying that Grameen Bank was
virtually bankrupt. For believers in the Bank this was either heresy or the end of the
world. For proponents of the non-subsidised, financial systems approach it showed the
validity of their ideas.
But a mere financial crisis was not enough to sink the Grameen Bank. An authoritative
independent account of how the Bank survived is not available, but I believe a threepronged strategy was used to stabilise and reshape it. The first prong of this strategy
involved Bank staff in carefully going through the entire portfolio at the local level. They
screened outstanding loans to raise repayment rates, reschedule loans and, when
necessary, write-off loans that could not be recovered from borrowers or their centres.
This meant that the entire Bank had to recognise significant losses. These could be
absorbed by writing off parts of the Bank’s asset base, but a second prong of strategy
helped reduce this ‘hit’ on the Bank. Professor Yunus was partially able to mobilise
grants from aid donors to offset these losses. Again, it is unclear precisely how this was
done, but some commentators suspect it was by presenting the Bank’s financial
problems as being due to the floods of 1998, rather than being more systemic. The third
prong of the strategy was to redesign the Bank’s products, so that they became more
profitable and could compete with the many other providers of microfinance in the
country (many of which had prospered in the wake of Grameen’s initial breakthrough).
This led to what Professor Yunus has called Grameen II.
7
From Grameen I to Grameen II
The problems faced by Grameen Bank in the late 1990s led to its senior staff piloting a
number of experiments with new products and new ways of managing service provision.
By early 2001 these had been consolidated and Professor Yunus announced the launch
of ‘Grameen II’ – the replacement of the Bank’s earlier products by a new range on
different terms. The components of Grameen II were designed so that (i) they should
meet client demand, and (ii) they should be profitable for the Bank. Between March 2001
and August 2002 all Grameen’s 1,200 branches were shifted from Grameen I to
Grameen II products and systems. Accounts of this process and the practice and
outcomes of Grameen II are provided by Rutherford et al. (2006) and Dowla et al.
(2006).
The main elements of Grameen II are:
•
•
•
•
A major focus on savings from members and the public. This includes voluntary
savings, term deposits and the Grameen Pension Scheme (GPS) – a long-term
savings programme.
The provision of flexible ‘basic loans’ to members (rather than the standardised
Grameen I 12-month loans). These are for variable amounts, can be repaid over
three to 36 months, have negotiable repayment schedules and interest rates are
determined by loan type (size, length, grace period, etc).
The abandonment of joint liability (and the idea of social collateral).
A poverty-focused ‘struggling members’ programme, that provides small,
subsidised loans to beggars and encourages them to join Grameen Bank
centres.
The results have been staggering. The Bank has not only been able to stabilise itself but
has, in effect, relaunched itself and its trajectory. While it took Grameen 25 years to
reach a client base of 2.5 million, it took only three years, from 2001, to recruit the next
2.5 million clients (Rutherford et al., 2006). Over the period 2002 to 2005 the Bank
tripled the deposits it held (US$478 million) and doubled its portfolio of outstanding
loans. The Bank’s loans portfolio became smaller than its savings portfolio. It built up a
large fund for bad loan provision and profits rose from 60 million Taka in 2002 to 442
million Taka (US$7 million) in 2005. This growth meant that physical expansion became
essential and the Bank opened 500 new branches, so that it had more than 1,700
branches, by late 2005.
While the Bank still proclaims its mission of poverty reduction, my personal observations
lead me to believe that its clientele is less economically deprived than was the case in
the 1980s and 1990s. This is partly because clients have done well (perhaps through
Grameen membership), and partly because of the product redesign and the drive for
expansion and profitability. Many of its clients would be classed as non-poor or
8
moderately poor by Bangladesh’s official poverty line. A much smaller proportion is
extremely poor (the targets for Grameen I over 1975 to 2000). The ‘struggling members
programme’ is targeted at the extreme poor, but by December 2005 it had only 56,000
clients, against more than 25 million extremely poor people in the country. Average loan
size for these members was only $6 and their average savings were $1 (Rutherford et
al., 2006). While many poor and extremely poor people may benefit indirectly from
Grameen II (through employment, increased demand for products, greater availability of
local level charity) the struggling members programme appears to be either failing or
tokenistic.
The future of the Grameen Bank
The Grameen Bank looks as though it has a secure future as an MFI in Bangladesh and
should remain a major player in the microfinance market, alongside other big players,
such as ASA and BRAC. It also seems set to remain a global icon, although there is real
confusion about the message that the Bank (and Professor Yunus) project.
Internationally, it is still perceived as a micro lending institution, focused on extremely
poor women, despite the fact that it has adopted a market-based, ‘financial systems’
approach since 2001.
The confusion could be a cause for concern, but my personal analysis is more positive.
Within Bangladesh, Grameen now plays an important role as a substantial MFI that
meets client needs and helps to promote competition within the financial markets. Its
viability is essential for this internal role, but also very important for its external role. Had
the Grameen Bank collapsed, then optimism about the feasibility of poverty reduction
and international development would have been dented. While the international
message associated with the Bank – microenterprise credit for extremely poor women
lifts them out of poverty – is now inaccurate, the broader thrust of this message – of hard
working poor people using their personal agency to overcome the problems they face –
is highly appropriate for the publics and politicians of rich countries. It helps the citizens
of the rich world to understand that poor people are active agents in the processes of
development and not passive recipients of food aid and humanitarian relief, as the media
(in the USA, Europe, Japan and the Middle East) usually stereotype them. The Grameen
Bank today is a very different organisation from what it was 20 years ago, but it still
serves as an inspiration for those trying to help poor and low- income people in their own
efforts to improve their lives.
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References
Hulme,.D and Arun, T.G. (forthcoming 2009) Microfinance: A Reader, London,
Routledge.
Fuglesang, A. and Chandler, D. (1986). Participation as Process: What Can We Learn
from the Grameen Bank, Bangladesh. Oslo, Norway: Norwegian Ministry of
Development Corporation.
Rutherford, S. with Maniruzzaman, Sinha, S.K. and Acnabin & Co. (2006), ‘GRAMEEN II
- The First Five Years: 2001-2006’, Grameen II Briefing Notes for MicroSave. [Online
resource available at: http://www.microsave.org/]
Dowla, A. and Barua, D. (2006). The Poor Always Pay Back – The Grameen II Story.
West Hartford, CT: Kumarian Press.
Yunus, M. (1999). Banker to the Poor: Microlending and the Battle Against Poverty.
New York: Public Affairs.
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