On October 13, 2006, Professor Muhammad Yunus of Bangladesh stepped to the podium in Oslo, Norway, to accept the Nobel Peace Prize. The work for which Yunus was being honored had started a financial revolution of sorts in 1976, when he turned the banking industry on its head by giving micro-loans to poor people.
With the success of his initial loans, Yunus founded the Grameen Bank. (The definition of Grameen is rural or village in the Bangla language.)
“We were happy that the world has given recognition, through this prize, that poverty is a threat to peace,” Yunus writes on the Grameen Bank’s website.
“Grameen Bank, and the concept and methodology of micro-credit that it has elaborated through its 30 years of work, have contributed to enhancing the chances of peace by reducing poverty. Bangladesh is happy that it could contribute to the world a concept and an institution which can help bring peace to the world.”
Innovation in Lending
I remember reading about the Grameen Bank (GB) more than two decades ago. I was evaluating various charities that I might consider supporting. I didn’t have much to share, and I wanted my small gift to have the greatest possible impact. Grameen’s innovative idea of making microloans to impoverished people excited me.
The Grameen Bank left the central field of my vision for a number of years, and I hadn’t revisited their work until writing this post. What I’ve learned about Grameen Bank since has continued to inspire me. GB no longer accepts donations. By loaning money to enterprising poor people over three decades, the bank has amassed enough money to finance projects on its own.
What’s more, it supports 23,689 staff, who visit 84,237 villages across Bangladesh each week. This is a labor-intensive process, but necessary, so that the bank can fulfill its first purpose: “The clients should not go to the bank, it is the bank which should go to the people.”
Other principles of Grameen Bank illustrate the group’s dedication to serving the under-served poor of Bangladesh, especially women. Here are a few of Grameen Bank’s other unique practices that make it different from traditional banks:
- There are no contracts between the borrower and Grameen Bank, and the bank never sues if a borrower has difficulty repaying her loan.
- When a person can’t repay a Grameen Bank loan in the time they agreed to, GB renegotiates the payments to give them more time. There are no late fees or penalties, as in a traditional bank.
- If a borrower experiences trouble that prevents her from paying her loan on time, GB works with her to help find a solution including. Employees may even work with her to recover her health. The bank never takes away collateral in lieu of repayment.
- GB never charges interest in excess of the value of the principal. In a conventional loan, a borrower may repay the principal many times over.
- GB charges simple interest, rather than compounding interest quarterly.
- Grameen Bank concerns itself with the welfare of the borrower’s family, not just the welfare of the loan principal. The bank often provides scholarships to the borrowers’ children, helps with housing and sanitation, works with them to establish pension funds, and assists in emergencies.
- If a borrower dies, the loan and interest are considered paid in full. There is no additional insurance fee for this service, and the borrower’s family does not assume the debt.
- Bank ownership is held by the borrowers, not by a few wealthy people.
- 97% of the borrowers and owners are women.
- If a borrower builds a house with Grameen Bank funds, the bank insists that the ownership remain in the name of the woman. By owning property, a woman gains new status and a more equal foothold on power in the family and the community.
Serving the Poorest of the Poor
To me, the most significant difference between Grameen Bank and conventional banks is this: Conventional banks only loan t people who have money. The more one has, the more one can borrow.
But Grameen Bank puts the priority on loaning to those who have nothing. The less a person has, the more likely she is to get a GB loan. As the GB website puts it, “Conventional banks look at what has already been acquired by a person. Grameen looks at the potential that is waiting to be unleashed in a person.”
Grameen Bank actively seeks out beggars to offer them loans. The goal is to give each person dignity through work and to end her begging. If a woman begs on a street corner, for example, the GB persuades her to carry some small merchandise to sell. Or, she can sell door to door. Imagine a bank in a developed country offering loans to the poorest of the poor — especially with such favorable, humanitarian terms.
For borrowers affiliated with Grameen Bank, the experience is life changing. That is partly true because the majority of borrowers have never been extended credit.
But it’s also reflective of the “Sixteen Decisions,” which GB encourages all borrowers to make. These include:
- paying no dowry upon a child’s marriage
- educating all of the borrower’s children
- installing and using a sanitary latrine system
- planting trees
- eating vegetables
- getting clean drinking water
- and more
How It Works
Grameen Bank groups are formed of five people, who support each other. Initially, two of the five may borrow money. The others enter into a morally binding contract with each other and with Grameen, to support the borrowers and help them repay if they should have difficulty meeting their obligations. As the first two women show responsibility in repaying their loans, two more may request funding. If all goes well, the fifth and final person then gets funded.
By forming this moral bond, the groups become reliant on each other, yet self sufficient at the same time. They move out of poverty together, helping each other along the way.
“Bicycle bankers” move among the villages, supervising and providing discipline to the borrowers. This highly effective model has resulted in 97% loan repayment.
The benefits are multiple and have powerful effects on the women’s lives. According to the Grameen Bank website, “Women… proved not only reliable borrowers but astute entrepreneurs. As a result, they have raised their status, lessened their dependency on their husbands and improved their homes and the nutritional standards of their children.”
But what about their families? Does Grameen only benefit the women? Take a look at what the Grameen Bank website says:
It is estimated that the average household income of Grameen Bank members is about 50 percent higher than the target group in the control village, and 25 percent higher than the target group non-members in Grameen Bank villages. The landless have benefited most, followed by marginal landowners. This has resulted in a sharp reduction in the number of Grameen Bank members living below the poverty line, 20 percent compared to 56 percent for comparable non-Grameen Bank members…. What started as an innovative local initiative, “a small bubble of hope”, has thus grown to the point where it has made an impact on poverty alleviation at the national level .
And that is as good a definition of success as any.
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