1. Case Study: The Grameen Bank
Lecture # 13
Week 7

2. Structure of this class
Muhammad Yunus and the founding of Bangladesh’s Grameen Bank
The group lending methodology re-visited
Limits to Group Lending
Grameen Bank II
Main challenges

3. Yunus and the Grameen Bank
1970s: War against Pakistan, flooding, famine
80% of the population living in poverty
Yunus: Economist trained in the US teaching at Chittagong University ( southeast Bangladesh)
1976: Yunus started a series of experiments lending to poor households in nearby Jobra
Activities financed: rice husking, bamboo weaving
Finding: poor borrowers without collateral making profits and repaying

4. Financing out of his own pocket could not meet growing demand
Yunus convinced the Bangladesh Central Bank to help him set up a special branch that catered the poor of Jobra
Another trial in Tangail (North Central Bangladesh) assured success was not region-specific
Grameen went nationwide, village by village, thanks to donor agencies: IFAD, Ford Foundation, and the governments of Bangladesh, Norway, and the Netherlands

5. -- Rapid growth

6. Group lending methodology
Key to the success of rapid growth
Group of potential clients form groups (5 members)
Loans made to individual participants within the group
Joint responsibility: if a member defaults all members have to pay for her or else the entire group excluded from future loans
Group lending under joint responsibility gives costumers incentives to select responsible partners, to (peer) monitor, and repay
A five-member group is in turn part of a larger “center” composed of eight groups

7. Under the the Grameen “classic” methodology
Advantages:
Economies of scale
“Agency Costs” were reduced as the bank delegated screening, monitoring, and loan enforcement onto the borrowers via “social sanctions”
Efficiency gains: borrowers faced lower agency costs
Promotion of mutual assistance and solidarity (insurance)

8. Disadvantages
Group lending under joint responsibility difficult to replicate in sparsely populated areas
“Social sanctions” difficult to impose on close relatives
Scarcity of much needed “group leaders”
Attending frequent repayment meetings time – consuming and costly for the borrowers
Risk aversion
Scope for collusion undermines the bank’s ability to harness “social collateral”
Too harsh on borrowers as member were experiencing negative idiosyncratic shocks

9. Grameen II
Foods in the 1990s prompted Grameen to lend for rehabilitation
Amounts lent exceeded capacity to repay
Widespread defaults and demands for withdrawals from “group fund”
Rules were too strict, and failure to repay by one member triggered group and entire center defaults
The system was redesigned under the name Grameen Generalized System or GGS and was launched in 2001

10. Main features
Sharp reduction in number of financial products (family loans, seasonal loans…)
No more “compulsory fund”
Relaxation of fixed-size weekly installments
Flexible “loan cycles”
Not repaying in full did not equal “default” anymore
Recognition that borrowers were heterogeneous and subject to idiosyncratic shocks
Faith on the fact that the poor will eventually repay, some over a longer period of time, some over a shorter period of time

11. Basic loan accessible to all
This can however be renegotiated (rescheduled), “flexibility”
Full repayment of basic loan enable borrowers to access (1) housing loans, and (2) higher educational loans
Two-speed system: high and low
Disincentive for borrowers to go from high to low because she starts creating a credit history from scratch
Custom-made Credit service
Group loan replaced
Pension fund

12. Savings
Loan insurance
Growing credit ceilings
Destitute members program
Computerization of Grameen accounting and monitoring systems

13. Main challenges Excessive reliance on a charismatic leader
Governance: Pyramidal structure even though a coop on paper
Capacity to cope with aggregate shocks
And last but not least: “Social Business”
- Next class: The Case of Financiera Compartamos (consult the web site for required readings)
Have a nice weekend -