Because of the failure of most DFIs to effectively reach the rural poor, Grameen Bank of Bangladesh has attracted widespread attention as one of the more successful banks catering to this target group. In addition to its phenomenal expansion in Bangladesh over the last decade, with over 1.6 million members and 1,030 branches by June 1993, the Grameen Bank model has been replicated in many other countries. The World Bank has also recognised the potential of such a model of financial intermediation for the poor and has recently provided an "exceptional" grant of US $ 2 million to the Grameen Trust for the replication exercise.

The Grameen Bank model

Grameen Bank operates in a credit market that is characterised by imperfect information and imperfect enforcement; two common sources of the failure of many DFIs in many countries. Lending entails high risk of loan default. The viability of lenders, therefore, depends on the selection of borrowers, their incentive to repay loans and the ability of lenders to enforce the loan contract (Hoff and Stiglitz, 1990) But formal lenders are not part of the community and, hence, do not have the ability as well as the means to collect information about the borrowers and their activities. Thus, the formal lenders often lend based on asymmetric information and are handicapped in their ability to enforce contracts in the absence of an effective legal system for contract enforcement.

Grameen Bank has developed ways of tackling both problems of asymmetric information and imperfect enforcement. It offers group-based credit, where an individual’s access to credit is tied to group responsibility and repayment behaviour. Grameen Bank’s lending process starts with five self-selected persons who own less than 50 decimals of land and who agree to form a group where they guarantee and monitor each other. Each group is organised and trained by Grameen Bank workers in weekly group meetings about the Grameen rules and regulations and how to keep individual, financial and social discipline. Advantages of the group-lending approach are that it satisfies the self-fulfilling expectations of like-minded groups of people and makes borrowers’ activities transparent to bank workers. Group lending, essentially, uses peer pressure to monitor and enforce contracts, provides an incentive structure for the borrowers to repay, and helps screen good borrowers from bad ones, all of which would be costly for the bank to accomplish otherwise.

Also, unlike many other DFIs, Grameen Bank adheres to savings mobilisation as an integral part of lending. While this provides an internal source of funds for on-lending, Grameen’s savings mobilisation scheme is also designed to address both production risk as well as market imperfections that exist in credit and other markets. Each member is required to save Taka 1 (Taka 47 is equivalent to US $ 1) each week, which is deposited at the weekly group meeting. Moreover, 5 per cent of the loan amount is levied for the "group fund", while Taka 5 for every Taka 1,000 above loan size greater than 1,000 is charged for the "emergency fund" contribution. The group fund is managed by the group and provides an additional source of loanable funds for the poor when mutual agreement is obtained. The emergency fund is managed by Grameen Bank and is used as an insurance against default, owing to death, disability or natural disaster.

In addition, each member purchases one Grameen Bank share worth Taka 100. These shares provide a stake in the ownership of Grameen Bank for the membership, as well as their representation in its board of directors; over time, both the proportion of members’ shares in total capital and in the representation have increased.

Since its inception as a bank for the poor in 1983, Grameen Bank has evolved as a large organisation, employing 10,531 men and women in 1992. As of June 1993, there were 1,030 Grameen Bank branches, covering members in 32,529 villages (about half of the villages in Bangladesh).

The phenomenal expansion of Grameen Bank is evident in the 840 per cent increase in its membership in eight years, as it grew from 171, 622 in 1985 to 1,614,673 in mid-1993. About 94 per cent of the membership is women and over the eight year period, growth in female membership was always higher than the growth in male membership.

For Grameen Bank, membership means access to credit. This is indicated by the overwhelming proportion of members who are borrowers: by June 1993, as much as 98.2 per cent of all members had taken loans, compared to 88.9 per cent in 1985. The emphasis on female membership and group expansion is also evident in the growth of borrowers: the proportion of male borrowers, among all borrowers, declined progressively (from 34.9 per cent in 1985 to 6 per cent in mid-1993). The number of female borrowers increased by 1,205.3 per cent in the 1985-92 period, compared to 67.1 per cent growth in the number of male borrowers.

Grameen Bank experienced an enormous growth in savings mobilisation between 1985 and 1992. Total savings mobilised increased by 2,920 per cent during this period, from Taka 114.9 million in 1985 to Taka 3,478.8 million in 1992. In the first six months of 1993, total savings had increased by 30.9 per cent to Taka 4,553.3 million.

Along with its financial services, Grameen Bank has implemented several programmes aimed at promoting social development. It encourages its members to practice the "sixteen decisions" — guidelines for codes of conduct and activities aimed at improving the social and financial conditions of the rural poor — on a daily basis and trains them on the modus operandi of Grameen Bank, as well as on improving their health, nutrition and productivity. It also encourages its members to operate nursery schools at the centres (six to eight groups), which also double as day-care centres, and distributes seeds and seedlings to promote kitchen gardens and tree planting.

Grameen Bank also organises workshops in order to train members on various topics, including its operational rules and procedures, livestock and poultry care, health and nutrition, and other social issues. The total number of participants in these workshops have increased by 655 per cent over the 1985-92 period.

The sustainability of Grameen Bank depends to a large extent on its institutional development and viability, and the vital role of its head, Professor Muhammad Yunus in the growth of the organisation. With the institutionalisation of its management style, a high element of decentralisation and its emphasis on monitoring, evaluation and adaptability in decision-making innovative processes have been replicated at all levels of the bank’s administrative structure. Combined with the extensive training at the field level for new recruits and older staff based on problem-solving activity, Grameen Bank has created a cadre of dedicated professionals, who are as much motivated by the objective of helping the rural poor as by their pay and incentive structures.

The viability of Grameen Bank depends on the revenue and cost structures, as well as the assets and financial structures. While the revenue and cost structures indicate the degree of financial profit or loss, the assets and financial structures measure the expansion of assets over time, the capital adequacy and the role of internal resources in financing assets. Viability also depends on the rate of loan recovery, which is a necessary condition for profitability through high turnover of loanable funds and minimisation of default costs. Profitability, an outcome of the differences between revenue and cost, in turn, indicates the extent of financial subsidy involved in operation. However, the long term viability of Grameen Bank depends on the extent of the subsidy received from low cost funds (provided by donor agencies of different countries and the government) and its ability to operate without such subsidy.

Grameen Bank suffered losses in 1991 and 1992 only; in all other years since 1986 it has turned in profits. An analysis of the trends in profit for the period of 1986-93 shows that Grameen’s profit is very much influenced by whether or not grants received for research and development, training and monitoring and evaluation are included as part of revenue. If profit is calculated on the assumption that Grameen meets these costs from its generated revenue, then Grameen Bank has been making losses since 1987. In contrast, if operating profit is calculated without costs on these accounts and grants, Grameen Bank can be shown as a profitable organisation. This finding suggests that if institutional development were financed by donors or government, Grameen Bank could earn profit, given its cost and revenue structures.

The sustainability of Grameen Bank and its branches ultimately depends on the viability of the borrowers. This can be judged in terms of outcomes relevant to the economic and social welfare of the members as well as their drop out behaviour and loan repayment performance. The household level welfare impacts of Grameen Bank are being quantified using household and individual survey data and are not yet ready. Some aggregate indicators of borrower level viability, such as members’ drop out rate, loan default rate, and rural wage impacts are discussed in this paper.

The aggregate drop out rates of Grameen Bank members increased from about 5 per cent in 1985 to 15 per cent in 1991. This rate is higher in the case of men: it was 22 per cent in 1991, compared to 7 per cent in 1985. In contrast, the corresponding drop out rates for women were 14 per cent in 1991 and 4 per cent in 1985. Overall, the drop out rate increased annually by 17 per cent over the 1985-91 period; the average annual growth rate was 21 per cent for female members and 18 per cent for men. This suggests that the benefits must have been high enough; otherwise the membership drop out rates would have been higher.