Banker to the Poor (24 page)

Grameen Bank has come a long way since it began its journey in the village of Jobra in 1976. During this quarter of a century it has faced many operational and organizational problems and gained a lot of experience through its successes and failures. We have gathered many years of experience with the borrowers at our side. Borrowers of Grameen Bank at present own 93 percent of the total equity of the bank; only the remaining 7 percent is owned by the Bangladeshi government. The total number of borrowers is 2.6 million, 95 percent of whom are women.

Grameen Bank has 1,181 branches, works in 42,127 villages, and has a staff of 11,777. The total amount of loans disbursed by Grameen Bank, since inception, is 174.78 billion takas ($3.9 billion). Out of this, 161.33 billion takas ($3.6 billion) has been repaid, with the recovery rate standing at 98 percent.

Grameen is especially proud of its self-reliance. It finances 90 percent of its total outstanding loan of 13.45 billion takas from its own fund and the savings from its depositors, over 82 percent of whom are its own borrowers. Grameen does not anticipate any need to solicit donor money or even take new loans from internal or external sources in the future. In 1995, Grameen decided not to request any more funds from donors. The last installment of donor funds was received in 1998. Grameen's growing amount of deposits should be more than enough to repay its existing loans and run and expand its credit program from now on.

Grameen Bank borrowed 1 billion takas from the Central Bank of Bangladesh and 2 billion takas from commercial banks immediately after the devastating flood of 1998 to give fresh loans to the borrowers, most of whom lost their assets. All these postflood loans have been fully paid off. In addition, it has paid off all other loans that became due so far.

Grameen Bank has made a profit every year since it came into being except in 1983, 1991, and 1992—proving that businesses with social objectives can and do work. (Since the bank's operations began in 1983, it did not make a profit that year. The years 1991 and 1992 were years of massive rehabilitation for Grameen Bank members after a devastating cyclone hit Bangladesh in April 1991. The cyclone killed 150,000 people and affected hundreds of thousands of Grameen borrowers who lost their assets and livelihoods and were unable to pay back their loans on time.) It also publishes its audited balance sheet every year, audited by two Bangladeshi audit firms of international repute.

Grameen Bank provides three types of loans: income-generating loans (with an interest rate of 20 percent), housing loans (with an interest rate of 8 percent), and higher education loans for the children of Grameen families (with an interest rate of 5 percent). All interests are simple interest, calculated on a declining balance method. This means that if a borrower takes a loan of 1,000 takas and pays back the entire amount within a year through weekly installments, she'll pay a total amount of 1,100 takas (i.e., 1,000 takas in principal plus 100 takas as interest for the year).

Grameen believes that education is one of the primary components for moving oneself out of poverty. If current borrowers can educate their families and make their children better prepared to compete in the future, there will be a sustainable improvement for multiple generations. Students who succeed in reaching institutions of higher education are given loans covering tuition, living costs, and other school expenses. So far 466 students have received higher education loans. They are studying at various universities, medical schools, engineering schools, and other professional institutions. Scholarships—with priority given to girls and young women—are earned by the children of Grameen members every year. This encourages them to get better grades in school. An average of 3,700 children at various levels of education receive these scholarships every year. This is a means of in vesting in the future of our members.

Grameen Bank launched a program in 2001 to convert its operational methodology into a newer version called the Grameen Generalised System (GGS, or Grameen Bank II). (We now refer to the earlier version as the Grameen Classic System, or GCS.) We sat down in April 2000 to design the new system, part by part, piece by piece. We then test-piloted it immediately in a few branches. We fine-tuned the design, tried again in a larger number of branches, and reworked it. By the beginning of 2001, we had come up with a system that we all liked. All 12,000 staff members participated very actively in designing the product at all stages of its development.

While we were designing and debugging the system, we were deeply concerned about how we would manage the transition from the Grameen Classic System (GCS) to GGS in 41,000 villages without subjecting hundreds of thousands of illiterate borrowers to a large shock and messing up the accounts in 1,175 branches. The transition was very carefully choreographed. We initially put it into action in March 2001. It was a gradual process. By April 2002, two years after we began, Grameen Bank II had emerged. The last branch of Grameen Bank to switch over to Grameen II did so on August 7, 2002. The new Grameen Bank II is now a real functioning institution. This second-generation micro-credit institution appears to be much better equipped than the earlier version.

The central assumption underlying GGS remains the same as it was behind the Grameen Classic System—the firm belief that poor people always pay back their loans. On some occasions they may take longer to pay than originally stipulated, but repay they will. A credit institution dedicated to serving the poor should not get worried the minute a borrower fails to adhere to a strict schedule. Circumstances can befall a poor person over which they have no control. Since the borrower is paying additional interest for the period that she is delayed in repayment, there should be no problem on the institution's part. Micro-credit programs should not fall into the logical trap of conventional banking firms and start looking at their borrowers as some kind of time bombs, ticking away and waiting to create big trouble on prefixed dates.

We wanted to simplify life for our borrowers with GGS. GGS has been built around one prime loan product—called the
basic loan
. The basic loan comes with an exit option. It offers an alternative route to any borrower who needs it, without making her feel guilty about failing to fulfill the requirement of the basic loan. This alternative route is provided through a
flexible loan
.

A flexible loan is simply a rescheduled basic loan, with its own separate set of rules. I have described the basic loan as a "Grameen micro-credit highway." As long as the borrower keeps her schedule, she moves forward uninterrupted, with ease and comfort, on the micro-credit highway. She can pick up speed according to the rules of the highway. If she drives well she can shift to higher and higher gears. In other words, on the Grameen highway, a borrower can routinely upgrade her loan size at each cycle of the loan. This is done on the basis of predetermined rules. She knows ahead of time how much of an enhancement in loan size is coming and can plan her activities accordingly. But if a borrower faces engine trouble (a business slowdown or failure, sickness, family problems, accidents, thefts, natural disaster, etc.) and cannot keep up with the highway speed, she has to quit the highway and take an exit. This detour is called a "flexible loan" or "flexi-loan." It allows her to move at a slower speed more appropriate to her situation. She can reduce the installment size that she can afford to pay by extending the loan period. Taking a detour, however, does not in any way imply that she has changed the objective of her journey. Her immediate goal is to overcome her problems and take as short a detour as possible. A borrower may be lucky and succeed in getting back to the highway (i.e., the basic loan) quickly, or she may have sustained problems and the best she can do is to move from one detour to the next (i.e., moving from one flexi-loan to the next flexi-loan, working out an easier repayment schedule than the previous one), delaying reentry onto the highway. Under the new system, the flexibility is something that the borrower is entitled to, and rescheduling a loan is not seen as an offense or something to be disapproved of. This gives the borrower a dignified way to deal with any problem she may face in repaying her loan.

One big disincentive for a borrower to take the flexi-loan detour is that the moment she exits from the basic loan highway, her loan ceiling (i.e., the maximum amount that she can take out as a loan, built up on the basis of her performance over the years) gets wiped out. When she reenters the highway after completing her detour, her loan ceiling will have to be reconstructed. This will be somewhere between her entry-level loan ceiling and the loan ceiling she enjoyed immediately before taking the detour.

There are many exciting features in GGS, but I think removing tension from micro-credit by allowing the system to be flexible and permanently establishing full dignity to the poor borrowers are the two most important features of them all. Now both sides in the micro-credit system, the lender and the borrowers, can
enjoy
micro-credit, rather than creating occasional nightmares for each other.

GGS has also created a methodology that can provide custom-made credit to a poor borrower. GGS allows loans of any duration, such as three, six, or nine months or any number of months and years. GGS allows a staff member to be creative. He can design his loan product to make it the best fit for his client in terms of duration, timing, scheduling the installment, and so on. The more a staff member becomes a creative artist, the better music he can produce. Grameen can identify the levels of creativity among its staff, and GGS allows space for this staff to grow.

GGS requires all borrowers with loans above 8,000 takas ($138) to contribute a minimum of 50 takas ($0.86) each month to a pension savings account. After ten years a borrower will receive a guaranteed amount, which is almost double the amount she has put in during those 120 months. This has become an amazingly attractive feature of GGS for the borrowers. Many are coming forward to save more than 50 takas each month. There are borrowers who are saving 500 takas per month. While it has become popular with the borrowers, it is generating a huge cash inflow for the bank. It is now bringing in over 100 million takas ($1.75 million) each month as deposits on pension savings accounts. Grameen Bank can now rest assured that it will have enough of its own money to expand its lending operation in the future. By the same token, branches will now have enough money to carry out their lending programs with their own deposits. All Grameen branches can look forward to becoming self-financed. While the institution moves toward financial self-reliance, the borrowers also move to financial self-reliance as old age approaches. They can have monthly income at retirement out of the accumulated savings in the pension fund. For a poor woman, it is very comforting news.

GGS emphasizes receiving deposits from borrowers and non-borrowers. A variety of savings products has been incorporated into the system. The total amount of borrowers' deposits (i.e., savings) today accounts for 70 percent of the total outstanding loans of Grameen Bank. And this is after GB has paid back 3.3 billion takas ($60 million) of its loans to the Central Bank, local commercial banks, and the foreign lenders, which became due for repayment during the past two years.

Bangladeshi borrowers always worry what will happen to their debt if they die. Will their family members pay it? They believe that if their debt remains unpaid after their death, their soul cannot rest in peace. Inclusion of a loan insurance program in GGS has made them very happy. The insurance program is extremely simple. On the last day of every year, the borrower is required to put a small amount of money in a loan insurance savings account. It is calculated on the basis of the outstanding loan and interest of the borrower on that day. She deposits 2.5 percent of the outstanding amount. If a borrower dies any time during the next year, her entire outstanding amount is covered by the insurance fund. This money is provided by the interest income of the loan insurance savings account. In addition, her family receives back the amount she saved in the loan insurance savings account. Borrowers find it unbelievably generous. Everybody loves it.

Total deposits under loan insurance savings now stand at 321.55 million takas ($5.55 million). Since this insurance program was introduced in 2001 under Grameen Bank II, 4,215 borrowers have died, and total outstanding loans and interest of 25.99 million takas left to be repaid was covered by the bank under this plan. Each year, families of deceased borrowers of Grameen Bank receive a total of 8–10 million takas in loan insurance benefits. Each family receives up to a maximum of 2,000 takas. A total of 61,653 Grameen borrowers have died since 1983. Their families collectively received a total amount of 124.86 million takas ($3.04 million). Borrowers are not required to pay any premium for this insurance. Borrowers receive this insurance coverage simply by being a shareholder of the bank.

I have never seen Grameen staff charged with so much enthusiasm and energy than after the introduction of GGS. They were all captivated by the idea of creating Grameen Bank II. The staff's energy level is now at its peak. Every time one talks to staff members they appear as if they are having the most fun of their lives working for Grameen. You just can't stop them.

Creating Five Star branches really caught their imagination. Grameen Bank provides color-coded stars to branches for 100 percent achievement of a specific task. Five stars indicate a branch has reached the highest level of performance. At the end of 2002, branches showed the followed results:

 

• 696 branches, out of the total of 1,178 branches, received green stars for maintaining a 100 percent repayment record.
  
 

• 437 branches received blue stars for earning a profit. (Grameen Bank as a whole earns a profit because of the revenue it generates from the interest payments made by the branches on the funds borrowed from the head office.)
  
 

• 213 branches earned violet stars by generating a surplus of deposits over the loans outstanding in those branches. These branches not only carry out their business with their own funds, but also contribute their surpluses to meet the fund requirement of deficit branches.
  
 

• 61 branches have applied for brown stars for ensuring an education for 100 percent of the children of their Grameen families. After the completion of the verification process, their stars will be confirmed.
  
 

• 21 branches applied for red stars, indicating that they have succeeded in taking 100 percent of their borrowers' families over the poverty line. The star will be confirmed only after the verification procedure is completed.
  
 

• 772 branches (i.e., two-thirds of all branches) received a total of 1,346 stars, an average of 1.74 stars per branch.