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Grameen Bank of Bangladesh - The Grameen General Credit System

Case Details:

Case Code

:

FINC045

Case Length

:

14 Pages

Period

:

1992-2006

Pub. Date

:

2006

Teaching Note

:

Not Available

Organization

:

Grameen Bank

Industry

:

Banking

Countries

:

Bangladesh

Abstract:

The case explains Bangladesh based Grameen Bank's two microfinance models - Grameen Classic System and Grameen General System (GGS). For over two decades, Grameen Bank extended loans to poor people in Bangladesh under its Grameen Classic credit system. In 1998, the floods ravaged the country which led to many poor people default on their loan payments. This led to the need for a new, more flexible credit system. The result was Grameen General System which allowed the borrowers to remain as the member of the bank even when they were unable to pay their loan installments. The case gives an overview of the GGS and the success Grameen Bank achieved after implementing the new credit system.

Issues: » Study and compare the Classic and General microfinance models of Grameen Bank »
Issues:
» Study and compare the Classic and General microfinance models of Grameen Bank
» Examine the reasons that prompted the bank to introduce a new, more flexible credit system
» Analyze the advantages and disadvantages of Grameen General microfinance model
Contents:
Page No.
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Introduction Background Note The Grameen Classic System Need for a New System The Grameen II Credit System Basic and Flexi-Loans Savings Account Other Products Looking Ahead Exhibits

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Keywords:

SYSCO Corporation, Foodservice Distribution and Marketing, Supply Chain Management, Information Technology, Redistribution Centers (RDBC), ChefEx Program, SYSCO Uniform System (SUS), E-commerce, National Supply Chain Project, Radio Frequency Identification (RFID) System, North American Foodservice Market, Performance Food Group, Whole Foods Market Inc., Vendor Relationship

Grameen Bank, one of the oldest micro-finance institutions in Bangladesh, is a good example of how the industry is changing and growing. In 2000, Grameen Bank, began to consider how it could introduce greater client choice while ensuring credit discipline and controlling costs. This led to the emergence of Grameen II in 2002, offering deposit services to the general public, greatly expanding the range of deposit services offered to members, including the very popular 'Grameen Pension Savings'." 1

- Praful C. Patel, South Asia Regional Vice-President, The World Bank, in 2006.

"Grameen General System (GGS) is not only a powerful and efficient system, capable of providing custom-made financial services to support the economic and social upliftment of each individual borrower family, but also it frees micro-credit from the usual stresses and strains." 2

- Prof. Muhammad Yunus, Founder and Managing Director of Grameen Bank, in 2002.

Introduction

Saira Begum (Saira) became a member of Bangladesh-based Grameen Bank 3 in 1994. With the loans given by Grameen Bank, she invested in dairy cattle, and with this investment, she earned regular income. When her outstanding loan was around Tk 4 5,000, Bangladesh was ravaged by floods. Saira Begum lost heavily and was deep in debts.

She received a top-up loan from the bank, which increased the burden of weekly installments. Unable to repay the money she owed the bank, she stopped attending the mandatory weekly meetings of the bank, and she was not able to obtain any more loans. Later, the branch manager of Grameen Bank approached her and explained to her a new loan offering of the bank called flexi-loan, which required her to pay only Tk 25 a week as installment - a smaller amount than her earlier installment. Saira began paying the installments regularly and repaid her entire loan. This made her eligible for a fresh loan, and using this loan she started a small shop. She had plans to send her school-going son to college using the education loan provided by Grameen Bank.

Several women like Saira were able to improve their living conditions because of Grameen Bank,
Several women like Saira were able to improve their living conditions because of Grameen Bank, which provided
them small loans. For over 25 years, Grameen Bank has been following the Grameen model of micro-credit, later
renamed the Grameen Classic System (GCS) to extend loans to the poor in the country.
Though the system was successful, it was criticized for its standardized rules, which were strictly enforced. The
GCS rules required a strict adherence to repayment schedules. Once poor borrowers failed to pay their
installments on time, they were not eligible for any further loans.
In order to address the drawbacks of GCS, Grameen Bank introduced a new credit system called Grameen
General System (GGS) popularly known as Grameen II.
Elaborating on the need for the new system, Muhammad nus (Yunus), Founder and Managing Director of
Grameen Bank said, "The system (GCS) consisted of a set of well-defined standardized rules. No departure
from these rules was allowed.

Once a borrower fell off the track, she found it very difficult to move back on, since the rules which allowed her to return, were not easy for her to fulfill. More and more borrowers fell off the track.

Then there was the multiplier effect. If one borrower stopped payments, it encouraged others to follow." 5 The changes were brought out in the form of new products, flexible loans and repayment schemes for borrowers who were unable to pay their loans on time, deposit services, pension services, etc.

The new system was completely demand driven; the products were tailored to the borrower's needs. The new flexible system allowed the borrowers to decide on the amount, term and payment schedule of the loan. GGS brought non-members into its fold by allowing them to deposit money and use other services.

Background Note

Yunus completed his PhD in Economics from Vanderbilt University in Nashville, Tennessee. He became the Head of Economics department in Chittagong University in Bangladesh. In 1971, Bangladesh got its independence. The country was hit by famine in 1974.

During this period, Yunus came face to face with the problems faced by poor women in Bangladesh when he visited Jorba village, where he saw poor women making bamboo stools. They were in the clutches of poverty and were forced to sell the products they made to moneylenders at very low prices. He extended a small loan of

US$ 27 to US$ 42 to each of the women. They repaid the amount to the moneylenders and thus began the journey of Yunus and Bangladesh Grameen Bank.

When Yunus approached the banks in Bangladesh, asking them to lend loans to the poor, they were not willing to extend credit as the poor were not considered to be creditworthy and did not have any collateral to offer

Excerpts

The Grameen Classic System

Organizing people into groups of five members each and bringing together a few such groups to form a center was the keystone of GCS. Under the system, group liability replaced the collateral that was required by the banks to extend loans. The group had members from a homogeneous background, who knew each other, but were not related to each other. Six to ten such groups formed a center and each village had one or two centers. A branch of Grameen Bank, with branch manager and employees covered 15 to 20 villages, with the covered area not exceeding 50 square kilometers

Need for a New System

The floods that ravaged Bangladesh in 1998 devastated most of the country, and several places
The floods that ravaged Bangladesh in 1998 devastated most of the country, and several places were
submerged under water for over two months. The floods affected more than 1.2 million Grameen members and
most of the borrowers were unable to repay their loans. The bank relaxed the terms of repayment and tried to
help the borrowers rebuild their lives by providing additional loans. It was not long before the borrowers faced the
burden of paying higher installments, which was beyond their means. The repayment levels decreased and
several borrowers stopped attending the weekly meetings. In order to cover the defaults, Grameen Bank
obtained Tk 2 billion loan from the commercial banks and raised Tk 1 billion through bonds
The Grameen II Credit System
One of the major changes that was brought through GGS was that the group liability system was discontinued
and the individual liability system was adopted. The loan of each member was secured against her word. Against
the previous practice of providing the loans to only two of the needy people in the group, the loans could be
provided to all the members of the group. The first basic loan provided to the new members was Tk 5,000; fellow
members could recommend for a higher or lower loan amount. The final decision on the amount to be disbursed
was made by the Kendra Manager
Basic and Flexi-Loans

GGS consisted of one prime loan product called the basic loan. It provided flexibility to design the loan according to the requirements of the borrower. The term of the loan could range from 3 months to 3 years. When the borrowers had developed their skills, commitment and discipline for conducting small businesses and expanding existing businesses, larger loans were provided. If the members were regular in repaying their basic loan, saving, and attending the weekly meetings regularly, they could opt for business expansion or special production loans. The borrowers were also allowed to prepay the installments and loans

Savings Account

Since its inception, Grameen Bank had maintained a group fund system. However, under GGS, the group fund and the group joint account were done away with and the borrowers were required to open two accounts, a personal savings account and special savings account.

When the loan was taken, 2.5% of the amount was deposited into the personal savings account. The borrowers were also required to deposit a minimum amount every week depending on the value of the loan taken. For loans upto Tk 15,000 the weekly savings was Tk 5 and for loans of Tk 100,000, the weekly saving was Tk 50.

The borrowers could also deposit more money if they wished to. The minimum deposit amount could also be determined for a center in consultation with the Kendra Manager. Borrowers were free to withdraw money from the personal savings account at any point of time, provided they fulfilled the obligations related to the loan repayment schedule

Other Products

Insurance: Another new concept introduced in GGS was loan insurance. According to this scheme, on the last day of the financial year, borrowers were required to deposit a small amount in loan insurance savings account.

The amount to be deposited was equivalent to 3% of the total outstanding amount (loan and interest) on the last day of the year. If the outstanding amount was higher in the next year, 3% of the extra amount was to be deposited. In the event of the death of the borrower, the outstanding loan amount was paid by the insurance fund. The family of the deceased also received amount equal to the total savings in the borrower's insurance

account.

savings

Fixed Deposits: GGS also offered fixed deposit services to its members. Lump sum amounts deposited for one year were paid interest at 8.75% per annum in the year 2003. For a longer term, interest was paid at 9.5% for a period greater than one year

Looking Ahead The introduction of Grameen II had a positive impact on the membership and
Looking Ahead
The introduction of Grameen II had a positive impact on the membership and portfolio size of the bank. The
number of active clients grew to over four million by 2004 and to 6.2 million by 2006 from 2.3 million in 2002. Due
to the introduction of new savings products, deposits grew from US$ 163 million in 2002 to US$ 450 million by
the end of 2005. As of May 2006, total deposits were at US$ 506.67 million, with members' deposits at US$
321.05 million and non-members' deposits at US$ 185.62 million
Exhibits
Exhibit I: Key Statistics of Grameen Bank (April 2006)
Exhibit II: Grameen Bank's Organization Structure
Exhibit III: Sixteen Decisions of Grameen Bank
Exhibit IV: Features of Loans Extended under GCS
Exhibit V: Grameen Micro Credit Highway
Exhibit VI: Grameen Bank - Struggling Members' Program