ASPECTS OF MICROFINANCE SYSTEM OF GRAMEEN BANK OF BANGLADESH

Jamal Nazrul Islam, Haradhan Kumar Mohajan, Rajib Datta, Int. J. Eco. Res., 2012, v3i4, 76-96
ISSN: 2229-6158

ASPECTS OF MICROFINANCE SYSTEM OF GRAMEEN BANK OF
BANGLADESH
Jamal Nazrul Islam
Emeritus Professor, Research Centre for Mathematical and Physical Sciences,
University of Chittagong, Bangladesh
Haradhan Kumar Mohajan
Premier University, Chittagong, Bangladesh. E-mail: haradhan_km@yahoo.com
Rajib Datta
Department of Finance, Faculty of Business Studies, Premier University,
Chittagong, Bangladesh. E-mail: supta_part@yahoo.com
________________________________________________________________________

Abstract
The microfinance system of Grameen Bank is a revolutionary tool to eradicate poverty of the rural people
especially the women of Bangladesh. At present GB is the largest microfinance bank in Bangladesh and
probably the biggest microcredit organization in the world. It provides loans to assetless and landless poor
people whom no commercial bank give loan. Microcredit is the most useful and popular financial system in
the world to face financial crisis of the poor people. Grameen Bank loan distribution has risk of default and
sometimes the loans are used even dowry which is crime against women right. The rate of interest in
Grameen Bank is very high and due to high interest rate the poor women can not use the loan in a high
profitable business to bear this burden, so some of the borrowers lose lands and assets to pay the loan. The
paper discusses both advantages and drawbacks of Grameen Bank with mathematical calculations in some
details.
Keywords: Grameen Bank, Microfinance, Joint liability, Loan, Risk of default
________________________________________________________________________

INTRODUCTION is a difference between them.
The aim of Grameen Bank (GB) is to Microcredit refers to the act of providing
reduce poverty in both rich and poor the loan. On the other hand microfinance
countries. It gives loan to those people is the act of providing these same
whom the government or any borrowers with financial services, such
commercial bank will not give loan as savings institutions and insurance
facility. Both rich and poor countries of policies (Sengupta and Aubuchon 2008).
the world microfinance tries to improve Bangladesh is a developing country with
access to loans and to saving services for a vast rural society which is about 90%
low-income, low-wealth people which is of the total population. The majority of
the fastest-growing and best-known tool the rural population, particularly women,
to combat poverty. The Nobel Prize is subjected to severe poverty, gender
committee awarded the 2006 Nobel inequalities and unemployment. Due to
Peace Prize to Dr. Muhammad Yunus negligence of the rural development by
and the Grameen Bank for their efforts the government and rich population the
to reduce poverty in Bangladesh. In the financial condition of the poor in the
USA the number of microfinance villages remain unchanged after the
organizations and their budgets has independence of the country in 1971.
grown exponentially in the past decade The GB is a well-known institutional
(US Newswire 1999, Meyerhoff 1997). framework that has achieved
The terms microcredit and microfinance considerable success in improving the
are often used interchangeably but there socioeconomic conditions of the rural

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poor, particularly women, in Bangladesh 1994a,b). At first GB was extended to
(Sarker 2001). whole of Tangail district (a district of
Dr. Muhammad Yunus, a Professor in Dhaka division) in 1979 with the
Economics of the University of financial support of Bangladesh Bank
Chittagong, Bangladesh, has founded the (Central bank of the country) and some
GB. The country was slowly recovering other nationalized commercial banks. In
from a vicious war of independent in 1981 Yunus was preparing to test the
1971 which had destroyed its new lending model on a large scale and
infrastructure and its productivity and wanted to open dozens of branch offices
murdered much of its intelligentsia. The in five rural districts in addition with
damage caused by the war had been previous branches. The commercial
amplified by the famine of 1974 and banks declined Yunus’ initial request for
suffering of human on a vast scale could capital. So that he went to Ford
be witnessed in any town or village of Foundation’s office in Dhaka and asked
Bangladesh (Hulme 2008). He watched for an $800,000 loan guarantee fund as
the people of Bangladesh to starve in the security against commercial bank
famine of 1974 (Yunus 1998). He lent an lending. After careful appraisal by senior
average of $0.64 to a bamboo weaver staff, in 1981 Ford agreed to the request
and to 41 others in various purposes. The and deposited the requested funds in a
borrowers repaid their loans and GB account at London as a framework
improved their lots. After this success he for offering reflections on current
gave loan to some other persons but few debates within US philanthropy on
of them did not repay the loan. He accountability, support for innovation,
thought that this was because they had risk taking and impact. Ford’s loan
either used the money unwisely or were guarantee fund leveraged commercial
not trustworthy. He began to experiment bank lending to GB (Lawry 2008).
with ways of (i) approving and After that success in Tangail, the project
supervising loans, to ensure they would was further extended to several other
be used for productive investments, and districts of Bangladesh such as
(ii) selecting trustworthy clients and Chittagong, Dhaka, Rangpur and
managing them, so that they would Patuakhali. In 1983 it was transformed
repay their loans (Hulme 2008). He into an independent bank by a
made a brilliant idea for the best solution government ordinance, with the name
to help the poor out of their poverty, Grameen Bank. In 1983, the government
which then grows over the world. It provided 60% of the initial paid up share
initially began in the village Jobra near capital of the bank and the rest 40%
the University of Chittagong, procured by the borrowers of the bank.
Bangladesh and some of the neighboring In 1986, the government share capital
villages during 1976-79. was reduced to 25% and the rest was
Dr. Yunus has observed that commercial from the borrowers. In 29 June 2012, Dr.
banks had in-built constraints and are Yunus expresses that the share capital of
aimed only at those who are already well government is only 3% and major 97%
off. He contemplated an alternative from the members of GB (The Prothom
institutional framework that could be Alo, 29 June 2012).GB is the only an
used to raise the wellbeing of organization that provides interest free
impoverished sections of society (Yunus loans to the beggars.


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At present GB is the largest micro- The sectoral share of general loans in
finance bank in Bangladesh and 1994 was 35% for agriculture, 16% for
probably the biggest micro credit processing and manufacturing, 26% for
organization in the world. In the livestock and fisheries, and 23% for
commercial bank the clients have to other activities such as trade, commerce,
come for services in banks but GB and peddling.
officials go the clients which is a new Successes and potential benefits of the
system in microfinance banking sector. GB micro credit system are as follows:
It is known worldwide for its innovative • it exhibits an average of 97%
credit delivery to the rural poor (95% are repayment rates,
women). It selects assetless, landless • the members of GB enjoy an average
poor people of Bangladesh, focuses on household income at least 25%
the poor women, and provides credit higher than nonmembers,
delivery system to meet the diverse • the number of GB members living
socio-economic development needs of below the poverty line has rapidly
the poor. Many believe that GB’s decreased,
lending has been successful because of • the landless benefit most, followed
its joint liability loans have induced by marginal landowners,
borrowers to provide mutual assistance • there has been a shift from
in hard times (Besley and Coate 1995). agricultural wage labor to self-
But Rai and Sjöström (2001) argue that employment and petty trading a shift
joint liability is not enough to efficiently which results in an indirect positive
induce borrowers to help each other; it is effect on the employment and wages
also necessary to ask borrowers to make of other agricultural wage laborers,
reports about each other. and which has impacted poverty
GB adopted some social beneficial alleviation and economic
works such as group based lending, the improvement at a national level, and
collateral free lending system, and peer • group savings have proven as
group monitoring system. The successful as group lending.
adaptation and learning practice such as
flexibility of obtaining a loan, a housing THE MODEL OF GB
loan with lower interest rate, mandatory GB is purely a bank that provides
and voluntary savings were the most banking services only to the poor. It
significant issue. GB has computerized extends credit to the poor to invest in
accounting and monitoring system with productive sectors such as processing
its 2,552 branches out of 2,558 and manufacturing, agriculture and
(Grameen Bank 2009). By integrating forestry, livestock and fisheries, services
group-based lending, mandatory savings and trade. It is exclusively for poor
and insurance, repayment rescheduling people and it is directly owned by them
in case of disasters, and similar other as well. The government of owns 10% of
schemes, it has been able to minimize GB and has three nominated members
both behavioral and material risks of on the Board of Directors. It enjoys full
lending. Among the four major types of autonomy in discharging both its policy
loans, the general loan dominated and operational responsibilities. GB
lending, followed by housing loans, members’ contribution to net household
technology loans, and collective loans. income is more than 50% and more than


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half of the women surveyed have been 3. We shall not live in dilapidated
able to pull their families out of poverty houses. We shall repair our houses
(Hossain 1988, Todd 1996). The status and work toward constructing new
of women has been improved through houses at the earliest.
their fruitful participation in GB 4. We shall grow vegetables all the
activities. If a woman can escape out of year round. We shall eat plenty of
the poverty cycle, then the woman them and sell the surplus.
focused on asset building. Ahmed (1985) 5. During the plantation seasons, we
observed that physical violence and shall plant as many seedlings as
other verbal abuse against women possible.
decreased as a result of GB activities. 6. We shall plan to keep our families
The main objectives of GB are as small. We shall minimize our
follows (Barua 2006, Sarker 2001): expenditures. We shall look after
• to extend the banking facilities to the our health.
poor people, 7. We shall educate our children and
• to eliminate the exploitation of the ensure that they can earn to pay for
money lenders who pay loan with their education.
high interest, 8. We shall always keep our children
• to create opportunities for self- and environment clean.
employment for the vast unutilized 9. We shall build and use pit-latrines.
and underutilized manpower resource 10. We shall drink tube-well water. If
of rural areas of Bangladesh, it is not available, we shall boil
• to bring the deprived people within water or use alum.
the folds of some organizational 11. We shall not take any dowry in our
format which they can understand and sons’ weddings, nor shall we give
operate, and can find socio-political any dowry in our daughters’
and economic strength in it through weddings. We shall keep the centre
mutual support, and free from the curse of dowry. We
• to reverse the vicious circle of ‘low shall not practice child marriage.
income, low savings, low investment, 12. We shall not inflict any injustice
low income’, hanging it into an on anyone, nor shall we allow
expanding system of ‘low income, anyone to do so.
credit, investment, more income, 13. For higher income, we shall
more credit, more investment, more collectively undertake bigger
income’ (Rahman 1993). investments.
14. We shall always be ready to help
The sixteen decisions of GB are as each other. If anyone is in
follows (Shams 1995): difficulty, we shall all help him.
1. We shall follow and advance the 15. If we come to know of any breach
four principles of Grameen Bank: of discipline in any centre, we shall
Discipline, Unity, Courage, and all go there and help restore
Hard Work in all walks of our discipline.
lives. 16. We shall introduce physical
2. We shall bring prosperity to our exercise in all our centers. We shall
families. take part in all social activities
collectively.


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organizations. Various activities of the
GB’s organizational structure is highly bank are organized and implemented by
decentralized. The field officers are four tiers of administrative set-up such
encouraged to send monthly reports as branch office, area office, zonal office
directly to the Managing Director. He and head office. The branch offices are
reviews these and publishes significant the lowest operation units of GB which
issues, concerns, and suggestions are located in the villages. One branch
identified by the officers in GB’s serves a cluster of 120–150 centers and
internal monthly magazine, which it has a manager, six or seven workers,
reaches all bank officials and workers two to three trainee workers and an
(Auwal 1996). About GB Dr. Yunus accountant. The branch offices select
expresses that the “most distinctive and organize the target clienteles,
feature of Grameencredit is that it is not supervise credit operations, and
based on any collateral, or legally recommend sanction of loans. An area
enforceable contracts. It is based on office supervises about 10 to 15 branch
trust, not on legal procedures and offices which are assisted by program
system.” officers. The area manager works under
the supervision of the zonal office that is
MICROCREDIT SYSTEM OF GB located in the district headquarter which
Microcredit is a very effective is at the top of the hierarchy at the field
instrument to empower the poor level. A zonal manager supervises about
(especially to women). It is cost- 8 to 10 area offices. The zonal manager
effective and sustainable, creates self- is responsible for handling accounts,
employment for the most poor and managing funds, and monitoring,
opportunity to move out of poverty, evaluating and supervising the social
builds on trust and mutual co-operation, development programmes. The head
dedicates to establish credit as a human office of GB is situated in the capital city
right, and the poor do not have to come Dhaka. It is responsible for monitoring
to the bank but the bank goes to the and evaluation, research and
poor. Grassroots organizational development, supervision of training,
development is an integral part of GB’s and similar activities which are benefited
credit program which helps in building from access to information from
up viable grassroots units in the form of different operational areas. The Chief
groups and centers to promote strong Executive of GB is the Managing
group solidarity. Director. He is responsible for the
overall implementation of the policies of
STRUCTURE AND CAPITAL OF GB and has to maintain close contact
GB with various departmental heads in the
The Board of Directors of GB consists head office and zonal managers to assist
of 13 members of whom 9 are elected in formulation and change of policies.
from among the borrower shareholders The features of GB are as follows
and the rest 4 are appointed by the (Hulme 2008):
government of Bangladesh. This board • lend to poor rural women, as they
approves bank policies and serves as the were less likely than men to use
link between the bank, the Ministry of loans badly and were more reliable
Finance, and other government for repayment,


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• organize women into cells of five million) and the balance of deposits is
which took collective responsibility Tk.35.49 billion ($506.66 million)
for each other’s loans, (Barua 2006). By the end of February
• establish centers where six cells 2008 GB had 7.4 million clients and
consists of 30 women met at a set outstanding loans of $545 million
time each week, to apply for loans (Hulme 2008).
and make repayments,
• charge a higher rate of interest than WORKING SYSTEM OF GB
government schemes and NGO loans Five new members form a group and 5
programmes, to 8 groups form a centre, and all
• require clients to make compulsory members in the centre meet with a loan
micro savings each week and to officer weekly and members must sit in
make promises about their social straight rows, salute, chant, and
conduct, sometimes perform exercises (Hashemi
• simple, standardized products that 1997). The chant related to praise small
required regular, small repayments, families, prohibit dowry and child
and marriage, promote gardens, admire
• recruiting and training bright, young education, and encourage members to
graduates to administer services to drink clean water and to use sanitary
minimize corruption. latrines. Each borrower has learned to
GB has started from one village in 1976 sign their names, and memorize a set of
and at present it is covering to 68 vows to self-improvement and save
thousand villages (all the villages of $0.02 a week. A group can have only
Bangladesh). It has provided services to one person from any particular
42 poorest borrowers in 1976. In 1983 household and relatives must not be in
GB had established as a bank with the same group. Groups have either male
36,000 borrowers and a portfolio of $3.1 or female members but not both. Each
million. In 1997 GB had a portfolio of group elects a chair, and each centre
$260 million and 2.3 million members, elects a chief. New members must also
most of them were very poor, more than buy a share of stock in GB for 100 taka
90% of them were women, and all of ($1= Tk.48.5 in December 1998).
them from rural areas. In December The group members select a chairperson
1999 the branches of GB became about and a secretary, and these positions
1,149 which were operating in 39,706 rotate cyclically among the members on
villages with 67,691 centers. Also there a yearly basis so that all members can
were 2,357,083 members, of which learn the responsibility of these
2,234,181 were female and 122,902 positions. The chairperson’s work is to
male (Grameen Bank 1999). maintain discipline in the group and for
The first disbursement was Tk.856 ($27) supervision of loan utilization by the
and in 2006, it covers 6.23 million members. All members in the centre
borrowers through 2,121 branches of meet with a loan officer weekly. The
whom 96.52% are women and the group chairpersons elect the chief and
cumulative disbursement is Tk.276.54 the deputy chief of the centre for a one-
billion ($5.52 billion). The recovery rate year term. They are required to ensure
of the bank is 98.55%. The outstanding attendance at the general meetings,
amount is Tk.31.13 billion ($444.39 payment of installments, and overall


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discipline of the centre members. The sizes are modest, ranging from Tk.3,000
members promise to repay but some ($75) to Tk.10,000 ($250) and no
break their promises. If any member collateral is required for a loan, and the
fails to repay the loan then other borrowers invest the loan in the area of
members of the group must pay the their choice. The group chairperson and
amount of the defaulter and the group is bank workers monitor borrowers to see
banish if they fail to repay the full loan whether they are utilizing the money
at the end of the year and will not find properly (Sarker 2001). Borrowers who
loan in future which is called joint have paid most of their debts have
liability by the GB rule. The safe incentives to make sure that their peers
borrowers who repay the loan regularly also repay on time. If the GB fails to
have to subsidize risky borrowers of the collect the entire loan with interest
group who are default. But the GB never within one year it may suspend all
safe a sincere borrower from a risky one disbursement at a centre until all debts
and end of the week the GB officer takes are up-to-date. Then the officers may
repayment from the chairperson. also scold the women or detain them in
Sometimes the chairperson has to pay the centre longer than normal which
full repayment. If the subsidize rates are shames women and may subject them to
sufficiently high, safe borrowers are the wrath of their husbands when they
unlikely to apply for a loan, because they finally are released (Rahman 1999b).
face heavy loss by taking loan from GB. The new borrowers get very small loans
Joint liability at GB is more subtle than and the amount increases gradually
the popular perception and more depending on creditworthiness. After
complex than the theory. But Rai and returning previous loan GB offers bigger
Sjöström (2001) show that joint liability loans such as housing loans with bigger
is not enough to efficiently induce disbursements, longer terms, and lower
borrowers to help each other (discusses interest rates. But housing loans provide
later). Such cross-reporting is used by women with legal rights to the land and
the GB at village meetings where loan the house (Islam et al. 1989). Later GB
repayments are collected (Rahman made a quantum leap to loans for
1999a). education expenses and for cell phones
Most formal lenders require assets such (Zwingle 1998). GB provides loans to
as land, houses, or bank balances to the poor women for buying Grameen
avoid risks which also help to take loan mobile phone and women do business by
in future. As a result most borrowers offering mobile services in the rural
repay because they want to preserve areas that have not been linked to the
their future access to loans (Schreiner nationwide telecommunication schemes,
1999). To avoid risk GB applies as so the poorest women are able to raise
techniques such as 2 members get loans income and savings (Mair and Schoen
first, if they pay the installments 2007).
regularly during the observation period GB has four types of forced savings,
of 6–8 weeks, 2 more members get loans where saving is compulsory and
one month later and after one more withdrawals are restricted but members
month, the last member, the chairperson can borrow against in emergencies and
receives a loan. Loans have to repay GB calls it emergency fund (Morduch
within one year (Hashemi 1997). Loan 1999a, Khandker, Khalily and Khan


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1995). The first two types are not really strengthen their support networks for
savings at all but rather fees which when various troubles strike.
members will never get back. After As the clienteles GB are from the
taking their first loan each member must impoverished part of society, it intends
pay $0.01 each week to support schools to provide training on health and
(where members learn rules of loans and nourishment and creates consciousness
payments of GB) run by the centre. They among its borrowers regarding the tree
must also pay 0.5% of disbursements in plantations and clean environments. It
excess of $20 into a fund used to cover offers seeds of vegetables and fruits to
losses from default. The last two types of its borrowers and motivates the
forced savings are real savings. borrowers for making and developing a
Members must deposit 4 cents each kitchen garden in order to increase the
week into personal savings with interest daily basis income of borrowers
8.5%, and withdrawals are unrestricted. (Hossain et al. 2001).
In addition, 5% of each disbursement GB realizes that besides income and
goes to the group fund with same production risk, lack of financial and
interest 8.5% and makes loans from the social discipline is an important source
group fund after floods and other natural of poverty. It encouraged planting trees,
calamities. Members cannot withdraw growing kitchen gardens, raising small
their savings in the group fund until they families, and building houses and
leave GB or until they have ten years of sanitary latrines. It mobilizes the poor
membership. But a member can borrow into groups for training and
from the group fund for consumption at disseminating information about
times of sickness or social ceremony. contraceptives, children’s education,
GB manages the emergency fund for use health and nutrition, and other
as insurance against potential default socioeconomic indicators of
because of death, disability, or other development. Its objective has become
misfortunes. This fund is also used to to empower women by enabling them to
provide life accident insurance to all undertake independent income-earning
group members, repay bad debts, and activities (Khandker 1996). GB
undertake activities that improve the intervention has helped develop happy
health, skills, education, and investment partnerships between husband and wife
opportunities of group members. in terms of decision making regarding
GB wanted to change the social and family affairs (Todd 1996). GB
economic structure of rural Bangladesh development programmes have given
and it supplies loans and insurance, what many women a sense of empowerment
it calls discipline (Montgomery 1996). in the society.
The most important non-financial
service of GB is social intermediation Management System of GB
(Bennett 1998) where membership in The staff and clients of GB have the
GB gives women a socially accepted strong management system to devolve
excuse to gather and to talk (Larance basic decision making and all work
1998). The impacts are both efficiently. All the works are done in
psychological and economic and not grassroots level and the head office bears
only women feel less isolated but also little responsibility except for strategic
issues such as basic policies and research


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and development (Jain 1996, Holcombe million in subsidies, including both
1995). The GB has developed by a direct donations and soft donations such
unique management system based on as soft loans, implicit subsidies through
people’s capacities, learning and equity holdings, and delayed loan loss
innovation, transparency and openness, provision (Sengupta and Aubuchon
honesty and so forth (Holcombe 1995). 2008).
Trust between staff and client is an SOCIAL BENEFITS OF GB
important management system of GB There are six distinct but linked aspects
and all banking transactions are carried of the social benefits of microfinance as
out in front of the clients and bank staff. follows: worth to users, cost to users,
Efficient field-based training is given depth, breadth, length, and scope
both staffs and clients. Democratic (Schreiner 1999).
leadership practices are given by the Worth to users is defined as their
rotation among members of centre and willingness to pay. If a woman is willing
group leadership. The most important to bear costs of up to $500 to get a year
factors behind the successes of the GB of membership in GB then she would be
are its unique decentralized just as well off with $500 more income
organizational structure, client-centered as with a costless year of membership.
delivery system, vision, management Theoretical models often assume that
culture, and human resources worth to users is equal to the increase in
management. No meaningful business profits due to access to finance
development can take place in any but microfinance may improve well-
country unless the standard of living of being even if it does not increase
the poor is raised and GB takes a business profits. The most important
constructive step to develop the poor effect of microfinance is to help
society as well as the development of the households to diversify their sources of
country. Due to efficient management income (Mosley and Hulme 1998,
system more than 60 countries of the Schreiner 1999).
world started GB types microcredit Cost to users is defined as the sum of
banking. price costs and transaction costs. Price
Management processes, such as decision costs are defined as direct cash payments
making, communication and leadership to a microfinance organization. Price
are all practiced contingently, costs borne by users are revenue for the
disregarding conventional wisdom. The organization. Transaction costs are
GB’s managerial personnel are fresh defined as non-price costs. They include
graduates without any work experience. both non-cash opportunity costs such as
Its managers at different levels have the time to meet each week and indirect
demonstrated that they are capable of cash expenses for such things as
planning, organizing and implementing transport and documents linked to the
bank’s development activities use of microfinance. In GB non-cash
independently. opportunity costs probably exceed
In 1995, the GB decided not to request indirect cash expenses (Bhatt and Tang
any more funds from donors and instead 1998). It wants to hide costs to users and
began to fund the bank from collected shows low profits; because the
deposits. Armendáriz and Morduch government imposes more taxes. Net
(2005) calculated that GB accepted $175 gain to users is defined as worth minus


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cost, the change in well-being due to length is important in microfinance
microfinance. because society cares about the well-
Depth is defined as the social value of being of the poor both now and in the
net gains that accrue to a given user. In future. A common proxy for length is the
welfare theory, depth corresponds to the ability to attract grants or soft loans from
weight of a user in the social welfare government or donors or, in the absence
function. If society has a preference for of perpetual subsidies, the ability to earn
the poor, then poverty is a good proxy enough profit to maintain the real value
for depth (Schreiner 1999). The person of equity (Schreiner 1999).
who has assets less than an acre of land Scope is defined as the number of types
can join in GB but in real life some of services supplied. A microfinance
members have more wealth than this organization which offers both loans and
(Matin 1998). Some members are with savings services has greater scope than
an income less than half the poverty line one that offers only loans. Of course
and most are still very poor, and almost scope increases with the variety and
all are women (Hashemi 1997). flexibility of the terms of a given type of
Breadth is defined as the number of financial contract; a one-year loan for
users. Breadth is important in $500 is a different product than a two-
microfinance because the poor are many year loan for $500 (Adams 1994). GB
but the development dollars are few. has great scope in some ways and weak
With more than 2.3 million members, scope in others. It supplies savings
more than 2.1 million borrowers, and services, but almost all savings are
centers in more than half of the villages forced, and withdrawal is often
in Bangladesh, GB has extensive breadth impossible. GB provides loans in
(Schreiner 1999). different techniques which are
Length is defined as the time frame of recoverable with interest.
the supply of microfinance. Expected

Let, t = 1 to T be the index length of time,
st = index scope for time t,
nst = each user’s index,
N ts = breadth in time t for a given service st ,
Wtsn = worth in year t of products st to user nst , and
Ctsn = cost to users.
Hence we can express the net gain as follows:

NG = Wtsn − Ctsn . (1)

The depth function Dtsn (Wtsn − Ctsn ) gives the social value of the net gain from contract st
for client nst in year t. The general social welfare function W(.) returns the total social
benefits B of net gains users, services and time. Now the social benefits are given by;

B = W (Dtsn (Wtsn − Ctsn )) . (2)


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Let δ > 0 be a distant factor and the assumption that W(.) is additively separable across
users, services and time. Hence social benefits B, can be expressed as;

T St N ts
Social Benefits, B = ∑∑∑ δ t Dtsn (Wtsn − Ctsn ) . (3)
t =1 s =1 n =1

Let C be the social cost and if B > C, then a project passes the benefit-cost test and is
deemed a good social investment. If t sn be the number of outputs of type st for user nst in
year t, then the number of outputs being as follows:

T St Nts
O = ∑∑∑ δ t otsn . (4)
t =1 s =1 n =1

If OtT be the total output one type of service in a year then;
St N st
OtT = ∑∑ otsn . (5)
s =1 n =1
Hence (4) becomes as follows:
T
The number of outputs, O = ∑ δ t OtT . (6)
t =1

B C
Now let B = be the unmeasured social benefit per unit of output and C = be
O O
measured social cost per unit of output. Obviously B > C implies for O ≥ 0 , we find
B C
> i.e., B > C . Hence a project passes the cost effectiveness test if unmeasured
O O
average social benefits B are judged to exceed measured average social costs C .
1
Let r > 0 be a choice of social discount rate such that δ = . In real life the World
1+ r
Bank and the US government set r = 10% p.a. (Belli 1996, US Office of Management
and Budget 1972). Let the microfinance organization’s reports stocks only at the start st −1
and end of a year st . With linear change between the two end points, the daily average

discount weighted stock is not simply δ t − 0.5 (st − st −1 ) because the discount is a non-
1
2
linear function of time (Schreiner 1999). Again from Schreiner (1997) we get;

Discount average stock = δ * (st − t.∆st ) + δ **∆st , (7)

δ t − δ t −1
where δ * = ,
ln δ

∆st = st − st −1 ,


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δ ** =
1
{ }
δ t (t ln δ − 1) − δ t −1 ((t − 1)ln δ − 1) .
(ln δ )2

For r = 10% in the period 1983-97, GB produced about 5.4 million discounted person-
years of membership and produced about 0.5 billion discounted dollar-years of borrowed
purchasing power.

Let, E0 = initial equity of the simplest expression of social cost,
Ft = the discounted fresh flows of funds between public entities get back from the
end of the time frame. Hence we can write;
T
Social Cost = E0 + ∑ δ t Ft − δ t Et . (8)
t =1

In (8), the measurement of first and third terms is simple but that of second term is
complex. Public entities are defined as those funded voluntarily by taxpayers and private
entities are funded voluntarily. The government of Bangladesh bought stock and bonds of
GB and GB borrowed from the public International Fund for Agricultural Development
and from the public development agencies of Norway and Sweden. All cash flows
between GB and its members are private. Members choose to join because they expect
that their benefits will exceed their costs.

Let, EGt = liabilities as part of grants,
RGt = gifts as revenue grants,
DX t = discounts an expenses,
Dt = average public debt,
Ct = the average interest rate paid for public debt, and
mt = the market interest rate for private debt of like risk.

The discount on public debt is the savings that come from borrowing from a public
source rather than from a private source. Hence the discount on public debt= Dt (mt − Ct ) .
The choice of the market interest rate m is as difficult as the choice of the social discount
rate r.
True profit Pt is defined as what reported profits Pt R would be without the arbitrary
choice to count some grants not as injections to equity but rather as revenue grants RGt ,
discounts on public debt Dt (mt − Ct ) , or discounts on expenses DX t as follows (Schreiner
1999):
(
Pt = Pt R − RGt + Dt (mt − ct ) + DX t . ) (9)

Every year true profit of GB is much smaller than reported profit due to large discounts
on public debt. In 1997 reported profit was $300,000 but the true profit was
− $23,000,000 .


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GB SHOULD FOLLOW EFFICIENT LENDING
GB loan distribution has risk of default. To induce repayment GB must punish borrowers
who default such as by denying future loans. It must choose successful borrowers to help
repay the loans of unsuccessful borrowers to avoid punishment. Joint liability scheme is
an inefficient system of GB.
For simplicity let us consider two individual borrowers of GB. Let ci ≥ 0 denotes
individual i’s consumption and qi ≥ 0 be the amount of punishment imposed on i by GB.
Then individual i’s utility is given by (Rai and Sjöström 2001);

U (ci , qi ) = ci − qi . (10)

Punishments are a deadweight loss. Let the maximum feasible punishment is denoted by
M, so that 0 ≤ qi ≤ M . Let the individuals’ output is denoted by xi ∈ {0, h} where
xi = h > 0 is i’s success and xi = 0 for failure. Let x = ( x1 , x2 ) ∈ X = {0, h}× {0, h} be a
stable state and the probability of state x is denoted by p( x ) . The individuals are
symmetric at the time of investment, so that;

p(h,0 ) = p(0, h ) . (11)

Let K be the cost of capital of GB. We assume that;

∑ p(x )(x
x∈ X
1 + x2 ) ≥ 2 K , (12)

so that projects are feasible. Let bi ( x ) denotes the payment from individual i to the bank
in state x, then GB’s break-even constraint if it finances both projects is given by;

∑ p(x ) (b (x ) + b (x )) ≥ 2K .
x∈ X
1 2 (13)

GB must impose lowest punishment on default to repay the loan. Let the GB demands a
repayment of R* , where R* ≤ h ≤ M , when a project succeeds, and threaten a
punishment of M if a project succeeds but no repayment is made. Let R* be chosen so that
the GB breaks even be as follows (Rai and Sjöström 2001):

K
R* = (14)
p(h, h ) + p(0, h )

If the project fails, the GB observes it and does not punish the individuals for defaulting.
If there is no defaulter then the GB will not punish any individual. To protect project
from fail GB should decrease rate of interest in loans.


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FAULTS OF GB from patching together earnings from
The rate of interest is higher which 31% casual employment, self-employment,
is roughly and due to this higher interest remittances and a variety of loans from
rate charges GB has criticized (The New other sources. The severe floods of 1998
Nation 2010). The interest of all and the collapse of the bank’s recently
national and commercial banks in introduced agriculture loans, exacerbated
Bangladesh is 10-15% (Hossain et al. the repayment problem. The crisis in
2001). Fernando (2006) has argued that 2000 when Daniel Pearl, a journalist on
there have been existing borrowers of the New York Times, published an article
GB who face obstacles to pay the loan saying that GB was virtually bankrupt
on particular time for having higher (Hulme 2008).
interest charges. Borrowers only get the
advantages of using the loan for their RECONSTRUCTION OF GB
survival but they do not involve in By the early 2001 the irregularities had
generating profit, so they fails to pay been consolidated and professor Yunus
higher interest rate on their loan announced the launch of Grameen II, the
(Hossain et al. 2001). Obviously the high replacement of the bank’s earlier
interest rate becomes burden to the poor products by a new range on different
women who can not use the loan in a terms. Its new model Grameen II, takes
high profitable business to bear this it much closer to a financial systems
burden. As a result some of the approach. The GB made dramatic
borrowers lose lands and assets to pay changes to its services around 2001 and
the loan which cause them serious 2002. The main elements of Grameen II
miseries and they face serious problems are as follows (Hulme 2008):
due to the loan system of GB. The GB • A major focus on savings from
loan distribution has risk of default and members and the public. This
sometimes the loans are used even includes voluntary savings, term
dowry which is crime against women deposits and the Grameen Pension
right. Scheme (GPS) which are a long-term
savings programme.
TEMPORARY IRREGULARITIES • The provision of flexible basic loans
IN GB to members rather than the
In 2000s Yunus propounded that every standardized Grameen I, 12-month
GB loan being used for microenterprise, loans. These are for variable amounts,
and every microenterprise being can be repaid over three to 36 months,
successful. This independent fieldwork have negotiable repayment schedules
showed that GB clients used their loans and interest rates are determined by
for many different purposes such as loan type (size, length, grace period,
business, food consumption, health, etc.).
education and even dowry. GB loans did • The abandonment of joint liability
not go to microfirms for a single, and the idea of social collateral.
specific investment but they went into • A poverty-focused struggling
the complex financial portfolios of low- members’ programme, which
income households. GB clients paid the provides small, subsidized loans to
kisti (weekly repayments) on their loans beggars and encourages them to join
not from a single microenterprise, but GB centers.


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in Europe until 2002 (Hulme 2008). In
New to Grameen II is a pension fund, the USA the GB model has been
which allows clients with loans greater suggested for the homeless and for the
than 8,000 taka ($138) to contribute at ghetto (Banerjee 1998 and Soloman
least 50 taka ($0.86) per month. The 1992). It indicates the successful of GB
client receives 12% per year in as poverty alleviation program and has
compound interest, earning a 187% been internationally accepted by
return after the mandatory 10-year wait. different countries of the world. It
This scheme allows Grameen II to earn improves the quality of life provide
more money in the present and expand better food, better education, as well as
services, while delaying payment in the better housing to the poorer community
near future. Grameen II serves as a good (Wall Street Journal 1998, Thomas
example of a second innovation in 1995). GB model has been duplicated
microfinance: flexible loan repayment extensively in Bolivia, Chile, China,
(Sengupta and Aubuchon 2008). Ethiopia, Honduras, India, Malaysia,
Over the period 2002 to 2005 the bank Mali, the Philippines, Sri Lanka,
tripled the deposits it held ($478 million) Tanzania, Thailand, the USA and
and doubled its portfolio of outstanding Vietnam (Sengupta and Aubuchon
loans. The bank’s loans portfolio became 2008).
smaller than its savings portfolio. It built No doubt the microfinance revolution
up a large fund for bad loan provision has recorded success in most developing
and profits rose from Tk.60 million in nations of the world; but it has provided
2002 to Tk.442 million ($7 million) in little success in some developed
2005. GB opened 500 new branches, so countries. Schreiner and Woller (2003)
that it had more than 1,700 branches by show the characteristics of the poor are
late 2005. It now plays an important role different in the two regions. In the
as a substantial MFI that meets client developing world, jobs are relatively
needs and helps to promote competition scarce and hence the unemployed are
within the financial markets. At present more likely on average to include
is a very different organization from individuals that are highly skilled or
what it was 20 years ago, but it still better motivated to become
serves as an inspiration for those trying entrepreneurs. In the developing country
to help poor and low-income people in like Bangladesh 60 to 80% of jobs
their own efforts to improve their lives. supplied by micro-enterprise but
microfinance beneficiaries in the
GB MODEL AROUND THE developed country like USA are
WORLD substantially smaller.
The GB of Bangladesh holds an iconic Although microfinance is benefited to
position in the world of microfinance. It the poor of the USA, but group
is credited with proving that the poor are formation as like Bangladesh is difficult.
bankable, the GB model has been copied Hence Bangladeshi pure GB style of
in more than 60 countries; it is the most microfinance is not applicable
widely cited development success story successfully in the USA.
in the world. GB model has been
followed in 22 countries of Africa, 19 in GRAMEEN FAMILY OF
Asia, 3 in Oceania, 15 in America, and 7 ENTERPRISES


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Grameen Family enterprises are as employment and income-generation
follows (Grameen Family of Enterprises opportunities in rural Bangladesh.
2005, Grameen Bank 2005):

Grameen Trust Grameen Shikkha/Education
As a result of the success of GB in Grameen Shikkha is a company in the
reaching and serving the poor with family of Grameen companies.
credit, many people and organizations Established in 1997 its main objectives
began to think in GB’s way, and wanted are to promote mass education in rural
to learn more about GB and follow its areas, provide financial support in the
principles in their own sphere of work. It form of loans and grants for the purpose
is primarily to meet this demand that the of education, use IT for alleviation of
Grameen Trust (GT) came into being in illiteracy and development of education,
1989. Now more countries worldwide promote new technologies and innovate
follow the activities of the GB. ideas and methods for development of
education, etc. Grameen Shikkha has
Grameen Fund been conducting the Life Oriented
Grameen Fund was incorporated on 17 Education Program, Pre-school/Child
January 1994 as a not-for-profit Development Program, Early Childhood
company and started operations on 1 Development Program and Arsenic
February 1994. Its emphasis is on Mitigation Program in various districts
providing finance to ventures that are of Bangladesh.
risky, technology-oriented and otherwise
deprived of financing from existing Grameen Telecom
formal lending institutions. Grameen Telecom is a company
dedicated to bringing the information
Grameen Communications revolution to the rural people of
Grameen Communications, a member of Bangladesh. Grameen Telecom is
Grameen family of enterprises, is a not- planning, over the next four years, to
for-profit Information Technology provide GSM 900/1100 cellular mobile
company. It has been providing phone service to 100 million rural
complete systems solution through inhabitants in 68,000 villages of
developing software products and Bangladesh by;
services, internet services, hardware and (1) financing 60,000 members of GB to
networking services and IT education provide village pay phone service and
services since its inception in 1997 under (2) providing direct phones to potential
the Companies Act, 1994. subscribers.

Grameen Shakti/Energy Grameen Knitwear Limited
Grameen Shakti (GS) is a not-for-profit The company is a 100% export oriented
rural power company whose purpose is composite knitwear factory, located in
to supply renewable energy to the Export Processing Zone in Savar in
unelectrified villages in Bangladesh. GS the vicinity of Dhaka, the capital of
expects not only to supply renewable Bangladesh. It has knitting, dyeing,
energy services, but also to create finishing and garments production
facilities. Most of the machinery and


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equipment have been sourced from condition. Some borrowers could not
Europe. The factory is capable of escape from poverty due to high interest
producing a very high quality of rate. As they can not invest their loan in
different knit fabrics and garments for profitable sector, whose profit exceeds
children, men and women. The fabrics the rate of interest of the loan of GB.
and garments are fabric and yarn dyed The beggars can not take loan from GB,
100% cotton, TC, CVC, Polyester with because they can not form group, and
lycra (attachment) etc., of various nobody take risk of their repayment.
counts. The goods are currently exported Same conditions arose for the very poor
mostly to Europe. Exports are made people. So that GB loans goes to rich or
against confirmed irrevocable letters of non-poor people who can repay in due
credit. time and the amount of next loan
increases continually. Morduch (1999b)
Grameen Cybernet Ltd suggests that a dollar increase in income
Grameen Cybernet Ltd. has been for the very poor borrower has a five
Bangladesh’s leader in Internet service times greater impact than the same dollar
provision since it commenced operation for the marginally poor borrower.
in July 1996. Its chief executive has had According to this suggestion for the
an extensive career in education and poverty alleviation, GB should focus on
information technology in the USA and the poorest borrowers first, but this is not
is assisted by a team of bright, young always the case.
executives.
CONCLUDING REMARKS
CAN MICROFINANCE In this paper we have tried to describe
ERADICATE POVERTY? briefly ins and outs of GB of
We have shown that microfinance of GB Bangladesh. It is the largest
helps the poorest of the poor to escape microfinance organization of the country
from poverty. GB is working in 68,000 which provides loans the poor.
villages of Bangladesh. But the situation Inequality in the ownership of the means
of villages worsens continuously and of production, unequal access to public
there are beggars, extremely poor people resources, subordination of women,
in the villages. Some have lost their dominance of usury capital and
assets to repay the loan. complicated power relations between the
The World Bank estimates that in 2001, rich and poor are the features of life in
some 1.1 billion people of the world had rural Bangladesh. So that GB takes
consumption levels below $1 and rigorous steps to remove the poverty
another 2.7 billion lived on less than $2 from the rural society of Bangladesh. It
per day (World Bank 2001). As is a decentralized participatory
microfinance continues to grow, organization where both the staffs of the
questions have arisen to focus on who is bank and the members are actively
the optimal client. Should microfinance involved in different types of activities.
target the marginally poor or the It is credited with proving that the poor
extremely poor? (Sengupta and are bankable and its model has been
Aubuchon 2008). Some clients had to copied in more than 60 countries of the
pay a subsidized microfinance program world and has found success in poverty
and could not improve their financial alleviation program. Some limited poor


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people can improve their financial and other Instruments: The
condition by the loans of GB who find Experience of Grameen Bank.
scope to use the money in profitable Belli, P. (1996), Handbook on Economic
business. It improves the quality of life Analysis of Investment
provide better food, better education, as Operations, Operations Policy
well as better housing to the poorer Department, World Bank,
community. But the high interest rate Washington, DC.
becomes burden to the poor women and Bennett, L. (1998), The Necessity-and
GB needs to think to provide loans in the Dangers-of Combining Social
low interest rate to them. We tried to and Financial Intermediation to
show the mathematical calculations in Reach the Poor, in Mwangi S.
some detail. Kimeny, Robert C. Wieland, and
J.D. Von Pischke (eds), Strategic
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