Grameen Bank: History, Objectives and Methodology

Grameen Bank: History, Objectives and Methodology

Introduction to Grameen Bank

Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to the poorest of the poor in rural Bangladesh, without any collateral. At GB, credit is a cost effective weapon to fight poverty and it serves as a catalyst in the over all development of socio-economic conditions of the poor who have been kept outside the banking orbit on the ground that they are poor and hence not bankable. Professor Muhammad Yunus, the founder of "Grameen Bank" and its Managing Director, reasoned that if financial resources can be made available to the poor people on terms and conditions that are appropriate and reasonable, "these millions of small people with their millions of small pursuits can add up to create the biggest development wonder."  

As of October, 2011, it has 8.349 million borrowers, 97 percent of whom are women. With 2,565 branches, GB provides services in 81,379 villages, covering more than 97 percent of the total villages in Bangladesh.  Grameen Bank's positive impact on its poor and formerly poor borrowers has been documented in many independent studies carried out by external agencies including the World Bank, the International Food Research Policy Institute (IFPRI) and the Bangladesh Institute of Development Studies (BIDS).

History of Grameen Bank

Muhammad Yunus earned a doctorate in economics from Vanderbilt University in the United States. He was inspired during the Bangladesh famine of 1974 to make a small loan of US$27 to a group of 42 families as start-up money so that they could make items for sale, without the burdens of high interest under predatory lending. Yunus believed that making such loans available to a larger population could stimulate businesses and reduce the widespread rural poverty in Bangladesh.

Yunus developed the principles of the Grameen Bank (literally, "Bank of the Villages" in Bengali) from his research and experience. He began to expand microcredit as a research project together with the Rural Economics Project at Bangladesh's University of Chittagong to test his method for providing credit and banking services to the rural poor. In 1976, the village of Jobra and other villages near the University of Chittagong became the first areas eligible for service from Grameen Bank. Proving successful, the Bank project, with support from Bangladesh Bank, was extended in 1979 to the Tangail District (to the north of the capital, Dhaka). The bank's success continued and its services were extended to other districts of Bangladesh.

By a Bangladeshi government ordinance on October 2, 1983, the project was authorized and established as an independent bank. Bankers Ron Grzywinski and Mary Houghton of ShoreBank, a community development bank in Chicago, helped Yunus with the official incorporation of the bank under a grant from the Ford Foundation. The bank's repayment rate suffered from the economic disruption following the 1998 flood in Bangladesh, but it recovered in the subsequent years. By the beginning of 2005, the bank had loaned over USD 4.7 billion and by the end of 2008, USD 7.6 billion to the poor.

The Bank continues to expand across the nation. By 2006, Grameen Bank branches numbered over 2,100. Its success has inspired similar projects in more than 40 countries around the world, including a World Bank initiative to finance Grameen-type schemes.

The bank has gained its funding from different sources, and the main contributors have shifted over time. In the initial years, donor agencies used to provide the bulk of capital at low rates. By the mid-1990s, the bank started to get most of its funding from the central bank of Bangladesh. More recently, Grameen has started bond sales as a source of finance. The bonds are implicitly subsidised, as they are guaranteed by the Government of Bangladesh, and still they are sold above the bank rate. In 2013, Bangladesh parliament passed 'Grameen Bank Act' which replaces the Grameen Bank Ordinance, 1983, authorizing the government to make rules for any aspect of the running of the bank.

The bank is also engaged in social business and entrepreunership fields. In 2009, the Grameen Creative Lab collaborated with the Yunus Centre to created the Global Social Business Summit. The meeting has become the main platform for social businesses worldwide to foster discussions, actions and collaborations to develop effective solutions to the most pressing problems plaguing the world.

Mission and Objectives
“By providing comprehensive financial services, empowering the poor to realize their potential and break out of the vicious cycle of poverty.”
§  Extend banking facilities to poor men and women;

§  Eliminate the exploitation of the poor by money lenders;

§  Create opportunities for self-employment for the vast multitude of unemployed people in rural bangladesh;

§  Bring the disadvantaged, mostly the women from the poorest households, within the fold of an organizational format which they can understand and manage by themselves; and

§  Reverse the age-old vicious circle of “low income, low saving & low investment”, into virtuous circle of “low income, injection of credit, investment, more income, more savings, more investment, more income”.

Methodology/ Credit Delivery System
Grameen Bank Credit Delivary means taking credit to the very poor in their villages by means of the essential elements of the Grameen credit delivery system.
Grameen Bank credit delivery system has the following features:
There is an exclusive focus on the poorest of the poor.
2.     Borrowers are organized into small homogeneous groups.
3.     Special loan conditionalities which are particularly suitable for the poor.
4.     Simultaneous undertaking of a social development agenda addressing basic needs of the clientele.
5.     Design and development of organization and management systems capable of delivering programme resources to targeted clientele.
6.     Expansion of loan portfolio to meet diverse development needs of the poor.

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