critical analysis grameen bank

5/20/2018 Critical Analysis Grameen Bank

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Grameen Bank and the Microcredit model

Economics professor Muhammad Yunus is often referred to as the father of

microcredit (Yunus & Jolis, 1998). Dr Yunus was inspired to start the microcredit

movement when he working at Chittagong University in rural Bangladesh and saw

how poor suffered because of their lack of access to credit (Yunus, 1999). He started

his own initiative of lending money to the poor directly and found that they always

paid back all their loans. He tried to get banks to lend directly to the poor, however

they refused to since the poor could not provide collateral for the loans (Yunus,

1999).

After negotiations with the Government he started Grameen Bank (the Bank) in

1983, and began lending money to the poorest people in the country (Yunus, 1999).

Grameen Bank works on principles that challenge conventional perspectives on

poverty. It is based on the philosophy of the old proverb Give a man a fish and you

feed him for a day. Teach a man to fish and you feed him for a lifetime. Yunus

(2004) believes that poverty is caused by structural inequalities and the solution to

long term sustainable change is to develop new policies.

He believes that charity perpetuates the cycle of poverty and creates dependency.He adds that poor people often do not get the opportunity to explore their creative

potential and thus remain left out from participating in the economy (Yunus, 2004).

The Bank believes that poor people are committed to repayment of loans as many of

them have never been able to get a loan and so are determined to establish good

credit history (Yunus, 2004). It also lends money primarily to women as they are

believed to be better managers of money and they comprise 96% of the banks

customers (Yunus, 2004).

The Grameen difference

Grameen Bank does not enter into legal agreements with its customers, and does

not require collateral for loans supplied (Grameen Bank, 2011A). Instead when

customers cannot make payments, the Bank works with the customers to reschedule

their payments and provides advice and assistance during difficult periods. The Bank

also caps the interest charged to customers such that the interest amount to be paid

never exceed the amount of the principal (Grameen Bank, 2011).


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In addition to small business loans, Grameen Bank is also providing housing loans to

the poor to build simple homes. It also provides study loans for children of its

customers to pursue higher education. The Bank also provides scholarships to some

students, with a particular aim of improving educational outcomes for female children

(Yunus, 2004). Another innovative enterprise that the Bank has started is known as

Grameen Phone, and it sells mobile phones to village women. These telephone-

ladies then sells the telephone services in their village where often even fixed lines

are nonexistent. The income generated from this business in on average more than

double the per capita income in Bangladesh (Yunus, 1994).

To become a customer of the Bank, lenders had to form a group with five others.

This allows for members to provide each other with mutual support and ensure the

viability of the business and the payment of loans. The Bank also visits rural villages

to provide loans and collect repayments, and staff members do home visits to

observe the progress of the business. In addition to the delivering microloans

Grameen Bank also incorporates social development in its service delivery by asking

its members to commit to 16 Decisions. These decisions include a commitment to

use sanitary facilities, prioritise education for children, maintaining small family size,

drinking clean water, providing mutual support to each other, improving their housingstructures and engaging in self-sustainable farming practices (Holcombe, 1995).

Customers of the Bank are also allowed to become share holders after one year,

and at present 97% of the Bank is owned by the borrowers (Grameen Bank,

2011B).Research has shown that the women in these communities are empowered

as their finances improved (Yunus, 1999). Other research has also shown that

female customers of the Bank are more likely to adopt family planning practices and

that their children were more likely to attend school and had improved nutrition

(Yunus, 1999).


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Working with the extremely poor

The Bank has also made efforts to work with extremely poor people in Bangladesh.

Many critics have pointed out that microcredit programs are not effective at targeting

the extremely poor (Yunus, 2005). In 2003 the Bank started The Struggling (Beggar)

Members Program to assist this extremely marginalized group (Yunus, 2005).

Members of this group are exempt from having to form groups, are charged zero

interest on the loans, and are allowed to design their own repayment plan (Yunus,

2005). These members are also allowed to attend weekly meeting at the villages if

they wish to receive advice from the group meetings, but they are not obliged to do

so (Yunus, 2005). The loans assist these people to sell small goods such as sweets

and toys from door to door as a supplement to their income from begging (Yunus,

2005). The Bank also provides these members with a badge of the Banks logo to

show support for these members (Yunus, 2005). As a result of this initiative, some

members have quit begging to rely only on income from selling goods (Yunus, 2005).

Community Participation

Ife & Tesoriero (2006, p.150) explains that participation in community development

involves recognising that different levels of power exist, and that those who areusually excluded are given an opportunity to influence decision making. Participation

can also be observed as a process of empowerment in the long term development of

a community (Ife & Tesoriero, 2006). Snodgrass & Sebstad (2002) found that women

felt an increased sense of self esteem, higher level of participation in decision

making and more confident about the future. They conclude that microcredit is

contributing to gender equality and improved household wellbeing

(Snodgrass & Sebstad, 2002).

Ife & Tesoriero (2006, p.168) believes that effective participation can be measured in

terms of qualitative and quantitative indicators. As an example quantitative factors

can include participation numbers and qualitative factors can include increasing

networks with other communities and organisations. Based on information from the

Grameen Banks website, in 2012, Grameen Bank had over 8 million members

across 81,386 villages and a loan portfolio of over USD 1 billion(Grameen Bank,

2013). Since its establishment 21 years ago, the Bank has been overwhelmingly


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successful in its reach across Bangladesh and its influence in promoting microcredit

as a poverty elimination tool around the world.

Sustainability & the Microcredit Model

Since 1995, Grameen Bank has decided to be self sufficient and no longer requests

for donor funding. The Bank finances itself entirely from deposits from its clients

(Yunus, 2004). Despite this, the Bank has been profitable every year since its

inception except for three years (Yunus, 2004). The main concern facing other

microcredit institutions is the availability of funds to lend to the poor. In Bangladesh

this issue was solved by the government and the World Bank who collaborated to set

up a wholesale fund for Grameen Bank. This allowed the Bank to access funds from

other financial institutions and to provide guarantees to deposits collected.

Yunus (2004) notes that other microcredit organisations in Bangladesh face

sustainability issues as they are reliant on donor funding. As donor funding is

unpredictable and declining, these organisations are unable to continue lending. He

proposes that the government should create new laws to allow Non Governmental

Organisations (NGOs) to convert into a formal financial institution. This conversion

would allow them to accept deposits so that they can be self sufficient (Yunus,2004).

Social Capital & the Microcredit Model

Yunus as cited in Woodworth (2008) believes that the microcredit model puts a great

emphasis on building social capital in communities. Woodworth (2008) defines

social capital as an intangible yet important aspect of relationships between people

that creates a sense of mutuality, trust and a willingness to help each other. Knack

(2002) adds that at the community level, improving social capital increases

wellbeing, decreases crime rates, encourages community participation and can

improve economic prosperity.

Woodworth (2008) suggest that social capital is especially lacking amongst poorer

communities and that the microcredit model is successful because it addresses this

lack. He explains that the poor are often marginalized from participation in the

economy because of the lack of skills and resources and thus are disconnected from

the rest of society.


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Putnam (1993) found that regular public meeting of members in a community is

associated with growth in social capital within that community. Putnam (1993, p. 37)

explains that social ties formed through regular meetings fosters social capital

because they facilitate gossip and other valuable ways of cultivating reputation an

essential foundation for trust within a complex society. Such community interaction

encourages participants transition from the I to the we, and the bonds

established through regular interaction give each participant a sense of being a

member of a larger community (Putnam, 1993).

In his study of microcredit models in the Philippines, Woodworth (2008) noted that

since loans are made to groups of individuals who commit to paying each others

loans, it builds a sense of camaraderie amongst the group. The process of being

involved in a microcredit group enhances the informal networks within the group and

in the community whilst also improving their finances (Woodworth, 2008). Larance

(1998) in her research with female clients of Grameen Bank in Bangladesh found

that participating in the weekly member meetings resulted in multiple community

wide benefits such as; an improved sense of wellbeing, less quarrels amongst

villagers, reciprocal child care practices, having nurturing friendships and a reduced

sense of class divide amongst different social classes.

In his observation of member group meetings in the Philippines, Woodworth (2008)

found that group members provided business contacts for suppliers and customers

to support each others businesses. Furthermore their friendships extended beyond

the world of finances as women assisted each other with caring for each others

children. Woodworth (2008) also found that members discussed each others

problems and worked together to brainstorm solutions. He adds that when looking at

the microcredit model from the perspective of organisational theory, social capital

encourages sharing of knowledge thus reducing organisational costs associated with

acquiring knowledge (Woodworth, 2008).

Woodworth (2008) adds that individual members feel an increased sense of

confidence in their capacity to succeed when they have the support of their group

members. He adds that the role of microcredit organisations goes beyond facilitating

access to credit and collecting payments and that it also encompasses the facilitation

of developing social capital in each group (Woodworth, 2008). He believes that


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social capital thus becomes an intangible asset for the microcredit organisation as it

is directly linked to the economic success of the groups (Woodworth, 2008). He

concludes that social capital builds resilience amongst their poor to step out of the

cycle of poverty and provides them with strength in the face of adversity

(Woodworth, 2008).

Ethical Issues

Structural Inequalities

Burkett (2007) acknowledged that the principles of microcredit works from a

strengths based perspective, seeking to highlight the capacities of poor people rather

than treating them as passive beneficiaries of donor funds. However Buckett (2007)

cautions that the microcredit ideology may place too much emphasis on the notion of

self- help that we may forget about challenging the structural inequalities that affect

the poor. Buckett (2007) notes that providing access to credit does not always result

in the desired impact. In her research in Bangladesh she found that some of the

enterprises that were started were not sustainable and not run in a cost effective

manner. She adds instead of empowerment, poor people may get in to more debt.

Farhodova, Kimani, Masa, Deng & Mungai (2008) caution that before deciding on

microcredit or other types of financial services intervention, the organisations

involved should perform an analysis of the situation in the community to find out if it

would be the most appropriate solution. The authors explain that most microcredit

institutions have some form of are donor funding and there may be other pressing

concerns such as access to drinking water, food, health, housing that these funds

could be used to address.

Gender & Cultural Issues

The culture in Bangladesh requires women to adhere to cultural norms and as such

they may not always be able to control the use of the funds they receive as their

husbands may have a greater influence on the finances (Farhodova et al, 2008).

Farhodova et al (2008) recommends that organisations should work to advocate for

womens rights to microcredit though educating women with literacy and other skills.


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At the same time, the organisation could also work with men to identify barriers to

womens participation and involve men in the process of developing strategies to

empower women. Farhodova et al (2008) suggest that it naive to think that

microcredit itself can lead directly to womens empowerment as it is dependent on a

complex of socio-economic factors. Thus it is recommended that microcredit

initiatives take an approach that is culturally appropriate and gender inclusive.

Peer Pressure

Montgomery (1996) notes that there are social costs involved with the formation of

solidarity group in microcredit schemes where group members are jointly liable for

each individual loan. He explains that poor people often experience instability in their

finances and thus may pose as a liability in their peer groups. For most members of

the peer group, the pressure to make repayments when they lack funds leads them

to seek funds from their informal network of friends and family (Montgomery, 1996).

However such sources are limited and thus members are at the risk of being

dropped out from the groups. In his research Montgomery (1996) found that peer

groups may become vicious in such situations and may resort to forced acquisition of

the defaulting members property. He adds that rapid expansion of microcredit

organisations have diluted the social aspect of solidarity groups such that the focus

during village meetings is more about collecting debt to maintain credit standards

instead of creating a mutually supportive community (Montgomery, 1996). Thus the

author concludes that there need to be flexibility in repayment schedules and offer

interest bearing savings facilities to make to protect poorer members. He also

suggests that performance indicators for staff should not focus entirely on repayment

discipline, so that there are incentives to address social development objective

(Montgomery, 1996). This particular issue does not apply to Grameen Bank as it

does not impose joint liability (Grameen Bank 2011B), however it is an issue of

concern for other microfinance organisations.


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Social Work Ethics &the Microcredit model

When analysing the model that Grameen Bank operates, I can see how their

principles aligns with social work practice and values. The fact that the Bank is

willing to lend money to people with no collateral is evidence of a non-judgemental

approach towards clients as it accepts them regardless of their history or current

circumstances. This also aligns with social work values of being non judgmental in

our practice (AASW, 2013).

The Bank also recognises that individuals dont exist in a vacuum but in complex

structures of interdependent mechanisms as explained Bronfenbrenners

Ecosystems theory (Bronfenbrenner, 1994). Dr Yunus believes that the historic ideas

of economic development via a top down approach of investment to create

employment opportunities has created problems of overcrowding and poor working

conditions in cities. He believed that each individual has an entrepreneurial spirit and

that poverty can be ended by giving the person control over his future. He adds that

poverty exist because those who are well off have created a system that privileges

their interest and ignores the poor (Yunus, 1999). It is through this recognition that

Grameen Bank challenges systemic oppression of the poor by creating opportunities

for its members to access credit and build the social ties, so as to achieve holistic

development for the individual and the community.

Dr Yunus believes that access to credit should be a basic human right (PBS, 2007).

He explains that basic human rights such as the access to food, shelter, health and

education are often recognised, yet governments of third world countries struggle

with providing these rights to citizens. He believes that by empowering poor people

through credit, they have the opportunity to be self employed and generate income

to life themselves out of poverty. This also aligns with social work ethics of promoting

policies that uphold human rights and ensuring access, equity and participation for

everyone (AASW, 2010, p.19). The philosophy behind the microcredit model is also

well aligned with social work values of social justice as it promotes fairness in terms

of access to credit, and acts to reduce barriers to credit for disadvantaged,

vulnerable and oppressed people (AASW, 2010, p.13).

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