An Introduction to Grameen Bank and Microfinance
By Luke Juran, University of Iowa

 

Background and Concept:

Microfinance is a developmental economic system that offers the poor a tool for upward mobility. The concept of microfinance is financing enterprises of the poor, especially women, by offering small loans of monetary credit. The loans are extended to worthy individuals who are not able to obtain credit from formal financial institutions because they have been deemed "unbankable" and "unprofitable." The borrowers use the loan to invest in capital for an entrepreneurial venture, with hopes of improving the quality of life for themselves and their family. Besides its economic implications, microfinance has also been heralded as a catalyst for women’s empowerment, human rights, health, human capital, literacy and education, and implications for environmental and agricultural sustainability.

Microfinance has evolved from an experimental outreach project to a multi-billion dollar global system. It all began with Muhammad Yunus, a professor of economics at the University of Chittagong, searching for a way to help his poverty stricken country of Bangladesh. Based on interviews with the rural poor, Yunus theorized that a major barrier to economic advancement was access to credit. Many women were either indebted to money lenders-- a form of bonded labor- or were simply living day to day with no opportunities to save or invest for the future. To test his contention, Yunus loaned forty-two villagers a total of $27. Yunus was convinced that small loans to start businesses and expand micro-businesses was a revolutionary and effective way to aid the impoverished. He soon founded the Grameen Bank and the rest is history. Grameen Bank has now loaned over $5.3 billion to seven million poor (96% women) and is entirely self sustainable. Yunus was awarded the Nobel Peace Prize in 2006 at Oslo, Norway for his great achievement in reducing poverty.

International replication of Yunus’ microfinance concept has proven extremely successful. There are now literally thousands of microfinance institutions (MFIs) offering loans in more than eighty countries. The United Nations made 2005 the "International Year of Microcredit," and the Gates Foundation, Google, the World Bank, Citigroup, and USAID are investing billions of dollars into the system of microfinance. It is now widely accepted that the poor, if given an opportunity, are not helpless and are fully capable of being effective and competent players in the economy.

Many microfinance cooperatives loan exclusively to women, and most have loan repayment rates of 99% and close to 100%. The successful repayment rates are due to ‘joint liability groups’ (JLGs), in which borrowers are placed in a small group and act as guarantors for each other. This form of liability and social pressure has proven an efficient way of reclaiming loans from borrowers, hence, assuring sustainability and scalability for well-managed MFIs.

Microfinance is also known as microcredit, microenterprise, village banking, and synonymously as the Grameen Bank. When a group of borrowers form a joint-business their entrepreneurship is called a microcluster. The word grameen means ‘rural’ in the Bengali language, thus, Grameen Bank translates to ‘rural bank.’

 

The Sixteen Decisions:

The Grameen Bank is founded on the "Sixteen Decisions." All members must take an oath to uphold these principles, objectives, and expectations.

1. We shall follow and advance the four principles of Grameen Bank- Discipline, Unity, Courage, and Hard Work- in all walks of our lives.
2. Prosperity we shall bring to our families.
3. We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest.
4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus.
5. During the plantation seasons, we shall plant as many seedlings as possible.
6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health.
7. We shall educate our children and ensure that they can earn to pay for their education.
8. We shall always keep our children and the environment clean.
9. We shall build and use pit-latrines [toilets].
10. We shall drink water from tube-wells. If it is not available, we shall boil water or use alum [aluminum potassium sulfate, an antibacterial agent].
11. We shall not take any dowry at our sons’ weddings, neither shall we give any dowry at our daughters’ weddings. We shall keep our center free from the curse of dowry. We shall not practice child marriage.
12. We shall not inflict any injustice on anyone, neither shall we allow anyone to do so.
13. We shall collectively undertake bigger investments for higher incomes.
14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her.
15. If we come to know of any breach of discipline in any center, we shall all go there and help restore discipline.
16. We shall take part in all social activities collectively.

 

Why Women?

It is often asked why women are the targets of microfinance loans. There are multiple reasons for microfinance’s gendered approach.

First off, it is an unfortunate and harsh reality that women are second-class citizens the world over. Women face inequalities in relation to men regarding human rights, personal sovereignty, mobility, literacy and education, law and politics, and access to banks, credit, markets, and job opportunities. If true development is to occur then women must be brought up to par with men both socially and institutionally, thus, microfinance targets women.

Secondly, it has been hypothesized that women are better at repaying microfinance loans than men. Men are more likely to spend the loan on consumptively whereas women are more likely to save, invest, spend wisely, and feel more obliged to repay the loan.

The last rationale is based on women’s intrinsic and steadfast dedication to family. Women are the gatekeepers of the family and they inherently place family first, sometimes at the cost of personal sacrifice. When a woman is given a loan she is likely to use it to advance the family and look after the well-being of her children. Therefore, when a loan is given to a woman, in actuality, the loan is given to the entire family. The entire family unit is benefited when women avail microfinance loans.

 

Human Rights and Human Rights Related Aspects of Microfinance:

Human rights are a major foundation of the microfinance concept, as is apparent in the "Sixteen Decisions." Following is a short list of aspects of human rights and related issues that are addressed via microfinance.

-Human Rights: Virtually the entire slate of human rights is directly or tangentially impacted by microfinance. Women’s rights, empowerment, food security, children’s rights, and access to healthcare and education are just a few rights aided by microfinance. For a better understanding of human rights refer to the United Nations Universal Declaration of Human Rights (1948) and Convention on the Rights of the Child (1989).

-Empowerment: Microfinance seeks to empower women by giving them access to credit, which allows them to earn a stream of income through entrepreneurial means. In doing so, women are freed from money lenders, bonded labor, and earn respect from their husbands as they contribute to household income. Microfinance also makes women more socially visible and active in society, thus opening new avenues for women.

-Health, Hygiene, and Sanitation: Women who engage in microfinance loans have better access to a wide scope of health measures. Food security (three meals a day) is attainable as well as access to more nutritional food. Microfinance institutions usually offer some form of healthcare program (insurance, medical camps, or subsidized healthcare) and they educate their members on hygiene (for themselves and children) and sanitation (cooking, clean water, and use of latrines).

-Education and literacy: Microfinance programs often structure education into the weekly repayment meetings in the form of literacy, numeracy, and skill development training. As for the youth, children of microfinance borrowers are required to enroll in school. There are also educational programs for children in the form of scholarships and education loans.

-Human Capital: Human capital is capacity in an individual that allows them to be positive contributors to the economy and society. Microfinance increases the level of human capital by offering education, literacy, skill development, and better health and nutrition. All of these measures improve an individual’s ability to be healthy, productive, contributive, and positive members to the economy and society.

-Child and Family Development: Children and the family are major beneficiaries of microfinance. As household income increases there is more of a disposable income for housing improvements, food and nutrition, healthcare, and familial necessities. Children of microfinance borrowers are required to attend school. Thus, microfinance is generational and seeks to lift children and families of microfinance borrowers out of poverty.

-Environment and Sustainable Agriculture: Multiple environmental projects and sustainable agricultural programs have been implemented through microfinance. Borrowers are contracted to produce crops for biofuels and to sell agricultural waste for biomass energy. Microfinance institutions have also developed and implemented sustainable cattle, goat, and poultry rearing schemes in which members raise the livestock and "pass on" the offspring to others in the community. Additionally, borrowers have taken loans to produce organic livestock, crops, and other agricultural commodities. Most microfinance institutions have some form of environmental or agricultural program.

-Millennium Development Goals: The United Nations recently drafted the "Millennium Development Goals," which is a list of eight global goals, each one accompanied by measurable targets. Microfinance directly and tangentially works towards realizing each of the goals, especially Goal 1 (eradicate extreme poverty and hunger) and Goal 3 (promote gender equality and empower women).

 

Types of Entrepreneurships and Common Uses of Microfinance Loans:

Livestock rearing and milking Sewing machine Clothing and saree sales Sandal and shoe making Fishing and fish sales Fruit and vegetable sales Weaving and handloom Beauty parlor Bicycle, tricycle, and rickshaw Spice and nut sales Printing press and bookbinding Bullock cart Fertilizer for farming Diesel water pump for irrigation Tractor Ice sales Bakery Internet café Rope making Egg production and sales Silkworm production Betel farm Catering services Sugarcane press Soap making

Petty shop Tailoring and embroidery Snack shop Flower production and sales and garland making Agriculture (rice, sugarcane, bananas, coconut, etc.) Laundry and ironing services Various handicraft production and sales Photo studio Phone booth or cell phone calls by the minute Painting and sign making Broom making Plow Seeds for farming Pay for a well or access to irrigation Aquaculture (prawn, catfish, etc.) Candle making Photocopy machine Leather production and sales Tea and coffee stall Doll making Pottery and ceramics production and sales Rice, corn, and grain grinders Butcher shop Bulk water sales Kitchenware sale

Sources:

Bruck, Connie. Millions for Millions. The New Yorker. Oct. 2006, Vol. 82, Issue 35.

Grameen Bank. "The Sixteen Decisions of Grameen Bank." Updated 06/12/06. Accessed 08/04/07. http://www.grameen-info.org/bank/the16.html

Microfinance Gateway. Microfinance FAQ’s. Sponsored by CGAP. Updated 2007. Accessed 08/04/07. http://www.microfinancegateway.org/

Sethuraman, N. Mahasemam Women’s Self-Help Cooperative. SMILE Ltd. 2007.