¹ This section, particularly for data on the performance of the Grameen Bank (GB), draws heavily on an evaluation of GB done by one of the authors of this paper: See Mahabub Hossain, Credit for the Rural Poor - The Experience of Grameen Bank in Bangladesh. Mimeo., BIDS, Dhaka, 1984.

The way it began

The Grameen Bank, whose target groups broadly include the bottom 50 per cent of the rural population of the country, was initiated as an action research project to test the hypothesis that, if financial resources are made available to the poor at reasonable terms and conditions, they can generate productive self-employment. The need for a separate credit institution was felt in view of the limitations of the traditional banking system in providing petty loans and in reaching the rural poor. After three years of experimentation in an area near Chittagong University, the project was formally launched in November 1979 in Tangail district with financial support from the Bangladesh Bank. Encouraged by its initial success, the project was extended to four other districts with financial assistance from the International Fund for Agricultural Development (IFAD) beginning April 1982. In September 1983, it was transformed into a formal public sector specialised credit institution - the Grameen Bank (GB). It has a paid up capital of Tk. 30 million, 40 per cent of which is held by the Government, 40 per cent by the loanees (members) and 10 per cent each by Sonali Bank and Bangladesh Krishi Bank.¹

¹Krishi Means ‘agricultural’.

The way it functions

A branch of GB is generally run by a field manager (FM) and six bank workers (BW). Any person belonging to households owning 0.5 acre or less of own cultivable land is eligible for the Grameen Bank loan.²

² When GB was a project, the ceiling was 0.4 acre.

Recognising that the people belonging to the target groups are generally illiterate and too shy to come to banks, GB takes banking services to their door steps. The BWs go around the villages, help prospective loanees to form groups of five and train them about the rules and procedures of GB. A number of group sin the same locality are federated into a centre and the elected centre chief conducts weekly meetings, recommends loan proposals and assists BWs. Once a loan proposal is accepted the credit is disbursed by the concerned BW in a weekly meeting. The loanee can use the credit in any productive or trading activity in his/her choice; but he/she must repay the loan as stipulated in regular weekly instalments. The repayment is collected by the BW when he attends the weekly meeting of the centre. One of the conditions of the loan is that the group members save one Taka each every week plus five per cent of the amount borrowed which is deducted at the time of its disbursement. The savings form the Group Fund (GF) from which the members can borrow at times of emergency and on terms to be fixed by the group members themselves. In addition, an Emergency Fund (EF) is created with contribution from the members, which can be used to repay the loan of a member if he/she becomes unable to repay due to accident or any other unforeseen circumstance.

Performance

The GB has progressed at quite a rapid pace. The details of the growth in membership and disbursement of loan during 1980-1983 are shown in Table 3.6. By the end of April 1984,95 branches of nationalised banks were participating in the GB operations covering 1,592 villages in five districts, which constitute nearly 2.5 per cent of all the villages in the country. By that time, an amount of Tk. 288 million was disbursed to about 84 thousand members, of which about Tk. 164 million had already been recovered. About 51 per cent of the members are female who received about 37 per cent of the total loans disbursed. The proportion of female members was about 39 per cent in 1980. The average savings per member in GF and EF together stood at Tk. 312 which is about 10 per cent of the per capita income in the country.

Table 3.6 Bangladesh: Progress of Activities of the Grameen Bank, 1980-1983

Source: GBP, Annual Reports, 1980, 1981 and 1982; and GBP, Monthly statements for December 1983.

The GB loan is being used basically for undertaking rural non-crop activities¹ (Table 3.7). In 1982 about 43 per cent of the loans was used for trading and shopkeeping, about 24 per cent for processing and manufacturing activities and about 23 per cent for livestock and poultry raising. Only about 2 per cent of the loans was used for agricultural production. Beginning in 1982, credit has also been issued to groups for collective enterprises such as purchase of irrigation equipment, rice hullers, oil mills, and leasing of market places. Trading and shopkeeping accounted for nearly 56 per cent of the loans disbursed to male members, while about 84 per cent of the loans disbursed to female members was for livestock raising and processing and manufacturing activities and about two-thirds for the three activities of milch cow raising, paddy husking and cattle fattening.²

¹ Rural non-crop activities are defined here to include non-crop agriculture such as livestock, poultry and fishery and rural non-farm activities such as manufacturing, construction, transport, trade and commerce.

² Mahabub Hossain, op. cit., Tables 3.4 and 3.5, pp. 64-65.

The GB has succeeded in reaching the people in its target groups. Only about five per cent of the loanees have been found to have own cultivable land of more than 50 decimals and only 2.7 per cent more than an acre (Table 3.8). About 52 per cent of the loanees did not cultivate any land and only 1.7 per cent cultivated more than 2.5 acres. About 62 per cent of the loanees had non-land capital asset valued at less than Tk. 1,000 (US$ 40) and only 6.2 per cent had assets exceeding Tk. 5,000. Thus the GB members are not only land-poor, they are in general asset-poor.

A GB branch in Tangail has extended credit, on average, to about 50 per cent of the households belonging to the target groups in the area of its operation. The households in the target groups who did not yet receive credit appear to be more among pure tenants and agricultural wage labourers than among the other occupational groups. The agricultural labourers are about one-third of the target group households, but they are found to be only about one-tenth among the loanees.³ Since these people are the poorest of the poor, it appears that the GB has not succeeded in serving the extremely poor as much as the other occupational groups. Moreover, since its loan operation has tended to remain limited to those already covered through repeat loans which are virtually automatic subject to good repayment record, the extremely poor continue to remain outside the GB net.

³Ibid., Table 3.12, p. 77.

Table 3.7 Bangladesh: Disbursement of Grameen Bank Loans by Sectors, 1980-1982

Source: Compiled from GBP, Annual Reports.

Table 3.8 Bangladesh: Distribution of Grameen Bank Loanees by Ownership of Land and Other Assets

The performance regarding recovery of loans is indeed excellent. The amount of overdue loans after two years of disbursement is less than one per cent; and only 2.5 per cent of the loanees did not fully repay the loans within the 52 weeks in which a loan is expected to be fully repaid, and the amount overdue with them was only about 2.6 per cent of the outstanding as of end-November 1982.¹ The female loanees have a relatively better repayment record than the male loanees. The GB requires the loan to be repaid in regular weekly instalments. Some lapses have, however, been noticed in keeping up the regularity in the payment of instalments. It has been estimated that about 88 per cent of the amount due was paid in regular weekly instalments - 84 per cent for the male and 94 per cent for the female loanees.²

¹Ibid., Table 3.11, p. 80.

²Ibid., Table 3.15, p. 85.

The GB has a significant impact on the income of the loanees. The per capita income of the households increased from Tk. 1,037 per annum at the beginning of 1980 to about Tk. 1,374 per annum in 1982 at the constant base period prices.¹ Thus their income increased by about 32 per cent over a period of two years when the per capita income of Bangladesh as a whole increased by only 2.6 per cent. Compared with the income of the target groups in areas outside GB operations, the per capita income of the loanee households in selected GB villages has also been found to be higher by about 31 per cent (Table 3.9). The income of the loanee households has also been found to be significantly higher in comparison with target group households in the GB villages, who had not yet received GB loans.

¹Ibid., Table 5.1, p. 122.

Table 3.9 Bangladesh: Impact of Grameen Bank on Income, Employment and Capital Accumulation, 1981/82

Source: Mahabub Hossain, op. cit.

A very important factor behind the increase in income was the additional employment generated for adult females in the households. The average number of women employed per household in productive activities was 1.37 for target group households in control villages, but 1.75 among loanee households. The proportion of female workers was only 5 per cent before the GB intervention; but it rose to nearly 25 per cent in about two years time following the intervention.

There has also been an increase in accumulation of capital (Table 3.9). The total investment in fixed assets during 1981/82 for the loanee households has been found to be about 2.6 times higher than that for the target groups in control villages. About 14 per cent of the capital stock of the loanee households was accumulated during 1981/82 compared to only 4.8 per cent of the control group. Nearly 61 per cent of the investment was made for acquisition of draft animals and agricultural tools and equipment.

The increase in income also had a positive impact on the satisfaction of non-food basic needs (Table 3.10). About 83 per cent of the loanee households incurred some expenditure on health and about 75 per cent some expenditure for betterment of housing compared to about 63 and 55 per cent respectively of the control group. Compared to the control group, the average per household expenditure for the loanee households has been found to be 2.3 times higher for health, 2.4 times higher for housing and 3.7 times higher for clothing. There has however been no significant positive impact on the expenditure on education consequent upon the increase in income.

Table 3.10 Bangladesh: Impact of Grameen Bank on Satisfaction of Non-food Basic Needs, 1981/82

Source: Mahabub Hossain, op. cit.

Prospects and constraints

One may conclude from the above assessment of the initial experience of the GB that it has made a positive impact on the alleviation of poverty in the areas of its operation, even though some of the extremely poor could not be reached. But the GB has so far covered only a very small fraction of the rural poor of the country. The question is whether it can be expanded to a wide enough scale to produce a significant impact on the alleviation of rural poverty at the national level.

One of the problems that the GB may face in expanding its operation is a limitation from the demand side. A major constraint on the expansion of the rural non-crop activities (which, as defined earlier, include non-crop agricultural and non-farm activities) that the GB is financing may be the small size of the markets for their products and services and the limited prospect of their expansion in view of the low and sluggish growth in per capita income of the population in general. However, the GB loanees have not yet faced this problem, perhaps partly because the GB has been operating within a small area so that the loanees can still count on the markets outside the locality. With expansion of GB operations, the competition among non-crop producers would increase and the members will need to count more and more on the markets of their own localities, which might lead to lower prices and reduction in their incomes. On the basis of the expenditure pattern of the loanees, it may be argued however that such a prospect may not pose so serious a problem (Table 3.11). The GB target groups are themselves more than half of the national population, and as their incomes rise they start demanding products and services of one another, thereby mutually expanding their markets. A large proportion of their additional income is spent on food and other necessities produced outside the family, which stimulates production and trading activities to the benefit of all concerned.

But the fact remains that agriculture is the dominant sector both as the supplier of raw materials to non-farm activities and as a source of demand for their goods and services so that a successful and sustained expansion of the GB would depend, to a large extent, on the level and nature of agricultural development, particularly the crop sectors. Also the increase in non-farm income will raise the demand for food which can be met only by raising agricultural production. Thus, although the landless do not benefit much from agricultural production directly, efforts to provide them more employment and income through promotion of non-crop activities may be thwarted if agriculture does not also progress side by side.

Table 3.11 Bangladesh: Expenditure Pattern of Different Income Groups of the Loanee Households

A major constraint on the expansion of GB operations is the low productivity of labour in the activities pursued by the loanees. It has been found that the cottage industries financed by the GB has a labour productivity which is lower than the prevailing agricultural wage rate.¹ The loanees pursue these activities because they can employ female members of the households in them, who have very little opportunity cost. It has also been observed that with every repeat loan, the size of the loan increases, but income generated increases at a much smaller rate because the rate of utilization of the loan for capital formation declines and the rate of return on capital also falls.² In recognition of this problem, the GB encourages loanees to take loans for collective enterprises so that they can use improved technology and thereby increase labour productivity. However, the basic approach remains one of loan to individuals for whatever activities they wish to undertake.

¹Ibid., Table 4.2, p. 105

²Ibid., Tables 4.7 and 4.8, pp. 115-117.

Now, the two intricately related crucial factors in the whole GB operation are: (i) the catalyst Managing Director of the GB, who till now manages to participate in the recruitment and training of all BWs and even plays a direct role in the supervision of their activities, and (ii) the BWs. The catalyst Managing Director will soon have reached the limits of his capacity to extend himself, if he has not already. And there has not been any other catalyst to join him in over five years of the operation of GBP/GB. Once his personal touch is lost it will be much more difficult to imbibe the BWs with proper motivation and dedication. The BWs are, however, the key to the success of the GB. They have to work hard and attend group meetings (having to travel six to eight miles every day - often on foot). If a BW fails to attend a meeting, the instalments to be collected remain unpaid, which may create complications later on in so far as regular recovery of instalments is concerned, as the loanees, poor as they are, may be tempted to spend the amounts. Also, over a longer term, the BWs will, like anybody else, want to have career advancement and good earning prospects, particularly if they are to take the necessary initiative and to put in the required hard work. But the GB cannot give them such remuneration as may be attractive enough to induce them to perform as effectively as needed. On the one hand, the GB’s salary and benefit structures are and will have to be in conformity with those of other public sector banks; and, on the other, if any extra benefits were to be given to the BWs, that will mean an addition to the cost of running the Bank. An estimate shows its total costs to be 16.3 per cent of the total loan disbursed (including 8.5 per cent interest paid to Bangladesh Bank on the money borrowed).¹ It charges an interest rate of 16 per cent (recently raising it from 13 per cent) on loans given. Hence, it is a marginally subsidised operation. The present rate of interest is in line with that obtaining in the organised sectors and should not be raised further if only because the loan is given to the poor to help them become economically viable and not perpetually loan-dependent. From the moral point of view also, charging a higher rate of interest from the poor cannot be justified - more so in view of the fact that the repayment record in the case of large loans extended to big borrowers in the organised sectors is very poor.

¹Ibid., Table 3.18, p. 94.

Finally, on the GB approach, it is observed that there is no process of development involved. The loanees are left to their individual choices as to what to do to utilise the loans as long as they earn some incomes and repay the loans. But it is well-known that credit alone cannot be enough if sustained development is the goal. The cash starved rural poor may be able to do something or the other to earn some income by utilising the loans. But, for sustained growth, it is necessary to promote those activities first which have the best potential considering the supply and demand conditions in the locality as well as the relevant circumstances outside the locality (in other rural areas, urban centres and foreign markets).² But the poor villages, who are mostly uneducated, are not informed of the circumstances outside their own locality and are unskilled. Such limited information is also bound to limit the scope for an expansion of the activities they undertake. For choosing and pursuing appropriate productive activities, they need information, supplies and services such as technical advice, supply of technology, skill training, market information, marketing assistance and other extension services along with credit. The GB approach of just providing credit and leaving the loanees on their own cannot therefore be a viable national anti-poverty programme.

² For a detailed discussion on these issues alongwith suggested planning and implementation mechanisms one may see Q.K. Ahmad, Promotion of Employment and Income through Rural Non-Crop Activities in Bangladesh, op. cit. This paper also contains a brief review of the Grameen Bank pointing out constraints on its expansion along the lines presented here.