Overcoming Poverty through Credit

The Grameen Bank in Bangladesh is identified as one of the world’s largest banking institutions and has 950,000 borrowers, 11 zonal offices, 97 area offices and 886 branches (statistics of June 1991).

Grameen Bank(GB)loans are disbursed to groups of five members who organise themselves under the guidence of the bank workers. The loans are given to each member but the group as a whole is responsible for the effective use of the loan for income generating activities and for the successful repayment of the loan.

The loans command the market rates of interest and the loans are given under the strict stipulation that they be used solely for income generating activities. The Grameen Bank Approach(GBA)requires no collateral nor guarantees, which are the biggest obstacles to credit that the poor have been found to face in the formal credit market.

Loan processing, done at the "Centre", which is the operating unit of the GB of a specific area, involves the endorsing of the loan. It is after this that the formal application and processing of the loan is done. These processes are very simple and are as far as possible done verbally. Thus the borrowers need only to learn to write and sign their names as acknowledgement of receipt of the loan. This ably accamodates the illiterate.

Loans are disbursed according to the investment requirements of the target group and are generally small and manageable. The average loan size is small, from US$ 35 going up to US$ 300 at the most. However these small loans are considered fairly large in relations to the borrowers’ incomes. At times the loan amounts to a borrower’s earnings of two months. Also the GB points out that it is better to start with small loans initially during which loan the borrowers can develop confidence in both the programme and their own ability to manage the loans.The loans are released in the form of cash and are repayable in weekly installments over a 1 year period. This ensures that the poor borrower is not overburdened.

When full payment is completed, the GB makes available a secondbigger loan. As this might prompt a borrower to repay the first loan fast by other means such as borrowing from amoney lender in order to obtain a second biggerloan, thereby falling into debt, the strict weekly repayment scheme becomes a suitable deterrent.

The GBA also prevents a quicker pace of repayment as it has shown to retard group solidarity and destroy discipline.

Loan disbursement is staggered on a 2:2:1 basis. The two poorest group members receive the first loans. After 6 weeks of successful repayment, the next 2 are given their first loans. The leader of the group receives the final loan when the installments of the second loans have been successfully paid for 6 weeks. This system makes the entire group responsible for all the loans of each member.

The credit scheme has many incentives which promotes members to join the scheme without hesitation and to make regualr and sustained repayment. The biggest is the second loan. Other incentives are that no legal repercussions will result if the loan is not paid and that the obligation to repay does not fall on the family of the borrower if the loanee dies. The credit scheme also promotes social interaction and offers social services such as a pre school service for the members. The scheme also offers housing loans to elder members who are defined as the members who first joined the scheme and are credit worthy.