A good case practice : Grameen Bank model
I- Program, vision, mission
Grameen is the first "bank to the poor", created more than 30 year ago in Bangladesh. It offers credit to the poorest of the poor, who have been kept outside the banking orbit on the ground that they are poor and hence not bankable so they can create their own income-generative activity.
Professor Muhammad Yunus, the founder of "Grameen Bank", 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."
Until now, these loans allowed 12 millions of Bangladeshi (which represent 10% of the population) to cross the poverty line. It aims, on a long term basis, to eradicate poverty.
I think Pr. Yunus will describe its beginning better than I would so here is an extract of the lecture he gave when receiving the peace Nobel prize in 2006. You can also access his whole speech on the following link : http://www.nobelprize.org/nobel_prizes/peace/laureates/2006/yunus-lecture-en.html%20
"In 1974, I found it difficult to teach elegant theories of economics in the university classroom, in the backdrop of a terrible famine in Bangladesh. Suddenly, I felt the emptiness of those theories in the face of crushing hunger and poverty. I wanted to do something immediate to help people around me, even if it was just one human being, to get through another day with a little more ease. That brought me face to face with poor people's struggle to find the tiniest amounts of money to support their efforts to eke out a living. I was shocked to discover a woman in the village, borrowing less than a dollar from the money-lender, on the condition that he would have the exclusive right to buy all she produces at the price he decides. This, to me, was a way of recruiting slave labor."
He then discovered that a lot of people from the village were in the same situation. He listed these people and when the list was done, he had the names of 42 victims who borrowed a total amount of US $27. Acces to proper credit options appeared to be the solution.
On the first place, he tried to convince commercial banks to lend to the poor. But the system required collaterals and the poor were not creditworthy. After several years of experimentation, he decided to create a new institution, following its own "poor-oriented rules".
Created officially in 1983, Grameen Bank today gives loans to nearly 8.5 million poor people, in 73,000 villages in Bangladesh. The repayment rate is 98%.
III- How does it work ?
Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and created a banking system based on mutual trust, accountability, participation and creativity.
GB provides credit to the poorest of the poor in rural Bangladesh, without any collateral.It also functions without any contract or other juridical aspects. It is not the poor's responsibility to go to the bank : the bank comes to them. Grameen bank (village in Bengali) is design to act directly towards it beneficiaries, in their own village to adapt to the local tradition of purdah.
The borrowers form a group of 6 to 8 people (mostly women) and meet on a weekly basis to reimburse their loan. Grameen bank employees also attend the meeting to collect their treat.
The interest rate is 20% and the loan is generally speaking reimburse within a year. In this way, for a 10 000 BDT (150$) loan, the interest will be 1000 BDT (15$).
Since its beginning, the bank developed new loan products such as :
- « flexible loans » : when a borrower doesn't meet his reimbursement target, he can reduce the amount of his weekly reimbursement to improve his financial situation.
- « Housing loans » to construct a proper house « Micro entreprise loans » : after a period of three year, a borrower can obtain a bigger loan to develop his business activity.
- " Higher education loan » : to allow the borrower's children to pursue their studies. The children are responsible for reimbursement, once they start a job after achieving their studies.
- « Beggar loans » : zero interest loans to help beggars starting a small activity Every new loan request is evaluate within 7 days.
Savings schemes have also been implemented. Today, the deposits are more important than the amount dedicated to credit. The interest rate is about 8,5%, using compound interests, in opposition with the simple interests used for loans.
Apart from its banking activities, the bank intents to increase its social impact by implementing "16 decisions" to allow borrowers' families to improve their living condition. Here is few examples : not having too many kids in order to afford education to all of them, not using dowry, build proper latrines...
To conclude, in addition of being created for the poor, the bank also "belong" to them : each borrower as a share in Grameen Bank and 75% of its revenues goes to them (the remaining 25% being the Bangladeshi government's share)
Considering Grameen's success, a lot of countries and organization are replicating and adapting the model to their regional situation. The transposition always has to target the bottom 20% of the population in terms of revenues and keep in mind that the reimbursement rate should be nearly 100%. Micro loan programs are now present in more than 58 countries, on every single continent.
If you're interested about the micro loan topic, I would recommend Muhammad Yunus' book "creating a world without poverty" : it gives more details about how the bank operates, examples of "success stories" and also describes other micro loan programs inspired by Grameen.
And in case you wonder, yes I'm a big fan of Yunus' work !