FINC/045

IBS Center for Management Research

Grameen Bank: The Grameen General Credit System

This case was written by P. Indu, under the direction of Vivek Gupta, IBS Center for Management Research. It was compiled
from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or
ineffective handling of a management situation.

2006, IBS Center for Management Research. All rights reserved.

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 FINC/045

Grameen Bank: The Grameen General Credit System

“Grameen Bank, one of the oldest micro-finance institutions in Bangladesh, is a good example of
how the industry is changing and growing. In 2000, Grameen Bank, began to consider how it
could introduce greater client choice while ensuring credit discipline and controlling costs. This
led to the emergence of Grameen II in 2002, offering deposit services to the general public, greatly
expanding the range of deposit services offered to members, including the very popular „Grameen
Pension Savings‟.”1
- Praful C. Patel, South Asia Regional Vice-President, The World Bank, in 2006.
“Grameen General System (GGS) is not only a powerful and efficient system, capable of providing
custom-made financial services to support the economic and social upliftment of each individual
borrower family, but also it frees micro-credit from the usual stresses and strains.” 2
- Prof. Muhammad Yunus, Founder and Managing Director of Grameen Bank, in 2002.

INTRODUCTION

Saira Begum (Saira) became a member of Bangladesh-based Grameen Bank3 in 1994. With the
loans given by Grameen Bank, she invested in dairy cattle, and with this investment, she earned
regular income. When her outstanding loan was around Tk4 5,000, Bangladesh was ravaged by
floods. Saira Begum lost heavily and was deep in debts. She received a top-up loan from the bank,
which increased the burden of weekly installments. Unable to repay the money she owed the bank,
she stopped attending the mandatory weekly meetings of the bank, and she was not able to obtain
any more loans.
Later, the branch manager of Grameen Bank approached her and explained to her a new loan
offering of the bank called flexi-loan, which required her to pay only Tk 25 a week as installment -
a smaller amount than her earlier installment. Saira began paying the installments regularly and
repaid her entire loan. This made her eligible for a fresh loan, and using this loan she started a
small shop. She had plans to send her school-going son to college using the education loan
provided by Grameen Bank.
Several women like Saira were able to improve their living conditions because of Grameen Bank,
which provided them small loans. For over 25 years, Grameen Bank has been following the
Grameen model of micro-credit, later renamed the Grameen Classic System (GCS) to extend loans
to the poor in the country. Though the system was successful, it was criticized for its standardized

1
“Micro-Credit: The Way Forward,” The Daily Star, January 22, 2006.
2
Muhammad Yunus, “Grameen Bank II Designed to Open New Possibilities,” www.grameen-info.org,
October 2002.
3
Grameen Bank, a pioneer in microfinance, provides collateral free loans to the poor in Bangladesh.
Grameen Bank firmly believes that credit is a cost effective weapon to fight poverty. Grameen Bank
extended facilities to the poor who were not given loans by any other banks. As of April 2006, Grameen
Bank had more than six million borrowers.
4
Taka (Tk) is the currency of Bangladesh. As on June 20, 2006, 1 US$ = 70.73 Taka.

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 Grameen Bank: The Grameen General Credit System

rules, which were strictly enforced. The GCS rules required a strict adherence to repayment
schedules. Once poor borrowers failed to pay their installments on time, they were not eligible for
any further loans.
In order to address the drawbacks of GCS, Grameen Bank introduced a new credit system called
Grameen General System (GGS) popularly known as Grameen II. Elaborating on the need for the
new system, Muhammad Yunus (Yunus), Founder and Managing Director of Grameen Bank said,
“The system (GCS) consisted of a set of well-defined standardized rules. No departure from these
rules was allowed. Once a borrower fell off the track, she found it very difficult to move back on,
since the rules which allowed her to return, were not easy for her to fulfill. More and more
borrowers fell off the track. Then there was the multiplier effect. If one borrower stopped
payments, it encouraged others to follow.”5
The changes were brought out in the form of new products, flexible loans and repayment schemes
for borrowers who were unable to pay their loans on time, deposit services, pension services, etc.
The new system was completely demand driven; the products were tailored to the borrower‟s
needs. The new flexible system allowed the borrowers to decide on the amount, term and payment
schedule of the loan. GGS brought non-members into its fold by allowing them to deposit money
and use other services.

BACKGROUND NOTE

Yunus completed his PhD in Economics from Vanderbilt University in Nashville, Tennessee. He
became the Head of Economics department in Chittagong University in Bangladesh. In 1971,
Bangladesh got its independence. The country was hit by famine in 1974. During this period,
Yunus came face to face with the problems faced by poor women in Bangladesh when he visited
Jorba village, where he saw poor women making bamboo stools. They were in the clutches of
poverty and were forced to sell the products they made to moneylenders at very low prices. He
extended a small loan of US$ 27 to US$ 42 to each of the women. They repaid the amount to the
moneylenders and thus began the journey of Yunus and Bangladesh Grameen Bank.
When Yunus approached the banks in Bangladesh, asking them to lend loans to the poor, they
were not willing to extend credit as the poor were not considered to be creditworthy and did not
have any collateral to offer. Ultimately, in 1976, Yunus obtained a loan from a bank after signing
as a guarantor. This money was lent to the poor. Yunus called the project Grameen Bank project
(Grameen meaning „rural‟ in Bengali). In 1979, Bangladesh Central Bank began providing
financial support to the project. A credit scheme for poor women was successfully implemented in
Tangail district and was then extended to other districts in the country (Refer Table I for the
objectives of Grameen Bank Project).
By 1980, Grameen Bank had disbursed US$ 1.10 million as loans to the rural poor. In 1983,
Grameen Bank was given the status of an independent bank by a special ordinance of the
Bangladesh Government. Initially, government contributed around 60% of the bank‟s capital and
the borrowers held the remaining 40%. However, by 2003, the government held only 7% and
Grameen Bank borrowers held a 93% stake in the bank.
Grameen Bank raised funds through bonds issued to commercial banks and it borrowed from the
Central Bank at subsidized interest rates. The bank also received funds from international agencies

5
Muhammad Yunus, “Grameen Bank II Designed to Open New Possibilities,” www.grameen-info.org,
October 2002.

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like the World Bank and the Ford Foundation.6 Foreign governments also provided funds to the
Grameen Bank at subsidized rates.
Table I
Objectives of Grameen Project
To extend the banking facilities to poor men and women.
To eliminate the exploitation of the moneylenders.
To create opportunities for self employment for the vast unutilized and under-utilized
manpower resources.
To bring disadvantaged people within the framework of some organizational format which
they can understand and operate, and through which they can find socio-political and
economic strength through mutual support.
To reverse the age-old vicious circle of „low income, low savings, low investment‟ into an
expanding system of „low income, credit, investment, more income, more credit, more
investment, more income.‟
Source: www.unesco.org.
In the late 1980s, Grameen Bank diversified into various new ventures. It started leasing unutilized
and underutilized fishing ponds and irrigation pumps. When it was successful in leasing fishing
ponds to the poor, Grameen Bank started expanding its non-banking activities. The Grameen
Fisheries Foundation and the Grameen Krishi (Agriculture) Foundation were formed to oversee the
leasing of fisheries and irrigation pumps. In 1989, the Grameen Trust was formed to provide
training and support to people from other countries to start micro-finance programs. By the mid-
1990s, Grameen Bank had expanded its activities to areas such as venture capital, the textile
industry and as an Internet Service Provider (ISP). All the non-banking ventures of Grameen Bank
were grouped under the Grameen Family (Refer Table II).
Table II
Grameen Family
Foundation Description
Grameen Trust Grameen Trust was formed in 1989. It provided training to organizations
for replicating the Grameen Bank model in other countries.
Grameen Fund Grameen Fund was formed in 1994 to provide capital for the new ventures.
Grameen Grameen Bank‟s IT department was hived off into Grameen
Communications Communications in 1994. In 1997, it entered the ISP market.
Grameen Shakti This was formed in 1996 to provide renewable energy in the rural areas.
Grameen Established in 1997 to provide education to bank‟s members and their children.
Shikkha It also extended scholarships to children for pursuing higher studies.
Grameen Grameen Telecom was formed to provide telephone services to the rural
Telecom areas. It provided GSM cellular mobile phone services to 100 million rural
people in and around 68,000 villages.
Grameen A 100% export-oriented composite knitwear factory with knitting, dyeing,

6
The Ford Foundation was established in 1936. It supports activities that help build common
understanding, enhance excellence and enable people to improve their lives.

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 Grameen Bank: The Grameen General Credit System

Foundation Description
Knitwear finishing and garments production facilities. Most of its finished products
Limited are exported to Europe.
Grameen This became operational in 1996 and it provided Internet service. It also
Cybernet Ltd. offered customer service, technical support and web page consulting.
Source: www.grameen-info.org.
As of April 2006, Grameen Bank had 6.04 million borrowers, of whom 96% were women. The
activities of the bank were spread across more than 65,000 villages in Bangladesh through 2,014
branches. Since its inception, the total loan disbursed was Tk 271.94 billion and total outstanding
loan as of April 2006 was at Tk 30.31 billion. Grameen Bank maintained a loan recovery rate of
98.41% (Refer Exhibit I for Grameen Bank as of April 2006).

THE GRAMEEN CLASSIC SYSTEM

Organizing people into groups of five members each and bringing together a few such groups to
form a center was the keystone of GCS. Under the system, group liability replaced the collateral
that was required by the banks to extend loans. The group had members from a homogeneous
background, who knew each other, but were not related to each other. Six to ten such groups
formed a center and each village had one or two centers. A branch of Grameen Bank, with branch
manager and employees covered 15 to 20 villages, with the covered area not exceeding 50 square
kilometers. Ten to fifteen branches come under the purview of one area office. About 5 - 10 area
offices were controlled by one zonal office. All the zonal offices reported to the head office
located in Dhaka (Refer Exhibit II for organization structure of Grameen Bank).
After a branch was set up, the employees of Grameen Bank visited villages in order to familiarize
themselves with the conditions there. The prospective clients were identified and were informed of
the purpose, functions, and the operating methods of the bank. The employees encouraged poor
people to become members of Grameen Bank. The members were to be from households with less
than half an acre of farmland and assets of limited value. The members needed to be located within
the operating area of the branch of Grameen Bank.
Five members formed a group. After the formation of the group, the members were taught how to
sign and were informed about the different products that the bank had to offer. They were given
details about their weekly installments and weekly meetings and were trained for a week on the
rules of the bank and the social contract of the bank, known as the sixteen decisions (Refer Exhibit
III for the sixteen decisions). After the training, an oral exam was conducted to test the
understanding of the members regarding the rules and operations of the bank.
The group then selected one person to head the group. This person‟s main responsibility was to
maintain discipline in the group. The head of the group served a term of one year, after which it
was the turn of another member to head the group. Another person was chosen to assist the head in
maintaining the group. Once the group was formed it began interacting with other groups forming
a Kendra or a Center. Each center had six to ten groups. Once a center was formed, it was free to
decide about the members who could form a part of these groups.
Every center selected a head and an assistant head of the center. These positions were not
permanent and revolved among the members over a period of time. The centers also decided on
the place where they would conduct their weekly meetings. Most of the transactions took place
during these weekly meetings. An employee from the bank known as Kendra Manager was present
during the weekly meeting. It was mandatory for all the members to attend the weekly meetings.

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In the first stage, two of the members of the group were eligible to receive loans. These small loans
were given for income generating activities, utilizing the skills that the borrowers already
possessed. The two borrowers were selected by other group members, and generally the most
needy in the group were chosen. The group was observed for a month to ensure that they adhered
to the rules set by the bank. When the two borrowers stuck to their repayment schedule, and repaid
the installments for the first six weeks, the loan was extended to two other members. The head of
the group was the last person to receive the loan. The other members of the group, exerted pressure
on the borrowers to repay their loans on time. Grameen Bank followed the group liability model,
where members guaranteed each other‟s loans. According to the bank, it never used joint liability
strictly, but employees and group leaders refused membership to people who could not pay the
installments regularly (Refer Exhibit IV for features of loans extended under GCS).
Savings were mandatory for all the members. From the loan disbursed to each member, 5% was to
be deposited into a compulsory group fund. Every week, all the members deposited Tk 1 into the
group fund. Loans from the group fund could be taken by the members for personal needs with the
consent of other members and had to be repaid within one month. The group fund was to be
operated by the head of the group. Apart from the group fund, Tk 1 every week was deposited by
members who had taken loans as compulsory savings. All the transactions were conducted during
the weekly meetings by the Kendra Manager.
Under GCS, only one loan called the general loan was offered. The loan was for a fixed period of
one year and was to be repaid in 50 equal weekly installments. The installment included the
principal amount to be repaid and an additional interest component of 20% per annum. The rules
were rigid, not allowing installments or loans to be prepaid. On the repayment of the first loan, if
the members required, an additional loan was provided.

NEED FOR A NEW SYSTEM

The floods that ravaged Bangladesh in 1998 devastated most of the country, and several places
were submerged under water for over two months. The floods affected more than 1.2 million
Grameen members and most of the borrowers were unable to repay their loans. The bank relaxed
the terms of repayment and tried to help the borrowers rebuild their lives by providing additional
loans. It was not long before the borrowers faced the burden of paying higher installments, which
was beyond their means. The repayment levels decreased and several borrowers stopped attending
the weekly meetings. In order to cover the defaults, Grameen Bank obtained Tk 2 billion loan from
the commercial banks and raised Tk 1 billion through bonds. The net profit of the bank reduced to
Tk 77 million by 1999 from Tk 103 million in 1998 and reduced further to Tk 11 million by 2000.
The incidents showed up the rigidity of the Grameen Bank‟s credit system. The system was
governed by standard rules and any departure from those was not allowed. If any of the members
dropped out of the system due to their inability to pay the installments, it was very difficult for
them to come back to Grameen Bank.
Then Grameen Bank decided on designing a new credit system, keeping in mind the new demands
of the borrowers and drawing from the experiences of over 25 years of operating the bank. The
processes of designing the new product began in April 2000. Some of the features of GCS
remained unchanged. These included village center meetings, five member groups, visiting field
workers and importance given to women.
The new system was pilot tested in few of the branches, before it was launched in a full fledged
manner. By early 2001, GGS was all set to be launched. The staff was trained as per the needs of the

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system. Though there was initial skepticism among the staff about the applicability and success of the
new model, the top management held on to its stand and went ahead implementing the new system.
The challenge that Grameen Bank faced was to achieve the transition from the GCS to the new
GGS, without causing any discomfort to thousands of borrowers. By March 2001, the
implementation of the new system began, and this went on until April 2002. By then, all of
Grameen Bank‟s 1,175 branches had adopted GGS.
GGS was significantly different from GCS. Several loans were scrapped in favor of new loans, the
group fund was done away with and so was the branchwise limitation set on the amount of loan
that could be disbursed. Earlier, it was mandatory to borrow for one whole year, but this was
scrapped in favor of a flexible time period. The changes brought in by Grameen II were
summarized by Yunus, “….gone are the general loans, seasonal loans, family loans, and more than
a dozen other types of loans; gone is the group fund; gone is the branch-wise, zone-wise loan
ceiling; gone is the fixed size weekly installments; gone is the rule to borrow every time for one
whole year, even when the borrower needed the loan only for three months; gone is the high-level
tension among the staff and the borrowers…”

THE GRAMEEN II CREDIT SYSTEM

One of the major changes that was brought through GGS was that the group liability system was
discontinued and the individual liability system was adopted. The loan of each member was
secured against her word. Against the previous practice of providing the loans to only two of the
needy people in the group, the loans could be provided to all the members of the group. The first
basic loan provided to the new members was Tk 5,000; fellow members could recommend for a
higher or lower loan amount. The final decision on the amount to be disbursed was made by the
Kendra Manager.
If the borrower paid all the installments on time and met the requirements of obligatory savings,
along with regular attendance at the weekly meetings, then the loan ceiling could rise by 10%. If
all the other members of the center were also paying the loans on time, the ceiling could further
increase by another 10%.
The term of the loan was decided by the member in consultation with the Kendra Manager and
could range from 3 months to 36 months. For loans with a duration of more than 12 months, after
26 weeks, the members could re-borrow the money that was repaid during that period. This
amount was added to the outstanding loan. If some stringent conditions like regular attendance in
weekly meetings and total repayment without missing any installment were fulfilled, the borrowers
could even obtain a loan equivalent to double the amount repaid during the previous six months.
The loans were repaid in weekly installments, beginning one week after disbursement. In
consultation with other group members, center leaders and the Kendra manager, members could
decide on the repayment schedule. The loan attracted an interest rate of 20% per annum. Total
interest was calculated and divided into weekly installments for the life of the loan.
The new liberal credit system was based on the premise that the poor always repay their loans.
Grameen Bank believed that it was only due to some unforeseen incident that a poor person found it
impossible to pay back the loan regularly as per the decided terms. The new system advocated that a
temporary default in loan repayment need not debar the person from the scheme, as the person would
be paying additional interest for the period (Refer Table III for an overview of GGS).

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Table III
Overview of GGS
Individual savings accounts (vs group savings accounts in the GCS system).
Loans can be disbursed to all the members of a group at a given time.
Non-members can save but cannot borrow.
Pension Scheme (GPS) is compulsory for those taking larger loans (above Tk 8,000).
Explicit removal of joint-liability or group-guarantee practices.
Introduction of the flexi-loan concept (or long-term loan) for borrower who falls into
difficulty.
Source: www.adb.org.
BASIC AND FLEXI-LOANS
GGS consisted of one prime loan product called the basic loan. It provided flexibility to design the
loan according to the requirements of the borrower. The term of the loan could range from 3
months to 3 years. When the borrowers had developed their skills, commitment and discipline for
conducting small businesses and expanding existing businesses, larger loans were provided. If the
members were regular in repaying their basic loan, saving, and attending the weekly meetings
regularly, they could opt for business expansion or special production loans. The borrowers were
also allowed to prepay the installments and loans.
The installments could also be scheduled according to the borrower‟s convenience. During the
peak season, when the income was higher, the borrowers had the option of paying weekly
installments or paying larger amounts in each installment. In the lean season, the amount of
installment was reduced. Before the disbursement of the loan, the repayment schedule was fixed
and the borrower was obliged to follow it.
All the borrowers started with a basic loan and continued borrowing, once they paid all the
installments as per schedule. In case the borrowers faced difficulty in repaying the loans, Grameen
had created an exit option, wherein the basic loan was converted into flexible loan (flexi-loan) or
renegotiated loan.
A member was eligible for a flexi-loan when she failed to repay ten consecutive installments due
to financial difficulties or when she did not pay pension savings scheme7 installments for four
consecutive months. Fulfilling any of the two conditions was mandatory and members could not
opt for flexi-loans at their will. Once the borrower opted for a flexi-loan, in consultation with the
Kendra Manager, a new term and schedule for the remaining outstanding balance was decided.
Under the flexi-loan scheme, another repayment schedule was worked out, which could reduce the
installment amount and increase the repayment duration. The value of the flexi-loan could not be
more than the value of the basic loan that the borrower had obtained. Once the flexi-loan was fully
paid, the borrower could again opt for a basic loan.
Yunus termed the basic loan as the „Grameen micro-credit highway.‟ As long as the borrowers
adhered to their repayment schedules they remained on the highway. After repaying the loan, the
borrowers could opt for a higher loan and continued to remain on the highway. If the borrowers
failed to hold on to their schedule they needed to exit from the highway and take a detour, in the
form of flexi-loans. When borrowers failed to repay ten consecutive installments, they were moved

7
The pension savings scheme was applicable to borrowers with loans of more than Tk 8,000.

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to flexi-loans. This provided the borrowers with a repayment schedule according to their
convenience and the size of installment was reduced and the duration was increased. Once the
borrower was able to overcome the problems, they would again be a part of the highway.
However, if the problem of non-payment of installments persisted, the borrowers had to continue
with the flexi-loan with still lower installments (Refer Exhibit V for Microcredit Highway).
Once the borrowers opted for the flexi-loan, the higher loans facility that they enjoyed by being a
part of the highway got wiped out and when they reentered the highway, the loan ceiling was
renegotiated and was equivalent to the entry level loan. The flexi-loan was only a departure from
the basic loan and could not be given independently. The loan was not attractive as the amount
extended was always lower than the basic loan. The borrowers of flexi-loan need to continuously
try to reenter the highway.
The flexi-loan provided the required opportunity to borrowers to remain in the system in spite of
having been unable to pay their installments on time as against the practice of being expelled from
the system under the GCS.
GGS followed stringent norms for recognizing loans at risk, making provisions for them and for
writing them off. Every time a borrower opted for a flexi-loan, 50% of the balance of the loan and
accrued interest was provisioned at the end of the financial year. In order to avoid these costs, the
bank encouraged the staff to design basic loans according to the repayment capacity of the
borrowers. If flexi-loan did not get repaid in two years, then 100% provision was made for the
loan. When the loan did not get repaid in three years, it became a bad debt.
If the borrowers did not pay installment for ten consecutive weeks, or were not able to pay the
amount in six months and did not opt for the flexi-loan, then they were categorized as willing
defaulters. Once a borrower became a defaulter, 100% provision was made for the amount that
included unpaid principal and interest. After a period of one year, the amount was written off. If
the borrowers failed to repay the loan in spite of opting for several flexi-loans, they were
categorized as unwilling defaulters.
SAVINGS ACCOUNT
Since its inception, Grameen Bank had maintained a group fund system. However, under GGS, the
group fund and the group joint account were done away with and the borrowers were required to
open two accounts, a personal savings account and special savings account. When the loan was
taken, 2.5% of the amount was deposited into the personal savings account. The borrowers were
also required to deposit a minimum amount every week depending on the value of the loan taken.
For loans upto Tk 15,000 the weekly savings was Tk 5 and for loans of Tk 100,000, the weekly
saving was Tk 50. The borrowers could also deposit more money if they wished to. The minimum
deposit amount could also be determined for a center in consultation with the Kendra Manager.
Borrowers were free to withdraw money from the personal savings account at any point of time,
provided they fulfilled the obligations related to the loan repayment schedule. Deposits could be
made during the weekly center meetings but to withdraw the money, a visit to the bank was
necessary. Interest of 8.5% p.a. was given on the deposits based on the daily balance.
About 2.5% of the loan was deposited into the special savings account. The amount deposited in
special savings account could not be withdrawn for three years. After three years, the amount could be
withdrawn, provided the minimum balance was Tk 2,000. The interest paid for the special savings
account was 8.5%. Some amount from the special savings account was used to buy the shares of
Grameen Bank. All the members were required to hold at least one share of Grameen Bank.

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In case of flexi-loans, borrowers could not withdraw any amount from their savings accounts. The
obligatory savings of 5% were deposited entirely into the special savings account of the member.
The borrowers who borrowed more than Tk 8,000 were required to open another account called
the Pension Savings account, where they were required to deposit Tk 50 a month for a period of
five years or ten years. While for the members borrowing more than Tk 8,000, the saving was
obligatory, for other borrowers it was voluntary. Under the five year scheme, the interest was 10%
and under the ten year scheme, the interest provided was 12%. Payments could be postponed by a
maximum of three months, provided borrowers deposited an additional amount apart from the
monthly installment. As of April 2006, the balance under pension fund stood at Tk 9.36 billion.
If the payments were due for more than four months, the account would be closed and the deposits
were returned to the borrower (the deposits returned carried lower interest than the agreed rates).
When the borrower‟s outstanding loan was greater than Tk 8,000 and pension savings were not
paid for more than four months, the loan was converted into a flexi-loan.
After the specified period, the lump sum amount could be withdrawn or could be converted into a
monthly income scheme. Owing to its popularity, many of the borrowers were saving much more
than the mandatory 50 Tk per month in the scheme.
When GGS was implemented, group savings were converted into new personal savings and special
savings accounts. After the conversion, there were 2.25 million personal savings accounts and an
equal number of special savings accounts. As the popularity of the personal savings accounts grew,
the borrowers started using the accounts to save and withdraw money and started depositing larger
amounts of money beyond the mandatory requirement. After the introduction of new savings
schemes, the savings with the bank have increased from US$ 146 million in 2002 to US$ 344
million in 2004. Of this, members‟ savings accounted for US$ 299 million as of 2004.
OTHER PRODUCTS
Insurance: Another new concept introduced in GGS was loan insurance. According to this
scheme, on the last day of the financial year, borrowers were required to deposit a small amount in
loan insurance savings account. The amount to be deposited was equivalent to 3% of the total
outstanding amount (loan and interest) on the last day of the year. If the outstanding amount was
higher in the next year, 3% of the extra amount was to be deposited.
In the event of the death of the borrower, the outstanding loan amount was paid by the insurance
fund. The family of the deceased also received amount equal to the total savings in the borrower‟s
insurance savings account.
Fixed Deposits: GGS also offered fixed deposit services to its members. Lump sum amounts deposited
for one year were paid interest at 8.75% per annum in the year 2003. For a longer term, interest was
paid at 9.5% for a period greater than one year. In another scheme called „double in 7 years,‟ after a
period of seven years, Grameen Bank provided amount that was double the initial lump sum amount
deposited. In monthly income scheme, immediately after the amount was deposited, every month a
certain amount of money was paid to the depositor. The interest rate in monthly income scheme was
10.04% per annum for a five year scheme and 10.67% for a ten year scheme.
Grameen Bank extended the savings scheme to non-members also. They could open fixed deposit
accounts including „double in 7 years‟ and monthly scheme accounts. Non-members could not opt
for the pension scheme account.
Scholarships/Education Loans: Grameen Bank provided scholarships for the children of
borrowers. Each branch of the bank extended four scholarships of which two were reserved for
girls. The other two were open for both boys and girls. Grameen Bank started off by providing one

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scholarship from each branch and this was subsequently increased to four per branch. The bank
gave scholarships in order to encourage these children to study in colleges and universities. Yunus
believed that education was important to eradicate poverty and provided the children of Grameen
borrowers with education loans covering the cost of tuition fees, books and other expenses. As of
May 2006, 17,173 girls and 12,299 boys received scholarships amounting to Tk 21.37 million.

LOOKING AHEAD

The introduction of Grameen II had a positive impact on the membership and portfolio size of the
bank. The number of active clients grew to over four million by 2004 and to 6.2 million by 2006
from 2.3 million in 2002. Due to the introduction of new savings products, deposits grew from
US$ 163 million in 2002 to US$ 450 million by the end of 2005. As of May 2006, total deposits
were at US$ 506.67 million, with members‟ deposits at US$ 321.05 million and non-members‟
deposits at US$ 185.62 million. As of May 2006, total outstanding loans stood at US$ 444.39
million with a 98.55% rate of recovery. Outstanding basic loans amounted to US$ 412.72 million,
flexible loans US$ 20.74 million, housing loans US$ 6.10 million, and other loans amounted to
US$ 4.83 million.
In 2003, the first year of implementation of GGS, the profits of Grameen Bank surged from Tk 60
million in 2002 to Tk 358 million. Net profit increased to Tk 422 million by 2004 and to Tk 1045
million by 2005. Grameen Bank transferred the profit earned for 2005 to a rehabilitation fund that
was created for coping with disasters. Analysts said that increasing interest income could be
attributed to the surge in profits.
After adopting the Grameen II system, many branches of the bank achieved break-even within six
months of operations. At the branch level, deposits grew with the introduction of the new schemes.
With growth in deposits, the cash resources of the bank grew and the bank was able to extend
bigger loans. Due to the changes made in the range of products, it attracted several new members.
There was initial skepticism among analysts that flexi-loans were not financially viable and could
get out of control in the long run. Several analysts feared that Grameen Bank would face a
situation worse that that in 1998. Proving them wrong, by the end of 2004, all the loans that were
in arrears when Grameen II came into picture had been either repaid or written off. With the
changes brought in the system, the repayment of loans improved. Members were free to access
their personal savings accounts to repay loan installments. With the flexibility to prepay
installments, many of the borrowers repaid when they had money to spare.
With growing competition among microfinance institutions in extending loans, the field workers
were under pressure to recruit members quickly. In such a scenario, the waiting time required to
join a group reduced drastically. The time before the extension of the first loan was only around a
week. Even if borrowers were a part of other MFI, loans were extended without taking their earlier
loans into consideration.
According to Grameen Bank‟s internal findings reported during 2005, there were very few
conversions from basic loan to flexi loan. Analysts opined that the staff was given a lot of
responsibility in designing the loans and installments. As most of the borrowers were uneducated
and failed to understand the details, ultimately it was the field worker who made the final decision.
The field workers continued to enforce loan payment discipline among the members, often
resorting to tactics such as refusing to process new loans and savings withdrawals, until all the
borrowers paid their installments. When Kendra Managers found that any of the members were
falling into financial difficulties, they promised them top up loans if they paid their installments

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 Grameen Bank: The Grameen General Credit System

regularly for 26 weeks. The top up loan was used by the members for repaying the loan, rather
than any productive activities.
Another problem that analysts feared might arise was that with the possibility of the flexi loan
option, borrowers might not strive to repay the basic loan since they had the option of a flexi-loan.
Analysts feared that the discipline that Grameen Bank had built over the years could be eroded.
Moreover, Grameen Bank opting to make 50% provision on flexi loans and 100% provision, when
the loan was not repaid for two years, was not received well by industry observers. They felt that if
flexi loans gained popularity, the bank would end up over-provisioning. Observers found several
instances where higher provisions were made. In some cases, when borrowers did not move to
flexi loans, after ten consecutive installments were not paid, the loan was 100% provisioned.
The savings scheme, where borrowers were free to withdraw their savings, was also viewed with
skepticism by industry analysts. They were of the opinion that once the borrowers begin
withdrawing their savings to repay weekly installments, the discipline which they had would no
longer be present.
Notwithstanding the criticism, Yunus planned to extend the new services of Grameen Bank into
other areas (Refer Exhibit VI for Grameen Bank‟s Struggling Members scheme). Grameen Bank‟s
village phone had gained popularity across Bangladesh. Grameen Bank‟s subsidiary, Grameen
Telecom provided rural women loans to buy mobile handsets and solar chargers under lease
financing scheme. These phones functioned as pay phones in the villages where fixed lines were
not available. The women owning the phone extended services to other villagers and charged them
for making and receiving calls.
Grameen proposed to partner with Danone Food Company of France to make nutritious and
inexpensive baby food. Other plans of Yunus included low cost eye care and rural hospitals
providing video conferencing facilities. Grameen had also created the largest commercial energy
distribution company in the world through Grameen Shakti, which sold solar panels in Bangladesh
to address the needs of power and electricity. According to Yunus, “I‟m not a salesman of micro-
credit. My patient is poverty. If micro-credit does not work for poverty, I have no business with it.
I feel that it has an important contribution to make, but I‟m not going to stop here. I‟ve got to find
every single piece that works for poverty alleviation. I‟m not promising that every business will be
as successful as everything else, but I‟ll keep trying.”8

8
“Can Technology Eliminate Poverty?” BusinessWeek Online, December 16, 2005.

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 Grameen Bank: The Grameen General Credit System

Exhibit I
Key Statistics of Grameen Bank (April 2006)
6.04 million borrowers (96% women).
2,014 branches spread across 65,847 villages.
Amount of Loan disbursed since inception – Tk 271.94 billion.
Amount repaid – Tk 241.63 billion – Outstanding Tk 30.31 billion.
Loan disbursed in one year (May 2005 to April 2006) – Tk 43.64 billion.
Projected disbursement for 2006-07 – Tk 54 billion.
Recovery rate 98.41%.
Deposits Tk 34.46 billion.
Deposits equal to 114% of the total outstanding.
Revenue in 2005 Tk 7.39 billion.
Interest payment on deposits Tk 2.29 billion.
Profit in 2005 Tk 1045 million.
Source: www.grameen-info.org.

Exhibit II

Grameen Bank’s Organization Structure

Head Office

15 Zonal Offices
Zonal Office

5 -10 Area Offices

Area Office

10-15 Branches
Branch

30 – 40 Centers
Center

6-10 Groups
Group

5 Members
Member

Compiled from various sources.

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 Grameen Bank: The Grameen General Credit System

Exhibit III
Sixteen Decisions of Grameen Bank
We shall follow and advance the four principles of Grameen Bank – Discipline, Unity,
Courage and Hard work – in all walks of our lives.
Prosperity we shall bring to our families.
We shall not live in dilapidated houses. We shall repair our houses and work towards
constructing new houses at the earliest.
We shall grow vegetables all the year round. We shall eat plenty of them and sell the
surplus.
During the plantation seasons, we shall plant as many seedlings as possible.
We shall plan to keep our families small. We shall minimize our expenditures. We shall
look after our health.
We shall educate our children and ensure that they can earn to pay for their education.
We shall always keep our children and the environment clean.
We shall build and use pit-latrines.
We shall drink water from tube wells. If it is not available, we shall boil water or use alum.
We shall not take any dowry9 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.
We shall not inflict any injustice on anyone; neither shall we allow anyone to do so.
We shall collectively undertake bigger investments for higher incomes
We shall always be ready to help each other. If anyone is in difficulty, we shall all help him
or her.
If we come to know of any breach of discipline in any center, we shall all go there and help
restore discipline.
We shall take part in all social activities collectively.
Source: www.gdrc.org.

9
Dowry refers to payment in cash or/and kind by the family of the bride to the groom and his family at the
time of the wedding.

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 Grameen Bank: The Grameen General Credit System

Exhibit IV
Features of Loans Extended Under GCS

Very small loans given without any collateral;

Loans repayable in weekly installments spread over a year;
Eligibility for a subsequent loan depends upon repayment of first loan;
Individual, self chosen, quick income generating activities which employ the skills that
borrowers already possess;
Close supervision of credit by the group as well as the bank staff;
Stress on credit discipline and collective borrower responsibility or peer pressure;
Special safeguards through compulsory and voluntary savings to minimize the risks that the
poor confront;
Transparency in all bank transactions, most of which take place at center meetings.
Compiled from various sources.

Exhibit V

Grameen Micro Credit Highway

Source: www.grameen-info.org.

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 Grameen Bank: The Grameen General Credit System

Exhibit VI
Grameen Bank – Struggling Members’ Program
Refuting the allegations that Grameen Bank was serving only the higher strata among the poor,
the bank started a struggling members‟ program in 2004, which aimed at reaching the poorest of
the poor. To extend loan facilities to beggars, who were not part of any group or who do not
have any savings, Grameen Bank eased its rules. The centers were encouraged to bring destitute
families into their fold and become their mentors. It was not necessary for destitute to be a
member of any of the groups or to pay weekly installments or to save.
Typically, the loan provided was around Tk 500. The loan was collateral free and no interest
was charged on the loan. The repayment schedules were flexible and decided by the borrowers
themselves. The loan was to be repaid from money not earned through begging.
In order to boost their morale and improve their confidence, the beggars were given identity
badges with the logo of Grameen Bank. In some cases the bank entered into agreements with
local shops to provide credit to its struggling members, with the assurance that in case of any
default, the bank would pay the remaining amount. The struggling members were encouraged to
sell items like candy, ribbons, pickles and toys in the nearby villages. The struggling members
were also covered under the loan insurance scheme. As of July 2005, Tk 31.11 million was
distributed to more than 47,000 struggling members.
Source: www.grameen.com.

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 Grameen Bank: The Grameen General Credit System

Suggested Readings & References:

1. Poverty Reduction Strategy: The Grameen Bank Experience, www.gdrc.org, February 1994.
2. Bornstein David, The Barefoot Bank With Cheek, www.theatlantic.com, December 1995.
3. From the Land of Plenty to ‘the World’s basket case’, ABA Banking Journal, May 1996.
4. Muhammad Yunus, A Bank for the Poor, UNESCO Courier, January 1997.
5. The Other Government In Bangladesh, The Economist, July 23, 1998.
6. Pepall Jennifer, Bangladeshi Women and the Grameen Bank, www.idrc.ca, August 4, 1998.
7. Mark Skousen, The For-Profit Antipoverty Agency, Forbes, November 15, 1999.
8. Milner Kate, Fighting poverty in Bangladesh, www.news.bbc.co.uk, March 17, 2000.
9. Microcredit' rebuilding houses, lives in Bangladesh, Asian Economic News, June 3, 2002.
10. Muhammad Yunus, Grameen Bank II - Designed to Open New Possibilities,
www.grameen-info.org, October 2002.
11. Pathania M. Jyoti, Bangladesh’s Micro Credit: Millennium's Recipe For Poverty
Alleviation, www.saag.org, February 24, 2003.
12. Nada Kobeissi, Fariborz Damanpour, From Poor to Entrepreneur An Innovative
Strategy to Entrepreneurship and Small Business Development, Journal of Enterprising
Culture, December 2003.
13. Dipal Chandra Barua, A Sustainable Program for the Most Poor and Most Vulnerable
People - The Experience of Grameen Bank, Asia Pacific Regional Micro-credit Summit,
February 17, 2004.
14. Muhammad Yunus, We Can Create a Poverty Free World, COE Frontier Economics
Lecture, University of Tokyo, January 26, 2005.
15. Muhammad Yunus, Grameen Bank’s Struggling (Beggar) Members Programme,
www.grameen-info.org, July 2005.
16. Jeffrey Gangemi, Microcredit Missionary, BusinessWeek, December 26, 2005.
17. Can Technology Eliminate Poverty? BusinessWeek Online, December 26, 2005.
18. David Hulme, Karen Moore, Why Has Microfinance Been a Policy Success in
Bangladesh (and Beyond)? ESRC Global Poverty Research Group, March 10, 2006.
19. Micro-Credit: The Way Forward, The Daily Star, January 22, 2006.
20. Stuart Rutherford, Microsave Briefing Notes on Grameen II.
21. www.worldbank.org.
22. www.grameen-info.org.
23. www.microfinancegateway.org.

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