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Making Microfinance Work for the Poor:

The Grameen Bank of Bangladesh

Submitted by:

Sukeerti Shrestha

Roll no: 187105

BBA Fall 2018, Year II Sem III

Group B

Kathmandu University School of Management (KUSOM)

Pichhe Tole, Gwarko, Kathmandu

Date: October 19, 2019

Submitted to:

Ms. Anupama S. Panta

Development Economics
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Synopsis

The case talks about the Grameen Bank of Bangladesh which is a microfinance

institution, how it played an important role it in developing Bangladesh by reducing poverty and

transforming it from a symbol of famine to one of hope, its approach, and the challenges it faces.
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Identification of Core Issues

1. How did the Grameen Bank contribute in boosting the development of Bangladesh?

2. What are the challenges faced by the bank?

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Facts on Core Issues

1. The Grameen Bank of Bangladesh targets the poor and the marginalized, helping them

break out of the poverty trap by helping them start or upgrade their own businesses. The

bank also plays a vital role in women empowerment with 97% of its borrowers being

women. They not only provide loans, but also training sessions and group meetings to

increase the chances of the loan being used efficiently. Grameen also provides

uncollateralized loans for which borrowers will have to form a group. This formation of

groups encourages them to start a venture they were not confident starting alone.

Grameen’s borrowers are also successful in capital accumulation with 46% of loans going

for livestock and poultry farming, 25% for light manufacturing and almost none for crop

farming. Grameen is also involved in the social development of Bangladesh. Grameen and

its borrowers encourage hygiene, hard work, self-discipline, and rejecting backward

practices.

2. Grameen bank does face its fair share of problems. Bangladesh suffers from severe

flooding every year. On top of the environmental factors, the cultural factors also pose

challenges. Rural Bangladesh has a conservative Islamic culture which is very patriarchal

to say the least. The women empowerment that the Grameen bank supports and is

facilitating is seen as a threat and many women are harmed or ostracized for simply taking

out a loan. Many are divorced for such a simple act. The nontraditional changes are seen

as a threat to authority and culture, and can be received very violently by conservatives,

claiming that the bank is trying to eradicate Islam. They protest the efforts of the bank to

socially develop their societies by burning down schools and driving women who

participate in market activities out of the village.

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Analysis

In developing countries, what we see is how the rural areas are left undeveloped

and efforts are made to better the urban areas. Opportunities and facilities hardly ever reach the

people there. One such facility is access to credit. Not having an access to credit prevent people

from starting or upgrading their business. It prevents investment. It means that the poor people of

the rural area have little to no chance of ever improving their lifestyle because they are stuck in a

trap.

The people in the underdeveloped rural areas do not have much to spare and are

already doing the most that they can with their skills and technology. They do not earn much which

naturally means that they will have low savings. Because they save so little, it would take an

eternity for them to expand or start a business solely from their own savings. Normally, one would

take out a loan in such a situation, but because the people have no access to credit, they are stuck

working using the same inefficient and old techniques. They lack in productivity and cannot grow

to significantly improve the standard of living of the family. The small businesses will remain

small and fail to meet demands.

When collateral-free loans are offered to the poor, it does a lot. Firstly it facilitates

investment. Given that the people are being guided on new technology and how to increase their
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efficiency, the money from the loans will be used to upgrade the business and boost productivity.

This will, in turn, raise their income. A rise in income will increase both consumption and savings

to a certain point. Consumption is an injection into the economy. This increases the national

income. Moreover, it also increases government revenue through taxes.

In the figure, the x-axis denotes national income and the y-axis denotes expenditure.

We know that National Income is the sum of consumption, investment, government expenditure

and net exports. As mentioned above, collateral-free loans will increase consumption and

government revenue which will increase the national income from Ye to Ye’. It will also have

many indirect impacts. The increased savings of the families could mean that they will invest in

health and education. This will produce skilled human resources and increase productivity. The

new wave of skilled workers could also contribute to technological advancement. All this will

increase total productivity. The growing businesses will require more workers which will also

generate employment and income. This will increase the national income and standard of living

too. We can say that giving loans to poor people causes a sort of multiplier effect on the economy

with one person’s income facilitating another’s and so on.

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An increase in the output level and the personal income will increase the money

demand. At the initial money supply, it will increase the interest rate, but the interest rate will go

down. This is assuming that the government uses proper monetary policies to increase the money

supply.

In the above figure, x-axis represents the money supply and money demand, and

the y-axis represents the interest rates. The initial money supply is denoted by MS1 and the initial

money demand is denoted by MD1. The two are at equilibrium at an interest rate of I1. When the

demand for money increases to MD2 because of the growing income, MS1 and MD2 are at

equilibrium at I2. We see that the interest rate has increased from I1 to I2 in this case. The

government or the Central Bank uses monetary policy to alter the money supply. They increase

the money supply to MS2. Now, MS2 and MD2 form a new equilibrium point at interest rate I3.

This is lower than the two previous interest rates. This is necessary to keep the economy in check.
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97% of its borrowers are women and 96% of its borrowers own less than half an

acre of land. Women in the rural areas are oppressed and confined to traditional gender roles. In

fact, 50% of women were unemployed when they became Gameen members which is a lot

compared to the 7% of men. When the need for labor kept growing, women began joining the

market and some even opened their own businesses. This increased the labor supply and increased

the productivity. We assume that only two factors—capital and labor are employed. Along with

demand for new labor, the firm will also be upgrading their capital resources for maximum

efficiency. In the graph above where Labor is represented by the x-axis and the capital is

represented by the y-axis, we can see that when labor increases from L1 to L2 and capital increases

from K1 to K2, the productivity increases from 10 units to 40 units. Hence, women should be

included to increase productivity. Moreover, it was observed that consumption expenditure

increased more when women borrowed money compared to men. However, it is not as smooth-

sailing as that because Grameen faces a lot of violence and criticism from conservative Islamists

who claim the bank is going against their religion.

While the bank has said that no subsidies remain at present, a few proofs of the

bank having subsidies has been presented. This also brings up a debate on whether subsidizing is

good or bad. Many would say that it is good because the poor cannot afford unsubsidized loans.

However, many also disagree and call it inefficient.

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In the figure, the x-axis represents quantity and the y-axis represents price. Without

the subsidy, the economy would have been at equilibrium at price P* and quantity Q*. However,

with subsidy, the cost for the consumers drops to Pc, but the suppliers will be receiving Pp for the

commodity. In the free market, the consumer surplus would be the area A+B and the producer

surplus would be the area C+D. With the subsidy, the consumer surplus is the area above Pc which

is bounded by the demand curve (A+B+C+F+G). The consumer surplus is the area under Pp

bounded by the Supply curve (B+C+D+E). We are left with a deadweight loss which has been

shaded in the diagram. This deadweight loss is caused by subsidies because they cost the

government too much money than the benefits they give to the consumers and producers. It cost

the government the area labelled S, but only gave a surplus of A+B+C+D.
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The bank also has to deal with negative supply shocks due to the floods in

Bangladesh. In the figure, x-axis shows quantity of output while y-axis shows price. The supply

shock causes the aggregate supply to shift leftwards from AS1 to AS2. This decreases the total

quantity of output from Y1 to Y2 and also raises the price from P1 to P2. Among other

commodities, the prices of agricultural products will shoot up. The increase in prices means that

the real income of the people will fall and it should be noted that the people in question are poor

people who are more or less vulnerable to price changes.

The bank also has to face the growing competition. The number of microfinance

institutions is rapidly increasing and while this can reduce the prices of financial products and

services, it can spark an unhealthy competition between the institutions. This could lead to many

institutions attracting buyers and encouraging them to borrow and trying to offer the best deals to

stay on top. The borrowers will borrow more freely because of all the services being thrown their

way. In this process, it is possible to forget about the borrowers’ ability to pay back. When the

borrowers are unable to pay back, this could start a debt crisis.
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Solutions

1. The government must step in to protect the Grameen Bank’s projects from the violent acts

of the conservatives. The projects help the nation a lot and should be protected so that the

bank does not get discouraged to continue their social efforts.

2. Proper regulations must be put in place and implemented so that it is not as easy to open

microfinance institutions to control the competition.

3. People should be encouraged and made aware to invest their savings in education, health

and advanced technology.

4. The inflation should be checked frequently and should be controlled with the use of

monetary and fiscal policies.

5. The interest rate must be subsidized at an optimal level that will minimize the government

expenditure/loss.

Managerial Implication

The managerial implication imparted by this case is that as a manager, we must check how

the plans formulated and implemented to achieve organizational goals is going and act

accordingly on time, and that we should be able to encourage teamwork and participation

through the use of incentives to encourage them to work efficiently.

Reference

Effect of Subsidies (2016), retrieved from

http://wilcoxen.maxwell.insightworks.com/pages/1896.html
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Honor Code

“On my honor as a student, I pledge that I have neither given nor received aid on

this assignment.”

-Sukeerti Shrestha-