Professional Documents
Culture Documents
Lecture # 13
Week 7
Structure of this class Muhammad Yunus and the founding of Bangladeshs Grameen Bank The group lending methodology re-visited Limits to Group Lending Grameen Bank II Main challenges
Financing out of his own pocket could not meet growing demand
Yunus convinced the Bangladesh Central Bank to help him set up a special branch that catered the poor of Jobra Another trial in Tangail (North Central Bangladesh) assured success was not region-specific Grameen went nationwide, village by village, thanks to donor agencies: IFAD, Ford Foundation, and the governments of Bangladesh, Norway, and the Netherlands
-- Rapid growth
Under the the Grameen classic methodology Advantages: Economies of scale Agency Costs were reduced as the bank delegated screening, monitoring, and loan enforcement onto the borrowers via social sanctions Efficiency gains: borrowers faced lower agency costs Promotion of mutual assistance and solidarity (insurance)
Disadvantages
Group lending under joint responsibility difficult to replicate in sparsely populated areas Social sanctions difficult to impose on close relatives Scarcity of much needed group leaders
Attending frequent repayment meetings time consuming and costly for the borrowers
Risk aversion
Scope for collusion undermines the banks ability to harness social collateral
Too harsh on borrowers as member were experiencing negative idiosyncratic shocks
Grameen II
Foods in the 1990s prompted Grameen to lend for rehabilitation Amounts lent exceeded capacity to repay Widespread defaults and demands for withdrawals from group fund Rules were too strict, and failure to repay by one member triggered group and entire center defaults The system was redesigned under the name Grameen Generalized System or GGS and was launched in 2001
Main features
Sharp reduction in number of financial products (family loans, seasonal loans) No more compulsory fund Relaxation of fixed-size weekly installments
Savings
Loan insurance Growing credit ceilings Destitute members program Computerization of Grameen accounting and monitoring systems
Main challenges
Excessive reliance on a charismatic leader Governance: Pyramidal structure even though a coop on paper Capacity to cope with aggregate shocks And last but not least: Social Business - Next class: The Case of Financiera Compartamos (consult the web site for required readings) Have a nice weekend -