The Repayment Mechanism The World Upside Down At Grameen we have always tried to maximize operational simplicity.

Today we have arrived at this simple repayment mechanism that all our borrowers understand almost immediately: - one year loans - equal weekly installments - repayment starts one week after the loan - interest rate of 20 per cent - repayment amounts to 2 per cent per week for fifty weeks. - interest payment amounts to 2 taka per week for a 1000 taka loan. We decided that if Grameen was to work, we had to trust our clients. From the very first day, we decided that in our system there would be no room for the police. We never use the judiciary in seeking repayment of our loans. We assume that we know how to do our business. If we dont, we should get out of banking and go into some other venture. We do not involve lawyers, or any outsiders. It is our business, and we try to ensure repayments as best we can. That is our job. There is no legal instrument between the lender and the borrower. We feel our relationship is with people, not with papers. We build up the human link based on trust. Grameen succeeds or fails depending on how strong our personal relationship is with the borrowers. We place trust in people, and the result is that they in turn trust us. The meaning of the word credit is trust. And yet over the years as commercial banking has become institutionalized, it has built its entire edifice on the basis of mutual distrust.

Today banks tend to assume that every borrower is going to run away with their money, so they tie him or her up with all kinds of legal papers, and all kinds of lawyers pour over the documents to make certain the borrower cannot escape the reach of the bank. In some cases the borrower does end up cheating the bank, but in most cases this is not so. If one of our bank workers is robbed (which is a very rare incident), usually all the borrowers in that village will find out who did it and will hunt them down. Their power, when acting together in a concerted effort can be very considerable. And more often than not they force the thief to return the money. Grameen on the other hand assumes that every borrower is basically honest. We may be accused of being naive, but it saves us having to fill out all those endless documents. And in 99 per cent of the cases our trust turns out to be vindicated. Our experience with bad debt is less than 1 per cent. Even then, Grameen does not conclude that a defaulting borrower is a bad person. Rather, that their personal circumstances were so hard that they could not pay back their tiny loan. So why should we run after lawyers for them to give us the blue pieces of paper, the yellow pieces of paper, the pink pieces of paper? Bad loans of 0.5 per cent is the cost of doing business, and it also represents a constant reminder of what we need to improve in order to succeed. As for the repayment mechanism, I decided that we should keep it simple. I went to visit the pan (betel leaf) seller, in his tiny stall in the middle of Jobra village. He was a small man with a toothy grin, often unshaven; his shop was open day and night, and he knew just about everyone in the village. Certainly everyone knew him. He was enthusiastic about what I was proposing to do, and he agreed to be the collection point. He did not ask for any fee. We told the borrowers:

Every day as you cross the road, or go about your ordinary business, just give your daily installment to the pan shop-owner. Its easy, you see him every day. This proved to be a short-lived experiment. Soon borrowers were claiming they had paid their daily installment, and the pan shop-owner said they had not. Dont you remember, a borrower would say, I came at midday and bought some pan from you. I gave you 5 taka, and when you gave me my change I told you keep my installment of the loan repayment, dont you remember? No, you didnt give me 5 taka? Yes, I did; I remember it very well. No, you paid me with a bill and I gave you back full change. Arguments were unending. My God, this is mad, I thought. We must simplify it. So I bought a notebook, and on the left I wrote the borrowers name, in the centre I had three columns showing amounts paid per installment and the date: Name of Borrower Installment amount Dates (Installment no. 1, 2, 3 etc.) I made it simple so that all the pan shop-owner had to do was to make a tick in the appropriate column each time a borrower made a payment. But after a few days even this system broke down. The borrowers claimed that the pan shop-owner had forgotten to put down the tick. Or else he had written in down next to someone elses name. We soon realized that the simplified streamlined system we had tried was worse than not having any system at all. Something had to be done about my accounting system. But what? I didnt know. I believe that every problem has many solutions, and that all we had to do was to select the best possible alternative. So we abandoned this daily repayment system and moved to the next best thing, a weekly repayment system.

And today, some twenty years later, our loans are still paid in the same way, in weekly installments. Our repayment rate has remained high all along. Generally, it is our success with repayment that most people find unbelievable. In Bangladesh the richest who borrow from the banks make it a habit not to pay back. I am always amazed by the mockery that goes on in the name of banking. Public deposits go through the banking system, through the government banks, through private banks, to people who will never pay back the money. So how do we manage? What is our secret? Money is a sticky substance. It has the habit of clinging to the person who is currently in possession of it. So it requires enough pull power to detach it. If the repayment time were to come six months or one year after the loan has been taken, even if the borrower had the cash ready in his pocket, he or she would hesitate to give it back because it is such a large amount, and large amounts are difficult to part with. Borrowers find a million opportunities not to pay back. A psychological barrier arises: I have the money. I know this is my obligation. But I will wait for an opportunity not to pay back. And life provides us with many such opportunities. In Bangladesh, people expect that when a new government comes into power, the first thing it does is to write off current debts. In fact, politicians promise as much during the election campaign: If you vote for us, we will write off your loans. When one party promises this, the other party does the same. So the borrower remains confident that whoever comes into power, he will not have to repay his debt. Borrowers wait for the next general election not to have to repay. How were we to fight against this? The psychology of the borrower is extremely important: we decided to make the

payments small, small enough for the psychological barrier never to come into play. I asked the borrowers to repay their loans in daily installments. So obviously they needed to invest their loan in something that had immediate payback: a cow they could milk, a rickshaw they could pedal as a taxi, cloth they could turn into clothes and sell, bangles they could fashion into jewellery. The asset purchased, when associated with their labour, would yield them a product that could be immediately sold at a profit, and the profit could give them enough to live on as well as pay back the original loan. At first when we were working only with ten or fifteen borrowers, it was easy to collect installments every day. But as the number of borrowers increased, it became messy. Then we moved on to weekly installments. Psychologically, nothing is more important than imparting confidence: if you have repaid your weekly installments three months in a row, you feel encouraged to pay back the rest because already one-quarter of the money is paid back, and there is only three-quarters to go. If you hit the half-way mark, you feel elated - only half way to go! It is encouraging. And within a year the entire amount plus interest is paid back. Our borrowers did not mind paying tiny amounts because it did not hurt them. On the contrary, it comforted them. All of these tricks are confidence-building measures. But they are also real, because it is hard to take a huge wad of bills out of ones pocket and pay the lender. There is enormous temptation from ones family to use that money to meet immediate consumption needs. But to part with a few takas every day that is easy. Borrowers find this incremental process easier than having to accumulate money to pay a lump sum because their lives are always under strain, always difficult. If there is going to be non-repayment, we can monitor the situation and know of it almost

immediately. There is no need to wait until the end of a long period when the borrower has disappeared or is no longer in a position to correct his or her economic circumstances. So Grameens repayment system was designed not only to help, encourage and strengthen the borrowers psychological resolve but also to increase the likelihood that we would be repaid. What made us succeed even at this early stage was patience, innovation, moving with slow but steady steps, and the willingness and ability to correct our mistakes, for we made many mistakes. Early on, we decided not to influence the borrowers on their choice of income-generating work for we thought they would know best what to do in the locality, and if they did not know, their friends or group members could help them better than we could. From the very beginning, we introduced a system of annual workshops for centre-leaders in each branch. These workshops aimed at getting the centre-leaders to spend a week together to review their problems, progress, learn from each other, identify areas of concern and look for solutions to social and economic problems. This worked well. They learned from each other, and we learned a great deal about their lives and their worries. In our second year, we arranged for a national workshop of selected centre-leaders to allow a wider group interaction. The first national workshop was held in 1980, in Tangail. At the end of it, we wanted to write down some of the decisions they arrived at. We listed four such decisions which we wrote down and gave a copy of to each participant to take home. We did not expect these to be taken more seriously than the proceedings of the meeting, but we soon started getting requests for more copies. We held the second national workshop in 1982, and this time we concluded the

workshop with Ten Decisions. These Ten Decisions became very popular in all the Grameen centres. The decisions were increased to Sixteen Decisions in our 1984 workshop of a hundred Grameen centre-leaders, held that year in Joydevpur. We never imagined how deeply these Decisions would sink into the hearts of our members. Today, anywhere in any Grameen branch, our_ members take enormous pride in reciting these Sixteen Decisions and telling visitors how many of them they have implemented in their personal lives, and they feel guilty if some have not been fulfilled as they would wish them to be. Now in our national workshops, we plead with the participants not to increase the number of decisions. Let us do a good job implementing the existing Sixteen Decisions rather than keep adding new ones. The Sixteen Decisions help give meaning and purpose to the lives of our Grameen members. They make Grameen a closer part of the borrowers lives than it would otherwise be. The Sixteen Decisions are as follows: 1. We shall follow and advance the four principles of the Grameen Bank - discipline, unity, courage and hard work - in all walks of our lives. 2. Prosperity we shall bring to our families. 3. We shall not live in a dilapidated house. We shall repair our houses and work towards constructing new houses at the earliest opportunity. 4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus. 5. During the plantation seasons, we shall plant as many seedlings as possible. 6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health.

7. We shall educate our children and ensure that we can earn to pay for their education. 8. We shall always keep our children and the environment clean. 9. We shall build and use pit-latrines. 10. We shall drink water from tubewells. If it is not available, we shall boil water or use alum to purify it. 11. We shall not take any dowry in our sons weddings; neither shall we give any dowry in our daughters wedding. We shall keep the centre free from the curse of dowry. We shall not practice child marriage. 12. We shall not commit any injustice, and we will oppose anyone who tries to do so. 13. We shall collectively undertake larger investments for higher incomes. 14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her. 15. If we come to know of any breach of discipline in any centre, we shall all go there and help restore discipline. 16. We shall introduce physical exercises in all our centres. We shall take part in all social activities collectively. Local branches of Grameen also take local decisions which deal with problems in their own areas. At the very beginning, Grameen was really like a family. Today, twenty-two years later, in July 1998, we have over 12,000 employees and we have lost some of this family feeling. Right now we have 1112 branches in the country. The staff meet more than 2,300,000 borrowers face to face each week, on their doorstep. Each month we lend out more than S3 5 million worth of Bangladeshi currency in tiny loans. At the same time almost a similar amount comes back to us in repayments. Some of my colleagues from this early period are nostalgic for the old days, but I see

growth as an inescapable part of success. In spite of our numbers we are still small compared to the massive work that needs to be done in Bangladesh and worldwide. The success of a credit programme lies in how it builds up a rapport with its clientele and how well it can draw out its borrowers dynamic human qualities. So no matter how large we grow, we must never lose that close relationship between the borrower and the bank.