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Inception of Grameen Bank:

The word “Grameen” came from the word “gram” which means village in English. In 1976, the
Grameen Bank project was born in the village of Jobra; transformed into a formal bank in the year
1983.This bank works exclusively for women. Borrowers of Grameen Bank who are mostly women,
own 94% of this bank and the rest 6% is owned by the government.

In 1979, the bank has expanded to Tangail and that is where we went to experience the bank
an d the way of life of their members. In 1976 when Professor Muhammad Yunus and his
colleagues started giving out tiny loans under a system, which later become known as the
Grameen Bank, they never imagined that some day they would be reaching hundreds of
thousands, let alone three million, borrowers. But the capabilities and commitment of their
staff and borrowers gave them the courage to expand boldly.

In the late 1980s, they started to think of ways in which they could build on the network that
their borrowers represented, in order to accelerate their progress towards a poverty-free
world and also improve Bangladesh's overall economic performance. So, in the beginning,
they got involved in leasing unutilized and underutilized fishing ponds and irrigation pumps
such as deep tube wells. At about the same time, they also became involved in providing
training and other support to people from other third world countries that wanted to adapt the
Grameen methodology.

After some initial successes in the fisheries and irrigation projects, they became interested in
expanding their work by getting involved in other business in various new sectors. By this
time, carrying out all these initiatives under Grameen Bank became unwieldy, and from 1989
they began to establish new organizations.
As they moved forward, they gained confidence and became more and more bold in our non-
banking activities. Independently from Grameen Bank, they became involved in venture
capital, the textile industry, an Internet service provider and much more. Each new initiative
was incorporated in an extending organization or spun off into a new one. This became what
they call the Grameen Family of Organizations.

Objectives of Grameen Bank

The basic purpose of Grameen Bank is that the bank goes to the poor, since it’s difficult
for the poor people to come to the bank.

• Extend banking facilities to poor men and women;

• Eliminate the exploitation of the poor by money lenders;
• Create opportunities for self-employment for the vast multitude of unemployed
people in rural Bangladesh;
• Bring the disadvantaged, mostly the women from the poorest households, within the
fold of an organizational format which they can understand and manage by
themselves; and

• Reverse the age-old vicious circle of "low income, low saving & low investment",
into virtuous circle of "low income, injection of credit, investment, more income,
more savings, more investment, more income".

The Sixteen Decision:

The four principles of Grameen bank – Discipline, Unity, Courage and Hard work – we shall
follow and advance in all walks of our lives.

• We shall bring prosperity to our families.

• We shall not live in dilapidated house. We shall repair our houses and work
towards constructing new houses as soon as possible.
• 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
• We shall always keep our children and the environment clean.
• We shall build and use pit latrines.
• We shall boil water before drinking or use alum to purify it.
• We shall not take any dowry at our son’s weddings: neither shall we give any
dowry in our daughter weddings. We shall keep the 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
• For higher income we shall collectively undertake bigger investments.
• We shall always be ready to help each other. If anyone is in difficulty, we shall all
• If we come to know of any breach of discipline in any center, we shall go there
and help restore discipline.
• We shall take part in all social activities collectively.

Grameen Bank in 2006:

Today Grameen Bank is reaching 5.7 million poor borrowers, 96% of whom are women. The
bank is owned by the poor borrowers. Grameen Bank has 1736 branches working in 90
percent of the villages in Bangladesh. The staff is nearly 17000. The total amount of funds
disbursed is US$ 5.25 billion. Out of this, US$ 4.83 billion has been repaid. Current amount

of outstanding loans stands at US$ 425 million. From January to December, 2005 Grameen
Bank disbursed US$ 612 million.

Projected disbursement for 2006 is US$ 821 million; among this monthly disbursement of
US$ 68.40 million. End of the year outstanding loan is projected to be at US$ 600 million.
The loan recovery rate is 99.01%.

The Nobel Peace Prize:

The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006,
divided into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to
create economic and social development from below. Lasting peace cannot be achieved
unless large population groups find ways in which to break out of poverty. Micro-credit is
one such means. Muhammad Yunus has shown himself to be a leader who has managed to
translate visions into practical action for the benefit of millions of people, not only in
Bangladesh, but also in many other countries. Loans to poor people without any financial
security had appeared to be an impossible idea. From modest beginnings three decades ago,
Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever
more important instrument in the struggle against poverty. Grameen Bank has been a source
of ideas and models for the many institutions in the field of micro-credit that have sprung up
around the world.

Micro-credit has proved to be an important liberating force in societies where women in

particular have to struggle against repressive social and economic conditions. Economic
growth and political democracy cannot achieve their full potential unless the female half of
humanity participates on an equal footing with the male. Yunus's long-term vision is to
eliminate poverty in the world. That vision cannot be realized by means of micro-credit
alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts
to achieve it, micro-credit must play a major part.

What separates Grameen Bank from Conventional Banks?

• Grameen micro credit promote credit as a human right
• Its mission is to help poor families in rural Bangladesh to help themselves by
targeting the traditional the anchor of the family who are the women.
• It relies on trust rather than legally enforceable contracts or collateral.
• It is provided for creating self-employment for income generation and housing
for the poor rather than for consumption.
• It rejected conventional banking ideology by affirming that poor people are
credit worthy individuals, a belief that other banks have generally refused to

Liquidity Ratio:

The liquidity of a firm ability to satisfy its short-term obligations as they come due. Liquidity
refers to the solvency of the firm’s overall financial position- the ease with which it can pay
its bills. The three basic measures of liquidity are 1. The current ratio, 2. Net working capital
and 3. Operating cash flow.

Current ratio measures the firm’s ability to meet its short-term obligations. Current ratio is
expressed as: current Assets / Current Liability. From the table below, it is evident that GB is
maintaining a stable current ratio. GB has almost one and half time the current assets to meet
its every current liability over last five years. The blue line in the graph also showing a stable

GB’s operating performance is also has a stable trend. It is generating over 20% cash of
current liability from its operating activities. Though it is not extra ordinary performance in
terms of financial institution, as a micro finance institute it is in acceptable level.

Working capital is also showing positive and increasing trend, which indicates that GB is
generating more liquid assets than liquid liability. From graph it is evident.

Item 2002 2003 2004 2005 2006 2007

Current Ratio 1.65 1.68 1.46 1.52 1.55 1.51
Cash Ratio 0.0025 0.0019 0.0012 0.0010 0.0007 0.0005
Operating cash flow Ratio 20.51% 13.49% 21.23% 17.79% 32.20% 14.43%
Growth of Net Working
Capital 48.65% -7.95% 55.99% 46.09% 10.72%

Current Ratio
Operating cash flow
Liquidity Ratio Cash ratio
Growth of NWC




2002 2003 2004 2005 2006

Profitability Ratio:
There are many measures of profitability. Each relates the returns of the firm to its sales,
assets, equity, or share value. as a group, these measures allow the management to evaluate
the firm’s earnings with respect to a given level of sales, a certain level of assets, the owners’
investment, or share value.

GB is retaining 65% - 70% of its earning as gross profit and incurring only 35% - 30% of its
earning as core expense to generate revenue. Operating profit margin is also a healthy figure.
It is about 30% of total revenue in recent years. Operating profit margin could be better if GB
can minimize its operating expense by moving to digital world.

GB’s net profit margin is poor. It is not expected comparing with gross and operating profit
margin. Poor net profit margin is due to more conservative approach. GB maintains high
provision for expected loan loss. The trend of changes of these three profit margins can be
examined from the graph below. Operating profit margin is showing an increasing trend.

Item 2002 2003 2004 2005 2006 2007

Gross Profit Margin 70.62% 69.13% 66.29% 69.09% 63.19% 58.01%
Operating Profit Margin 24.11% 26.66% 30.68% 36.92% 31.61% 23.11%
Net Profit Margin 24.11% 9.99% 8.99% 13.53% 14.83% 1.01%

Gross Profit Margin

Operating Profit Margin
Profitability Ratio Net Profit Margin
2002 2003 2004 2005 2006

Du-Pont Analysis:

Du-Pont analysis relates the firm’s net profit margin and total assets turnover to its return on
total assets (ROA). This analysis first brings together the net profit margin with its total asset
turnover, which indicates how efficiently the firm has used its assets to generate sales. The
product of these two ratios results in the return on total assets (ROA).

ROA = net profit margin X total asset turnover

= (net profits after taxes/ sales) X (sales / total assets)
= net profits after taxes / total assets

For Grameen Bank, asset turnover has a stable condition and net profit margin has
inconsistent fluctuation. In 2003, the company performed poorly which lead to a drastically
decrease in net profit margin at 9.99% from 24.11%. Asset turnover also decreased in that
year. The combined effect of this two is a decrease of ROA. Later on GB continues to
improve its performance and continuing a stable ROA.

In second step it employs the firm’s return on total assets (ROA) to the return on equity
(ROE). Here, ROE is measured by multiplying the ROA by the Financial Leverage
Multiplier (FLM), which is the ratio of total assets to stockholders’ equity. That is:


= (net profit after tax / total assets) X (total assets / shareholders’ equity)
= net profits after taxes / stockholders’ equity

Use of the financial leverage multiplier (FLM) to convert the ROA to the ROE reflects the
impact of leverage on owners’ return. In 2002, GB has gained 36% ROE. It was an
extraordinary performance. The underling reason of this performance was the higher net
profit and higher level of uses of leverage. In 2003, the ROE decreased to 7.63% from
35.93%. the reason of this sharp decline which is evident from the graph is the less uses of
leverage in association of low net profit. In later years, ROE gradually increases and the
latest rate is almost 23% which is handsome for any microfinance institution. Less net profit
suggest that GB has repaid its debt from its operating income. For this reason, the level of
uses of leverage was also low.

Item 2002 2003 2004 2005 2006 2007

Net profit Margin 24.11% 9.99% 8.99% 13.53% 14.83% 1.01%
Asset turnover 16.11% 13.12% 13.95% 16.57% 15.88% 11.21%
Fin. Leverage multiplier 9.25 5.82 7.14 9.47 9.72 16.08
ROA 3.88% 1.31% 1.25% 2.24% 2.35% 0.11%
ROE 35.93% 7.63% 8.95% 21.22% 22.88% 1.82%


2002 2003
Year 2004 2005 2006

Activity Ratio:
Activity ratios are used to measure the speed with which various accounts are converted into
sales or cash. A number of ratios are available for measuring the activity of the most
important current accounts like, accounts receivable, accounts payable, etc. The activity
(efficiency of utilization) of fixed and total assets can also be assessed.

Grameen Bank is improving its efficiency in working capital management. Interest

receivable turnover is increasing every year. Higher receivable turnover is indicating that GB
is revolving interest receivable more speedily. Lower Average collection period is also
suggesting the same. In 2002, GB took 423 days to collect its interest receivable where as in
2006 GB took only 119 days to collect interest receivable. GB revolves its receivables more
than 3 times in a year.

Higher payable turnover and lower payment period is also indicates that Grameen Bank has
improved its liquidity position. GB took only 1 day to settle all payables in 2006 where as it
took more than 19 days to make payment in 2002.

Grameen Bank is also improving its efficiency in fixed assets management. In 2006, GB
generates income more than 9 times than its fixed assets. In 2002 it was only more than 3
times. It means, GB is capable to generate more than Tk. 9 by using fixed assets of Tk. 1.
increasing trend in total asset turnover is also supporting the previous statement.

Item 2002 2003 2004 2005 2006 2007

Interest Receivable Turnover: 0.85 1.08 1.42 2.32 3.02 2.44
Average collection period (Day) 423 332 253 155 119 148
Interest Payable Turnover 18.510 62.933 117.722 207.820 326.505 438.163
Average payment period 19.45 5.72 3.06 1.73 1.10 0.82
Fixed Asset Turnover 3.30 3.93 5.18 7.74 9.02 9.49
Total Asset Turnover 0.16 0.13 0.14 0.17 0.16 0.11

Leverage Ratio:
Leverage position means the uses of debt financing. The debt position of a firm indicates the
amount of other people’s money being used in attempting to generate profits.

The debt ratio measures the proportion of total assets financed by the firm’s creditors. This
ratio is consistent over the last 5 years. In 2006, GB uses 90% of assets as debt. That is
higher uses of others money to generate profits.

Debt of equity, debt to capital and debt to assets all these three ratio indicates that Grameen
Bank is reducing its dependence on others fund by reducing debt portion. That is GB is
reinvesting its profit to reduce debt decency.

Item 2002 2003 2004 2005 2006 2007

Debt Ratio 89.19% 82.81% 85.99% 89.44% 89.71% 66.87%
Debt to Equity Ratio 342.06% 89.88% 61.43% 40.67% 30.36% 30.57%
Debt to Capital Ratio 77.38% 47.33% 38.05% 28.91% 23.29% 23.41%
Debt to Assets 36.97% 15.45% 8.60% 4.30% 3.12% 1.90%
Liability to Equity ratio 825.17% 481.84% 613.87% 846.59% 871.72% 1075.50%

Degree of Total Leverage:

Operating leverage is concerned with the relationship between the firm’s sales revenue and
its earnings before interest and taxes. Operating leverage can be defined as the potential use
of fixed operating costs to magnify the effects of changes in sales on the firm’s EBIT. Degree
of Operating Leverage (DOL) measures the sensitivity of operating income to the total
income. By the change of 1% in total income what is the change in operating income is
concerned issue. GB’s operating income was more sensitive to total income in 2002.
Gradually the sensitivity decreases and in 2006 operating income is less sensitive to total
income. Only 9.20% of operating income changes by the 27.53% change in total income.
That is influenced by other expenses more rather total income. Thus, DOL suggests taking
care of different expenses to increase operating income.

Financial leverage is concerned with the relationship between the firm’s earnings before
interest and taxes and its net income. Degree of Financial Leverage (DFL) measures the
sensitivity of net income to operating income. That is by the change of 1% in operating
income what is the change of net income. DFL is increasing in every year. It indicates that
net income is more depended on operating income. In 2006, it was 4.32 which indicate that
1% change in operating income will change the net income by more than 4 times. It is over
influence on net income.

Total leverage is the combined effect of this two leverage. That is with the change in both
total and operating income what the effect on net income is. DTL in 2006 is 1.44 which
indicates with the change of 1% the net income will change by 1.44 times. It is good sign for
Grameen Bank because the combined effect of more than 1 is desirable for any company.
Item 2002 2003 2004 2005 2006 2007
Change in Operating Income 30.09% 51.09% 89.48% 9.20% -18.02%
Change in Total Income 17.67% 31.26% 57.48% 27.53% 12.11%
Change in Net Income -51.22% 18.07% 137.00% 39.75% -92.35%
DOL 1.70 1.63 1.56 0.33 -1.49
DFL -1.70 0.35 1.53 4.32 5.13
Degree of Total leverage -2.90 0.58 2.38 1.44 -7.62

Degree of Total Leverage DTL DFL DOL






2003 2004 2005 2006



-4.00 Year

Sufficiency & Productivity Ratio:

The ratio indicates how efficiently GB is performing it’s operation. The operating and net
income growth on average 30% and 25% respectevily. It’s good sign for the company that it
is growing over the years. Deposit growth and the no. of member growth is also increasing at
the rate of more than 40% and 30% respectevily.It indicates that GB is expanding it’s
operation more speedily over the years.

The important point is operating expense ratio is decreasing over the years which contributes
in profitability and financial sustainability. The portfolio at risk ratio shows that only 1-2% of
total loan has the possibility to be default, but GB maintains 250-300% loan loss provision
which adversely affects it’s profit and under perform the efficiency of GB.

Item 2002 2003 2004 2005 2006 2007

Operating Income Growth 15.19% 25.86% 64.14% 16.65% 2.91%

Net income growth -51.22% 18.07% 137.00% 39.75% -92.35%
Deposit Growth 56.15% 40.79% 52.81% 39.85% 17.27%
Loan portfolio growth 47.80% 23.91% 38.62% 18.16% 9.96%
No. Members growth 26.61% 29.13% 37.44% 23.83% 7.27%
Operating expense ratio 24.11% 42.48% 35.60% 32.18% 31.59% 34.90%
Yield on loan portfolio 14.81% 12.85% 13.60% 12.12% 12.61% 13.43%
Personnel expense / Loan portfolio 9.66% 7.00% 6.00% 4.40% 4.22% 5.10%
Portfolio at risk 0.74% 1.74% 1.44% 1.23% 1.20% 2.03%
Loan loss provision/ Portfolio at risk 0.00% 160.66% 276.79% 361.04% 266.18% 228.36%
Cost per borrower (In Taka) 714 614 509 544
Cost per borrower (In USD) 12 11 8 8

Return on Investment:

In calculating ROI we have followed weighted average ROI approach. First we calculate
total investment and the return from that respective investment. Then we have calculated the
average amount of investment in respective investment items. Average is calculated by
adding beginning and ending balance of respective investment class and divided the sum by
two. After that, the weight of each investment class in comparison to total investment amount
is calculated. Then weighted investment of each class is multiplied by the rate of return of
respective investment class. The product is considered as weighted average return on

2002 2003 2004 2005 2006 2007

Investment :
Fixed deposits with 24455309686
4,005,894,8945,319,324,7887,209,785,942 9,966,716,945 19,723,515,990
other banks
Grameen Mutual Fund 6500000
12,000,000 12,000,000 12,000,000 16,500,000 16,500,000
- One
Share 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4000000
On short term deposit 870976622
422,969,406 524,113,474 767,318,053 918,599,330 856,102,107
Total 4,444,864,3005,859,438,2627,993,103,99510,905,816,275 20,600,118,097 25,336,786,308

Interest income:
Fixed Deposits with 2,904,090,130
409,166,597 489,526,787 655,432,120 851,952,678 1,693,658,097
other banks
Grameen Mutual Fund 0
0 0 0 0 0
- One
Share 0 0 0 0 0 0
On short term deposit 19,913,362
11,668,976 6,435,789 8,366,396 19,339,234 63,907,179
Total 420,835,573 495,962,576 663,798,516 871,291,912 1,757,565,276 2,924,003,492

Average investment:

Fixed deposits with 22,089,412,838
4,005,894,8944,662,609,8416,264,555,365 8,588,251,444 14,845,116,468
other banks
Grameen Mutual Fund 11,500,000
12,000,000 12,000,000 12,000,000 14,250,000 16,500,000
- One
Share 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
On short term deposit 863,539,365
422,969,406 473,541,440 645,715,764 842,958,692 887,350,719
Total 4,444,864,3005,152,151,2816,926,271,129 9,449,460,135 15,752,967,186 22,968,452,203

Investment Weight:
Fixed deposits with 96.17%
90.12% 90.50% 90.45% 90.89% 94.24%
other banks
Grameen Mutual Fund 0.05%
0.27% 0.23% 0.17% 0.15% 0.10%
- One
Share 0.09% 0.08% 0.06% 0.04% 0.03% 0.02%
On short term deposit 3.76%
9.52% 9.19% 9.32% 8.92% 5.63%
100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Fixed deposits with 13.15%
10.21% 10.50% 10.46% 9.92% 11.41%
other banks
Grameen Mutual Fund 0.00%
0.00% 0.00% 0.00% 0.00% 0.00%
- One
Share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
On short term deposit 2.31%
2.76% 1.36% 1.30% 2.29% 7.20%

Weighted Return
Fixed deposits with 12.64%
9.21% 9.50% 9.46% 9.02% 10.75%
other banks
Grameen Mutual Fund 0.00%
0.00% 0.00% 0.00% 0.00% 0.00%
- One
Share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
On short term deposit 0.09%
0.26% 0.12% 0.12% 0.20% 0.41%

ROI 9.47% 9.63% 9.58% 9.22% 11.16% 12.73%

Repricing Gap analysis:

The repricing gap analysis is essentially a book value accounting cash flow analysis of the
repricing gap between the interest revenue earned on an FI’s assets and the interest paid on its
liabilities over a particular period of time.

Repricing gap means the difference between assets whose interest rates will be repriced or
changed over some future period and liabilities whose interest rates will be repriced or
changed over some future period.

Rate sensitive asset/Liability means an asset or liability is repriced at or near current market
interest rates within a maturity bucket.

In the table below, we have classified interest rate sensitive assets and liabilities according to
maturity duration.

Rate sensitive assets:

Up to 1 - 3 up to 3 -12 More than 5
Up to 1 month up to 1- 5 years
month month years
Balances with other banks &
56,381,437 799,720,670
Investment- Fixed Deposit 3,567,219,089 2,904,267,719 13,252,029,182
Loans & Advances 2,120,398,112 4,257,868,671 19,230,406,059 8,194,775,309 341,448,971
Total rate sensitive assets: 5,743,998,638 7,961,857,060 32,482,435,241 8,194,775,309 341,448,971

Rate sensitive liabilities:

Borrowing from banks &
43,698,136 43,698,136 174,792,544 1,593,145,581
other inst.
Deposit 1,987,034,292 7,099,954,665 16,700,130,011 12,722,737,553 5,832,445,980
Total rate sensitive
1,987,034,292 7,143,652,801 16,743,828,147 12,897,530,097 7,425,591,561

In the table below, we have measured the changes in interest income. First we measured the
gap between assets and liabilities. Then we assume that with in the investment period the
market interest rate for assets and liabilities will increase by 1%. If interest rate changes then
what will be the impact on interest income of the company is measured in this table. From
the table below, we find the changes in interest income by multiplying the gap with the
change in interest rate. The result is change in net interest income is positive in total figure.
But the change is negative in the class of maturity duration is above 1 year. The negative
change in net interest income reduces the total net income. The negative change is the result
of higher liabilities than assets. Thus we need to match the maturity of assets and liabilities
otherwise we will face adverse change in interest income.

Equal change in interest rate:

Maturity Assets Liabilities Gap Cumulative Change Change in
(1) (2) (3) (4 = 2-3 ) Gap (5) in Net Interest

Interest Income
rate (6) ( 7=4*6)
Up to 1 month 5,743,998,638 1,987,034,292 3,756,964,346 3,756,964,346 1.00% 37,569,643
Up to 1 - 3
7,961,857,060 7,143,652,801 818,204,259 4,575,168,605 1.00% 8,182,043
up to 3 -12
32,482,435,24116,743,828,14715,738,607,09420,313,775,699 1.00% 157,386,071
up to 1- 5 years 8,194,775,309 12,897,530,097 -4,702,754,788 15,611,020,911 1.00% -47,027,548
More than 5
341,448,971 7,425,591,561 -7,084,142,590 8,526,878,321 1.00% -70,841,426
Total 54,724,515,21946,197,636,898 85,268,783

In the previous table, the change in interest rate was equal for both assets and liabilities. Now
what will happen if interest changes unequally for assets and liabilities? The effect of
unequal changes is calculated in the table below. Calculation procedure is as pervious. The
result is that if the change in interest rate for liabilities higher than assets and the change is
2% or more in favor of liabilities the net change is negative. That is interest rate for assets
changes less but interest for liabilities is higher the net change will be negative. This finding
again suggesting to match the volume of assets and liabilities.

Unequal change in interest rate:

Change in
Change of
RSA Assets income liabilities RSL Liability income Net change
assets rate
0.50% 54,724,515,219 273,622,576 2.50% 46,197,636,898 1,154,940,922 -881,318,346
1.00% 54,724,515,219 547,245,152 2.00% 46,197,636,898 923,952,738 -376,707,586
1.50% 54,724,515,219 820,867,728 1.50% 46,197,636,898 692,964,553 127,903,175
2.00% 54,724,515,219 1,094,490,304 1.00% 46,197,636,898 461,976,369 632,513,935
2.50% 54,724,515,219 1,368,112,880 0.50% 46,197,636,898 230,988,184 1,137,124,696

If we want to avoid any uncertainty regarding the changes in interest rate, we have to match
our asset and liability in terms of maturity as well as volume.

Efficiency and Sustainability of Grameen Bank:

Sustainability of micro finance institution refers to both financial and economic sustainability
of the programmes. Financial sustainability is necessary to reach significant numbers of poor
people. Most poor people are not able to access financial services because of the lack of
strong retail financial intermediaries. Building financially sustainable institutions is not an
end in itself. It is the only way to reach significant scale and impact far beyond what donor
agencies can fund. Sustainability is the ability of a micro finance provider to cover all of its
costs. It allows the continued operation of the micro finance provider and the ongoing
provision of financial services to the poor. Achieving financial sustainability means reducing
transaction costs, offering better products and services that meet client needs, and finding
new ways to reach the unbanked poor.

Financial sustainability: If the MFI has positive net margin or profit then it can be considered
as financially sustainable. Cost and financial efficiency determine the degree of financial
sustainability. Thus a cost and financial efficient MFI can only be financially sustainable.

Economic sustainability: A positive profit is not good enough to consider a MFI as

economically sustainable if the profit is sufficient to cover the gross subsidy then the MFI is
considered as both financially and economically sustainable.

To know whether an institution is financially as well as economically sustainable or not we

can use some ratios like Subsidy Dependency Index (SDI), Subsidy Dependency Ratio
(SDR) and Efficiency and Subsidy Intensity Index (ESSI). SDI was developed by Yaron in
1992 while SDR was developed by Khandker, Khalily and Khan and ESII was developed by
Khalily, Imam & Khan.

The Subsidy Dependence Index (SDI)

The Subsidy Dependence Index (SDI) is the most common way to measure the importance of
public support for Development Finance Institutions (DFIs).

Subsidized DFIs are worthwhile in principle as long as their social benefits exceed their
social costs.

We define social cost as the opportunity cost to society of the public funds used by a DFI less
what the DFI could pay back to society and still break even in a given time frame.
A DFI with no social cost is subsidy independent.

Subsidies for DFIs are not bad unless they could improve social welfare more elsewhere.

Common measures such as accounting profit and ROE do not tell society whether a DFI
creates or destroys social welfare.

The Subsidy Dependence Index: SDI =
Re venueFromLending

It tells how much subsidy society gave the DFI for each dollar of revenue collected from

The Subsidy Dependence Ratio (SDR)

In several papers about the performance of DFIs in Bangladesh, Khandker proposes the
Subsidy Dependence Ratio (SDR) as an alternative to the SDI (Khandker and Khalily, 1996;
Khandker, Khalily, and Khan [KK&K], 1995; Khandker, Khan, and Khalily, 1995). Measures
similar to the SDR have been proposed by Holtmann and Mommartz (1996), SEEP (1995),
and the Inter-American Development Bank (1994).

The main concern of these authors is that the SDI compares subsidy only with revenue from
lending even though DFIs also get revenue from investments in non-loan assets such as
treasury bills. In principle, a DFI could decrease its subsidy dependence through increased
revenues either from loans or from investments.

Thus the SDR suggests that subsidy be compared with revenue both from loans and from

Efficiency & Subsidy Intensity Index (ESII):

In case of measuring ESII both the cost side and revenue side are considered. It is the best
measure of determining subsidy dependency.

We specify ESII as follows:

S 1  ( w * Emp ) + ( bi * B ) + ( di * MS ) + θL + OPE  ( ri * I ) IG
+  − − −1
( rl * L ) rl  L  ( rl * L ) ( rl * L )
 ri * I 
1+  
 rl * L 

The ESII is essentially comprised of several ratios. They are,

• Gross subsidy intensity in relation to income from loans as captured by the first part
of the numerator.
• Cost and financial efficiency as represented by the second part of the numerator.
• Portfolio mix in relation to output price ratio as captured by third part of the
• Income grants intensity as captured by fourth part of the numerator.

Measurement of ESII

The degree of ESII is influenced by cost efficiency; portfolio mix, market interest rate and
gross subsidy and income grant intensity. Furthermore, it is inverse of cost and financial
efficiency and portfolio mix in relation to output price ratio. Higher the degree of cost and
financial efficiency and portfolio mix and output price ratio, lower is the degree of efficiency
and subsidy intensity index (ESII). A zero or negative value of ESII represents no subsidy

Richness of ESII

The ESII is rich in terms of policy implications. For example:

• Causes and its effects on sustainability can be derived from the constituents of the
• Financial and cost efficiency as an indicator of competitiveness and sustainability can
be examined.
• The degree of allocate efficiency in terms of indicator of portfolio shift can also be
• The role of income grant and gross subsidy intensity in sustainability can be
evaluated as inverse relationship exists between income grant and gross subsidy
intensity and sustainability.
• Different policy options can be made from the index to eliminate or reduced subsidy

item 2002 2003 2004 2005 2006

GS 841047169.1 729008465.8 702046970.2 724317102.8 816342494.8
Profit 434799717 535309881.5 235114459.6 -50650653.71 454796008.8
GS-profit 406247452.1 193698584.3 466932510.6 774967756.5 361546486
Int income on loan(r*L) 2332891799 3264559509 3853276711 5491731447 6793766822
ri*I 409166597 489526787 655432120 851952678 1693658097
Total income 2742058396 3754086296 4508708831 6343684125 8487424919
SDR 0.148154194 0.051596732 0.103562356 0.122163674 0.042597901

SDI 0.174139003 0.059333758 0.121178038 0.141115378 0.053217382

Cost & Financial Efficiency Ratio 0.99 0.99 1.11 1.16 1.18
Portfolio Mix 0.18 0.15 0.17 0.16 0.25
Inverse of indicator shift 1.18 1.15 1.17 1.16 1.25
Gross Subsidy Index 0.36 0.22 0.18 0.13 0.12
ESII 0.15 0.05 0.10 0.12 0.04

As ESII is positive it indicates that Grameen Bank has dependency on subsidy. That is it is
financially sustainable but not sustainable in economically. Grameen Bank can reduce or
eliminate subsidy dependency by employing the following techniques:
1. Improving cost efficiency through increasing productivity and exploiting economics
of scale

2. Improving financial efficiency through increasing lending interest rate
3. Optimizing portfolio mix through shifting resources away from low return generating
investment to high return investment.

As a micro finance institution Grameen Bank is operating in Bangladesh but its appearances
is larger than many other commercial bank in Bangladesh. its different financial indicators
are comparable with commercial banks. GB’s profitability condition is healthy enough
without any subsidy. It has efficiency in liquidity management like many other commercial
banks and efficiency is improving in every years. It is evident from our ratio analysis and
graphical presentation.

At this moment GB is maintaining its documentation system mostly in manual and partially
in digital system. Maintenance of both systems is taking longer time and higher cost also. If
GB can convert its documentation system in digital format it can reduces a large portion of
its operating cost that will improve GB’s profitability as well as speed up activities.

GB has recovery rate more than 98%. Even though, it maintains excess loan loss provision in
addition of IAS rules as reserve. This huge provision reduces the profitability of the company
but increases the reserve level.

Grameen Bank is not receiving any subsidy form donors since 1996. From our ESII
calculation we find that GB is still not achieved economical sustainability. But it is close to
achieving it. Thus we can say that GB will achieve in short time the ability to operate its
operation as any commercial bank. GB can achieve it by increasing its operating efficiency
and utilizing its fund in a manner to maximize the return.