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Grameen Bank and the Microcredit model
Economics professor Muhammad Yunus is often referred to as the father of
microcredit (Yunus & Jolis, 1998). Dr Yunus was inspired to start the microcredit
movement when he working at Chittagong University in rural Bangladesh and saw
how poor suffered because of their lack of access to credit (Yunus, 1999). He started
his own initiative of lending money to the poor directly and found that they always
paid back all their loans. He tried to get banks to lend directly to the poor, however
they refused to since the poor could not provide collateral for the loans (Yunus,
1999).
After negotiations with the Government he started Grameen Bank (the Bank) in
1983, and began lending money to the poorest people in the country (Yunus, 1999).
Grameen Bank works on principles that challenge conventional perspectives on
poverty. It is based on the philosophy of the old proverb Give a man a fish and you
feed him for a day. Teach a man to fish and you feed him for a lifetime. Yunus
(2004) believes that poverty is caused by structural inequalities and the solution to
long term sustainable change is to develop new policies.
He believes that charity perpetuates the cycle of poverty and creates dependency.
He adds that poor people often do not get the opportunity to explore their creative
potential and thus remain left out from participating in the economy (Yunus, 2004).
The Bank believes that poor people are committed to repayment of loans as many of
them have never been able to get a loan and so are determined to establish good
credit history (Yunus, 2004). It also lends money primarily to women as they are
believed to be better managers of money and they comprise 96% of the banks
customers (Yunus, 2004).
The Grameen difference
Grameen Bank does not enter into legal agreements with its customers, and does
not require collateral for loans supplied (Grameen Bank, 2011A). Instead when
customers cannot make payments, the Bank works with the customers to reschedule
their payments and provides advice and assistance during difficult periods. The Bank
also caps the interest charged to customers such that the interest amount to be paid
never exceed the amount of the principal (Grameen Bank, 2011).
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In addition to small business loans, Grameen Bank is also providing housing loans to
the poor to build simple homes. It also provides study loans for children of its
customers to pursue higher education. The Bank also provides scholarships to some
students, with a particular aim of improving educational outcomes for female children
(Yunus, 2004). Another innovative enterprise that the Bank has started is known as
Grameen Phone, and it sells mobile phones to village women. These telephone-
ladies then sells the telephone services in their village where often even fixed lines
are nonexistent. The income generated from this business in on average more than
double the per capita income in Bangladesh (Yunus, 1994).
To become a customer of the Bank, lenders had to form a group with five others.
This allows for members to provide each other with mutual support and ensure the
viability of the business and the payment of loans. The Bank also visits rural villages
to provide loans and collect repayments, and staff members do home visits to
observe the progress of the business. In addition to the delivering microloans
Grameen Bank also incorporates social development in its service delivery by asking
its members to commit to 16 Decisions. These decisions include a commitment to
use sanitary facilities, prioritise education for children, maintaining small family size,
drinking clean water, providing mutual support to each other, improving their housing
structures and engaging in self-sustainable farming practices (Holcombe, 1995).
Customers of the Bank are also allowed to become share holders after one year,
and at present 97% of the Bank is owned by the borrowers (Grameen Bank,
2011B).Research has shown that the women in these communities are empowered
as their finances improved (Yunus, 1999). Other research has also shown that
female customers of the Bank are more likely to adopt family planning practices and
that their children were more likely to attend school and had improved nutrition
(Yunus, 1999).




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Working with the extremely poor
The Bank has also made efforts to work with extremely poor people in Bangladesh.
Many critics have pointed out that microcredit programs are not effective at targeting
the extremely poor (Yunus, 2005). In 2003 the Bank started The Struggling (Beggar)
Members Program to assist this extremely marginalized group (Yunus, 2005).
Members of this group are exempt from having to form groups, are charged zero
interest on the loans, and are allowed to design their own repayment plan (Yunus,
2005). These members are also allowed to attend weekly meeting at the villages if
they wish to receive advice from the group meetings, but they are not obliged to do
so (Yunus, 2005). The loans assist these people to sell small goods such as sweets
and toys from door to door as a supplement to their income from begging (Yunus,
2005). The Bank also provides these members with a badge of the Banks logo to
show support for these members (Yunus, 2005). As a result of this initiative, some
members have quit begging to rely only on income from selling goods (Yunus, 2005).
Community Participation
Ife & Tesoriero (2006, p.150) explains that participation in community development
involves recognising that different levels of power exist, and that those who are
usually excluded are given an opportunity to influence decision making. Participation
can also be observed as a process of empowerment in the long term development of
a community (Ife & Tesoriero, 2006). Snodgrass & Sebstad (2002) found that women
felt an increased sense of self esteem, higher level of participation in decision
making and more confident about the future. They conclude that microcredit is
contributing to gender equality and improved household wellbeing
(Snodgrass & Sebstad, 2002).
Ife & Tesoriero (2006, p.168) believes that effective participation can be measured in
terms of qualitative and quantitative indicators. As an example quantitative factors
can include participation numbers and qualitative factors can include increasing
networks with other communities and organisations. Based on information from the
Grameen Banks website, in 2012, Grameen Bank had over 8 million members
across 81,386 villages and a loan portfolio of over USD 1 billion(Grameen Bank,
2013). Since its establishment 21 years ago, the Bank has been overwhelmingly
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successful in its reach across Bangladesh and its influence in promoting microcredit
as a poverty elimination tool around the world.
Sustainability & the Microcredit Model
Since 1995, Grameen Bank has decided to be self sufficient and no longer requests
for donor funding. The Bank finances itself entirely from deposits from its clients
(Yunus, 2004). Despite this, the Bank has been profitable every year since its
inception except for three years (Yunus, 2004). The main concern facing other
microcredit institutions is the availability of funds to lend to the poor. In Bangladesh
this issue was solved by the government and the World Bank who collaborated to set
up a wholesale fund for Grameen Bank. This allowed the Bank to access funds from
other financial institutions and to provide guarantees to deposits collected.
Yunus (2004) notes that other microcredit organisations in Bangladesh face
sustainability issues as they are reliant on donor funding. As donor funding is
unpredictable and declining, these organisations are unable to continue lending. He
proposes that the government should create new laws to allow Non Governmental
Organisations (NGOs) to convert into a formal financial institution. This conversion
would allow them to accept deposits so that they can be self sufficient (Yunus,
2004).
Social Capital & the Microcredit Model
Yunus as cited in Woodworth (2008) believes that the microcredit model puts a great
emphasis on building social capital in communities. Woodworth (2008) defines
social capital as an intangible yet important aspect of relationships between people
that creates a sense of mutuality, trust and a willingness to help each other. Knack
(2002) adds that at the community level, improving social capital increases
wellbeing, decreases crime rates, encourages community participation and can
improve economic prosperity.
Woodworth (2008) suggest that social capital is especially lacking amongst poorer
communities and that the microcredit model is successful because it addresses this
lack. He explains that the poor are often marginalized from participation in the
economy because of the lack of skills and resources and thus are disconnected from
the rest of society.
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Putnam (1993) found that regular public meeting of members in a community is
associated with growth in social capital within that community. Putnam (1993, p. 37)
explains that social ties formed through regular meetings fosters social capital
because they facilitate gossip and other valuable ways of cultivating reputation an
essential foundation for trust within a complex society. Such community interaction
encourages participants transition from the I to the we, and the bonds
established through regular interaction give each participant a sense of being a
member of a larger community (Putnam, 1993).
In his study of microcredit models in the Philippines, Woodworth (2008) noted that
since loans are made to groups of individuals who commit to paying each others
loans, it builds a sense of camaraderie amongst the group. The process of being
involved in a microcredit group enhances the informal networks within the group and
in the community whilst also improving their finances (Woodworth, 2008). Larance
(1998) in her research with female clients of Grameen Bank in Bangladesh found
that participating in the weekly member meetings resulted in multiple community
wide benefits such as; an improved sense of wellbeing, less quarrels amongst
villagers, reciprocal child care practices, having nurturing friendships and a reduced
sense of class divide amongst different social classes.
In his observation of member group meetings in the Philippines, Woodworth (2008)
found that group members provided business contacts for suppliers and customers
to support each others businesses. Furthermore their friendships extended beyond
the world of finances as women assisted each other with caring for each others
children. Woodworth (2008) also found that members discussed each others
problems and worked together to brainstorm solutions. He adds that when looking at
the microcredit model from the perspective of organisational theory, social capital
encourages sharing of knowledge thus reducing organisational costs associated with
acquiring knowledge (Woodworth, 2008).
Woodworth (2008) adds that individual members feel an increased sense of
confidence in their capacity to succeed when they have the support of their group
members. He adds that the role of microcredit organisations goes beyond facilitating
access to credit and collecting payments and that it also encompasses the facilitation
of developing social capital in each group (Woodworth, 2008). He believes that
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social capital thus becomes an intangible asset for the microcredit organisation as it
is directly linked to the economic success of the groups (Woodworth, 2008). He
concludes that social capital builds resilience amongst their poor to step out of the
cycle of poverty and provides them with strength in the face of adversity
(Woodworth, 2008).
Ethical Issues
Structural Inequalities
Burkett (2007) acknowledged that the principles of microcredit works from a
strengths based perspective, seeking to highlight the capacities of poor people rather
than treating them as passive beneficiaries of donor funds. However Buckett (2007)
cautions that the microcredit ideology may place too much emphasis on the notion of
self- help that we may forget about challenging the structural inequalities that affect
the poor. Buckett (2007) notes that providing access to credit does not always result
in the desired impact. In her research in Bangladesh she found that some of the
enterprises that were started were not sustainable and not run in a cost effective
manner. She adds instead of empowerment, poor people may get in to more debt.
Farhodova, Kimani, Masa, Deng & Mungai (2008) caution that before deciding on
microcredit or other types of financial services intervention, the organisations
involved should perform an analysis of the situation in the community to find out if it
would be the most appropriate solution. The authors explain that most microcredit
institutions have some form of are donor funding and there may be other pressing
concerns such as access to drinking water, food, health, housing that these funds
could be used to address.
Gender & Cultural Issues
The culture in Bangladesh requires women to adhere to cultural norms and as such
they may not always be able to control the use of the funds they receive as their
husbands may have a greater influence on the finances (Farhodova et al, 2008).
Farhodova et al (2008) recommends that organisations should work to advocate for
womens rights to microcredit though educating women with literacy and other skills.
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At the same time, the organisation could also work with men to identify barriers to
womens participation and involve men in the process of developing strategies to
empower women. Farhodova et al (2008) suggest that it naive to think that
microcredit itself can lead directly to womens empowerment as it is dependent on a
complex of socio-economic factors. Thus it is recommended that microcredit
initiatives take an approach that is culturally appropriate and gender inclusive.
Peer Pressure
Montgomery (1996) notes that there are social costs involved with the formation of
solidarity group in microcredit schemes where group members are jointly liable for
each individual loan. He explains that poor people often experience instability in their
finances and thus may pose as a liability in their peer groups. For most members of
the peer group, the pressure to make repayments when they lack funds leads them
to seek funds from their informal network of friends and family (Montgomery, 1996).
However such sources are limited and thus members are at the risk of being
dropped out from the groups. In his research Montgomery (1996) found that peer
groups may become vicious in such situations and may resort to forced acquisition of
the defaulting members property. He adds that rapid expansion of microcredit
organisations have diluted the social aspect of solidarity groups such that the focus
during village meetings is more about collecting debt to maintain credit standards
instead of creating a mutually supportive community (Montgomery, 1996). Thus the
author concludes that there need to be flexibility in repayment schedules and offer
interest bearing savings facilities to make to protect poorer members. He also
suggests that performance indicators for staff should not focus entirely on repayment
discipline, so that there are incentives to address social development objective
(Montgomery, 1996). This particular issue does not apply to Grameen Bank as it
does not impose joint liability (Grameen Bank 2011B), however it is an issue of
concern for other microfinance organisations.




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Social Work Ethics &the Microcredit model
When analysing the model that Grameen Bank operates, I can see how their
principles aligns with social work practice and values. The fact that the Bank is
willing to lend money to people with no collateral is evidence of a non-judgemental
approach towards clients as it accepts them regardless of their history or current
circumstances. This also aligns with social work values of being non judgmental in
our practice (AASW, 2013).
The Bank also recognises that individuals dont exist in a vacuum but in complex
structures of interdependent mechanisms as explained Bronfenbrenners
Ecosystems theory (Bronfenbrenner, 1994). Dr Yunus believes that the historic ideas
of economic development via a top down approach of investment to create
employment opportunities has created problems of overcrowding and poor working
conditions in cities. He believed that each individual has an entrepreneurial spirit and
that poverty can be ended by giving the person control over his future. He adds that
poverty exist because those who are well off have created a system that privileges
their interest and ignores the poor (Yunus, 1999). It is through this recognition that
Grameen Bank challenges systemic oppression of the poor by creating opportunities
for its members to access credit and build the social ties, so as to achieve holistic
development for the individual and the community.
Dr Yunus believes that access to credit should be a basic human right (PBS, 2007).
He explains that basic human rights such as the access to food, shelter, health and
education are often recognised, yet governments of third world countries struggle
with providing these rights to citizens. He believes that by empowering poor people
through credit, they have the opportunity to be self employed and generate income
to life themselves out of poverty. This also aligns with social work ethics of promoting
policies that uphold human rights and ensuring access, equity and participation for
everyone (AASW, 2010, p.19). The philosophy behind the microcredit model is also
well aligned with social work values of social justice as it promotes fairness in terms
of access to credit, and acts to reduce barriers to credit for disadvantaged,
vulnerable and oppressed people (AASW, 2010, p.13).