Collateral-free credit: Grameen Bank’s solution to rural empowerment

Grameen Bank works with the poorest and often illiterate, providing uncollateralized micro-loans for tiny business enterprises by which they can lift themselves and their families out of poverty – Muhammad Yunus (Founder, Grameen Bank)

About the bank

Grameen Bank has reversed conventional banking practice by removing the need for collateral and creating a banking system based on:

  1. Mutual trust, as the bank distributes zero collateral loans.
  2. Accountability, as the bank is liable to pay in full to the depositors in case of a non-payment of loans.
  3. Participation, as the bank appoints the customers as members to carry the banking business.
  4. Creativity, as the bank develops unique strategies to uplift the underserved, by providing revenue-generating business opportunities. (Example: Grameen Phone).

The Bank provides credit to the poorest of the poor in rural Bangladesh, without any collateral. The bank believes that credit is a cost-effective weapon to fight poverty. It further believes that credit serves as a catalyst in the overall development of the socio-economic conditions of the poor, who have been kept outside the banking orbit.

Source: Annual report 2018-19, Twimbit analysis

Challenge

Grameen Bank identifies that the primary reason, individuals choose to stay unbanked is because of their low economic status and lack of awareness for banking solutions at their disposal. Further, they struggle to take a loan because of lack of:

  1. Mandatory documents
  2. Collaterals
  3. Credit scores

How is Grameen Bank driving financial inclusion in Bangladesh? 

Grameen Bank is one of its kind in all of Bangladesh, empowering the poor by making banking facilities available to them, which especially includes credit. To date, they have successfully served over 9 million customers, out of which over 97% are women. Grameen Bank is continuously changing the shape of the Bangladeshi banking industry by successfully implementing unique strategies.

  1. Zero-collateral loan: Grameen Bank offers zero collateral loans involving no paperwork, to its customers. The loan is disbursed based on mutual trust. The interest rate on the loan depends on the customer’s needs. For example:
    1. Loans for income-generating activity: 20% p.a.
    2. Housing loans: 8% p.a.
    3. Educational loans:
      1. 0% during the study period
      2. 5% post-completion of studies
  2. Beggars as members: Grameen Bank serves beggars and brings them under the umbrella of financial inclusion through the ‘Struggling Members Group’ program. This helps them disburse loans to the beggars at 0% interest. To date over 1,10,000 beggars have joined this program out of which over 9000 beggars have joined Grameen Bank as main-stream borrowers.
  3. Village Phones: The concept of the Village phone caught people’s imagination. Poor household women are provided with mobile phones that create a new business opportunity (Telecom Booths) for the poor and bring access to information, market, health, and other services to the remote and rural areas of Bangladesh.
  4. Reach: Grameen Bank’s rural penetration is incomparable with any other bank in Bangladesh. With over 1,38,000 touchpoints and 2568 bank branches, Grameen Bank covers over 81,600 villages in Bangladesh.

People strategy

People Strategy of Grameen Bank is directed towards customer welfare and empowerment. This has led to unique practices such as:

  1. Appointment of members/customers as directors: In order to maintain fair practices and ignite innovations in the organization, Grameen Bank appoints customers to the Board of Directors. This helps the bank maintain a personal connection with the customers.
  2. Appointment of members/customers as directors: In order to maintain fair practices and ignite innovations in the organization, Grameen Bank appoints customers to the Board of Directors. This helps the bank maintain a personal connection with the customers.

Technology strategy

Grameen Bank is currently focusing on automating its services. The bank successfully implements automated MIS and accounting system in all its bank branches. This has freed the branch staff from the routine paper work and allowed them to devote more time to administer the loan portfolio and supervise the borrowers and the use of loan funds.

Partnership strategy

  1. Grameen Bank with Intel, to create software applications that address specific social problems such as low agriculture output or lack of prenatal care.
  2. Grameen Bank with Grameen Telecom, to provide rural Bangladesh with telecom connectivity at discounted rates.

The way forward

Today, Grameen Bank covers over 93.5% of Bangladesh and serves the underserved mainly by providing zero collateral loans. Grameen Bank has added to the noble cause of women empowerment by giving them access to easy loans and encouraging women entrepreneurship through their concept of village phones.

However, due to the recent fintech development zero collateral loans have now become a mainstream business activity. To be able to continue to serve the customers in an effective manner, the bank should move towards digitalization and introduce:

  • Digital Lending Platforms, for quick credit
  • Payment Applications, for fund transfers and withdrawals
  • Debit/Credit cards, to promote the use of plastic money
Topic:

Financial Inclusion

Banking the unbanked.

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