Microcredit Strategies and the Success of Grameen Bank

Introduction

Over the years, poverty has been an immense problem globally and finding effective and efficient methods to overcome this situation has become a major concern for many poor countries. What measures then, have been adopted to fight poverty? To deal with poverty, the UN initiated the introduction of the microcredit concept and declared the year 2005 as the International Year of Microcredit (United Nations 2004, par 1). This program was aimed at the provision of accessible microcredit and micro financing schemes for the poor to elevate and mitigate wide ranging issues: income, women empowerment, and regional economic cooperation as a response to the ill-beings of poverty. Poverty has been a major global issue because it threatens every man’s right for life and self-determination leading individuals and organisations to seek for better ways to reduce its incidence. The microcredit program of Grameen Bank has empowered majority of poor women in Bangladesh by allowing them to make decisions for themselves and on behalf of their families making an economically productive society. This essay discusses the UN Millennium Development Goal on how to fight poverty and hunger, the success of microcredit and how this has been a successful financial service program as introduced by Grameen Bank to the people of Bangladesh, and the related strengths and weaknesses in terms of the program’s implementation. In addition, a short discussion is taken on the issue of the possible pitfalls of replicating the bank’s popular introduction of the micro-credit program in Bangladesh to other poor countries.

Grameen Bank and the impact of microcredit

Despite the fact there are no precise standard courses of action for measuring poverty, the term, as defined by the United Nations (UN), has two concepts: absolute and relative (UNESCO 2014, par. 3). Absolute poverty embraces the idea of measuring poverty in relation to the amount of resources needed to supply basic living needs for all individuals. Relative poverty, on the other hand, is defined as a type of poverty that can be measured through identifying the economic standing of individuals in relation to other members of the society. Therefore, the contextual definition for both concepts revolves around the spectrum of consumption and income variables (UNESCO 2014, par 3). The dominant factors influencing poverty, as revealed by a study (UNESCO 2014, par 3), are social structure and culture. Clearly, both factors are beyond the control of the individual and there should be social and governmental intrusion to effect change and sustain communities.

According to the United Nations, the UN Millennium Development Goals as introduced in the year 2000, made an astonishing impact especially in fighting high rate of poverty incidence worldwide. As of 2010, 700 million people were reported to have passed the line to live outside of the extreme level of poverty than in 1990 (UN 2014, 4). UN Millennium Development Goal number one desires to alleviate the incidence of poverty all over the world. To do this, the United Nations introduced the microcredit initiative to help ease the burden of poverty by following of a system of financing and extension of loans to the poor. This was intended to empower them to become co-architects of economic growth and sustainability.

Consequently, as an initiative by financial institutions to implement the microcredit program, borrowing through joint liability lending or group lending is seen as an appropriate business model to ensure the collection of account receivables for debts. Lending through joint liability characterises the release of loan borrowings by groups rather than individually with expressed acceptance of the liabilities for the loans of fellow members (Ahlin 2007, 2). Collection-wise, requiring each member to be jointly liable for each other’s debt is a viable option as it will lessen the likelihood that loans will become uncollectible. In support for this concern, Grameen Bank took the initiative to mobilise efforts of the program by extending loans to women. This is because women are considered as most vulnerable in categorising the segments of the world’s poor (Sarker 2000, 8).

Muhammad Yunus was instrumental to the introduction of microcredit in Bangladesh through the Grameen Bank. Yunus’ initiative on economic and social development earned him the 2006 Nobel Peace Prize award for innovation in financial services. Microcredit has been successful in delivering financial services to the poor (Amin, Rai and Topa 2003, 59). Additionally, the success in the implementation of the microcredit program by Grameen Bank was attributable to various factors such as the provision of longer repayment terms, the provision for accessible capital sourcing for the poor, and partnership with government. Yunus thought that the idea of the United Nations in solving poverty through microcredit is an effective scheme to minimise poverty in Bangladesh. Microcredits aim to lift the socio-economic level of the people and through the initiative, provide additional income and consumption for everyday living.

Yunus offered microcredit financial services through the Grameen Bank in Bangladesh, especially to women who wanted to start on their own. Considering that a big portion of this market segment does not have stable jobs, they have limited or no access to borrowing programs of other financial institutions. Microcredit is offered by the Grameen Bank mostly to women because they found that women have higher repayment rates than men (Khandker 1998, 100). Through micro-credit, women are now empowered and they were given the chance to help raise funds to sustain the needs of their families. Before, women in Bangladesh don’t have much power due to the patriarchal nature of their society (Sultana 2010, 123).

Microcredit’s group lending practices have its advantages. Microloans without collateral provides opportunities to people with less income to easily acquire resources for investment thereby helping people to supply basic needs for their family and alleviating poverty. It also provides employment opportunities as many businesses were created through the entrepreneurial effects of the microcredit program. Moreover, microloans can lessen interests in loan borrowings as the costs associated with monitoring and processing of loans and enforcing repayment are distributed in groups making it remarkably lesser than in individual loans (Aghion and Morduch 2005, 85-86). To simplify, expenses or costs associated with the whole process of lending transaction for an individual loan may be enough to spend for a group of five loans in joint liability lending, making the interest of loans lesser than in individual loans. Alternatively, if someone from the group of borrowers fails to repay, other members directly assume responsibility and help in repaying the loan. This has led to more debts of the world’s poor causing serious repercussions: debt traps, family troubles, and suicides. There are high numbers of women committing suicide in 2010 while others sold their kidneys just to repay their loans (Hossain 2014, 7). Moreover, poor people with less education who receive loan grants from microfinance institutions may tend to invest carelessly or improperly leading again to a debt trap (Hossain 2014, 7). To avoid this, an introduction of a borrower education program would train borrowers how to use property their money. Additionally, regulation on the operations of all financial services organisations will protect the interests of the borrowers and the entire program.

Despite the overall impressive record of the introduction of microcredit, the number of people living in extreme poverty still totals 1.2 billion globally (UN Department of Public Information 2013, par. 1).

Applying the concept of the Grameen Bank microcredit strategies to other countries that are experiencing poverty may not possibly work due to a number of reasons. One reason is difference in political climate. The varying support by government and political subdivisions in the implementation of the microcredit program in other countries may harm the effectiveness of the microcredit program as applied by Grameen Bank. Another reason can be attributable to market suitability. Varying market attributes like competition, perception, and differing economic levels may prove not to complement with the idea of the microcredit with reference to the microcredit implementation of Grameen Bank. In sum, there should be viable studies to be conducted to save resources and eventually work together to lessen incidence of poverty.

Conclusion

For microcredit to be effectively applied, loan applicants should be briefed on how to properly invest the proceeds of their borrowing. Through this way, the true purpose of the program will not be wasted. Serious repercussion such as debt traps, troubles in the family, and suicide can be avoided when borrowers are given the right direction to spend their borrowings. Additionally, in order to reach its maximum potential as a tool for poverty alleviation, micro-credit institutions should be regulated by implementing policies to prevent financial institutions from abusing its profitability and preventing these institutions from becoming profit-oriented organisations. The advantages like lesser fees, no collateral, economic growth, and women empowerment will be compounded if the program will be seriously applied and supported by the government. Studies should also be conducted to ascertain success of the implementation of the Grameen Bank strategy in other countries to minimise unwise use of valuable resources. All of these approaches direct to the provision of quality of life for all, by working hand in hand to solve the issue of poverty around the world.

References

Aghion, Beatriz Armendáriz de, and Jonathan Morduch. “The Economics of Microfinance.” http://www.fgda.org/dati/contentmanager/files/documenti_microfinanza/economics-of-microfinance.pdf (The MIT Press), 2005.

Ahlin, Christian. “How does Micro-credit Work? Risk-Matching, Diversification, and Borrower Selection.” http://web.stanford.edu/group/SITE/archive/SITE_2007/segment_2/ahlin_groupsorting.pdf (Stanford University), 2007: 2.

Amin, Sajeda, Ashok S. Rai, and Giorgio Topa. “Does Microcredit Reach the Poor and Vulnerable? Evidence from Northern Bangladesh.” Journal of Development Economics (Elsevier) 70, no. 1 (2003): 59-82.

Hossain, Nazmul. “Micro-Credit Banking As A Poverty Alleviation Tool.” http://eujournal.org/index.php/esj/article/download/4005/3816, 2014.

Khandker, Shahidur R. “The impact of group-based credit programmes on poor households in Bangladesh: does the gender of participants matter?” Oxford University Press (http://trove.nla.gov.au/work/27998118?selectedversion=NBD14291904), 1998: 100.

Sarker, Abu Elias. “The Secrets of Success: the Grameen Bank experience in Bangladesh’.” Labour and Management in Development Journal (https://digitalcollections.anu.edu.au/bitstream/1885/41829/4/2-1-abusarker.pdf) 2, no. 1 (2001): 3-12.

Sultana, A.M. “Patriarchy and Women’s Gender Ideology: A Socio-Cultural Perspective.” Journal of Social Sciences (http://core.ac.uk/download/pdf/25988364.pdf) 6, no. 1 (2010): 123-126.

UN Department of Public Information. “Eradicate extreme poverty and hunger.” http://www.un.org/millenniumgoals/pdf/Goal_1_fs.pdf, 2013.

UNESCO. “Poverty.” http://www.unesco.org/new/en/social-and-human-sciences/themes/international-migration/glossary/poverty/, 2014.

United Nations. “Un Launches International Year of Microcredit 2005.” http://www.un.org/press/en/2004/dev2492.doc.htm, 2004.

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