Chapter 1 Introduction
In the era of the globalisation, people in many countries enjoyed the wealth from the economic boom and the benefits from the advancement in technology. However, some groups of people in other parts of the world cannot able taking that advantages and struggle with the poverty. The global inequality problem was very severe since Yunus (2007: 3) reports that the majority of world population (60%) lives on only 6% of world income while the rest enjoys about 94 % of global income. Consequently, since the 1990s the poverty problem and inequality in developing countries are the concern of national governments and international institutions. Poverty alleviation has been the main focus in international development programs (Develtere, 2005: 165).
Many scholars proposed the policies for poverty alleviation. They discovered that one major reason of poverty is the inability of the poor to get access to the formal credit market due to the lack of collateral which make them so vulnerable to fall into the poverty trap. Shabana, Kaur and Litt (2011: 90) suggests that credit is one of the essential components in the route of economic development. Furthermore, credit is an important instrument for poverty reduction (Haque, 2000: 234). So, the failure in the credit market led the government and international institutions to promote the ‘microfinance’ in developing countries.
The operation offers a small scale financial service both credit and deposit to the poor who operated small enterprise is the role of the microfinance (Ghosh, 2005; Khandker, 2001: 1; Shabana, Kaur and Litt, 2011: 90; Singh, 2003: 2). In addition, the microfinance’s aim is not only the helping to generate the credit but also the desire to support other development aspects which are helping to improve the quality of life and living standard of the poor.
The Grameen Bank, one innovation of the microfinance was finally established in rural Bangladesh in 1983 by Mohamas Yunus. The Grameen bank (Grameen means rural in Bengali language (Auwal and Sighal, 1992:8).) was serves as new hope for the poor. The initiative of Yunus to set up the Grameen Bank is originated after the independence in December 1971. During that time, Bangladesh has been suffered a lot from the poverty. It is one of the poorest counties in the world (Develtere, 2005: 165). Most of Bangladesh people are poor; possess few land and illiterate espealliy women. They suffer from the poor living conditions under the pressure of men and cultural norm. Moreover, the informal credits take over in most rural area (Auwal and Singhal, 1992: 5).The poor cannot get access to the formal credit market because it prone to support the fortunate group (Haque, 2000: 229).
So, the Grameen Bank tends to provide the lending to poor by offering lending in group. The high repayment rate of 98 %, the expansion to over two third of districts in Bangladesh with more than one million members in only 16 years and 94% of their clients are women elucidated the impressive role of the Grameen Bank (Auwal and Singhal, 1992: 7; Rahman, 1999, 67). As a result, in the mid 1990s, the Grameen Bank was internationally accepted as a new tool fighting against the poverty especially for the women. The women’s empowerment is promoted in rural Bangladesh due to the Grameen operation (Rozario, 2002). Many non-profit agencies, government and business enterprises in various developing countries started to implement thousands of micro credit organisations and programs due to the accomplishment of the Grameen bank (Yunus, 2007: xii). The Grameen Bank turned into ‘‘the world’s hot idea to reduce poverty’’ (New York Times, 1997; Amin, 2003: 59-60). It was a new magic wand against the poverty (Misra, 2006: 1). It is international well-known and served as model for other countries all over the world (Develtere, 2005: 165). The UN announced that the year 2005 was a year of microcredit (Barr, 2005: 273).
The claim of success of the Grameen Bank which made the microfinance system became prominence led to the necessity to consider and examine whether the Bank was really benefit the poor and serve as the new panacea to resolve the poverty. This dissertation, thus, aims to analyse both strengths and weaknesses of the service and impacts of the microfinance by focusing on the case of the Grameen Bank in Bangladesh where the accomplishment of the microfinance system is originated. It is represented as a ‘home’ of micro-finance (Denham, 2012: 4). Not only we can learn and understand more about the Grameen Bank operation but also this can be a good guidance for the improvement of the microfinance system in the future.
The argument of this dissertation asserted in the fact that the strengths of the operation of Grameen Bank are the use of the social capital and decentralised structure to overcome the imperfect information in lending process. Moreover, the impact of the Grameen Bank focuses on the poverty reduction especially the female clients. The strength in impact, so, is the increasing role of women and the rising in income which lead to the women’s empowerment. Combining with the Sixteen Decisions, the women’s empowerment also creates the positive effects to other members in the household. Consequently, the social impacts which lead to the improvement in quality of life and poverty reduction are also the strengths of the Grameen bank.
However, this dissertation also shows some of the weaknesses of the Grameen bank in both of the operation and the impact. The weakness of the Grameen bank operation is the long term self-sustainability of the Bank because it relies too much on the funding and subsidy from the government and donors. Moreover, there is the trade-off between the financial sustainability and the mission of Bank in poverty reduction. The Bankers may abandon their goal of lending because they are forced to focus on the good repayment rate, profit and financially sustainability. For the weakness in impact, the concern is on the long term poverty reduction and negative effects of women’s empowerment. The Grameen loan may be used in the non productive way and enhances the money lending businesses with the rent seeking behaviors. Furthermore, the men are the persons who force the women to join the bank and control the uses of loans. Combining with the Bank and the group pressure on repayment, it finally leads to a new form of the dominance and violence over women. The effect of the women’s empowerment is not that appealing.
This dissertation is structured to explain that argument. After this first chapter of introduction which describes the overview of the argument and the plan of the research, the second chapter will illustrate the theories and frameworks which importantly related in examining and analysing the strengths and weaknesses of the Grameen bank. It will begin with the poverty and the important of the financial accessibility, followed by the failure in credit market for the poor and how the microfinance is relevant to solve the problem. Moreover, the concept of neoliberalism used to promote the poverty alleviation through the NGOs combining with the issue of the social capital and civil society building are also explained. Finally, the women’s empowerment is proposed as a last framework. In the next chapter, chapter three, not only the poverty problem, the situation of women and credit market in Bangladesh are reviewed, but also the birth and the details of the operation of the Grameen Bank. The fourth chapter, furthermore, will analyse the strengths of the Grameen bank both the operational strengths and the impacts. The weaknesses of the Grameen Bank operation and impacts will be clarified in the fifth chapter. Finally, this dissertation will end with the conclusion.
Chapter 2: The theories and frameworks
This chapter will explain about the related theories and frameworks in order to draw the scope of this dissertation which helps to explain and analyse the Grameen Bank service.
2.1 The poverty and financial accessibility
2.1.1 What is poverty? And what is the reason for poverty?
The poverty has always been in the concern of national governments and international institutions. However, the definitions of poverty and how to measure it have been very varied and debatable.
In some way, the term poverty can be simply explained as the lack of money and income. According to the World Development Report (2000), whose income less than 2$ for a day is defined to live in poverty which reflects about half of the population in the world (Singh, 2003: 3). Moreover, the people who lives under 1$ per day is facing extreme poverty which covers almost a billion people in the world (Yunus, 2007: 3).
The way to estimate the poverty can be the increasing in GNP (Gross National Product) per capita or the decreasing headcount under poverty line (White, 2008: 26). However, this method has been criticized that it overlooks other important dimensions and does not concern about the inequality (White, 2008: 26). The growth itself does not reflect the advancement in the living standard at all (Clark, 1991: 23).
As a result, the development literature more broadly to cover other aspects which concern mainly on the related human features, social environment and the political participation as the indicators of poverty. The factors which impact on the living standard include asset, health condition, child mortality, education, security, life expectancy, shelter and access to essential resources (Clark, 1991: 20). The countries tend to adopt the human development along with the GNP growth. It reflected in the United Nations Development Programme (UNDP)‘s human development index (HDI) which covered , GDP per capita , life expectancy and education accomplishment (White, 2008: 26).
After identifying the poverty, the next important issue is the reason behind the poverty. The answer is also unclear because the factors which contributing to poverty is varied and complicated. The poor have struggled in the poverty trap because the causes of poverty seem to complement each other. White (2008: 25) describes the poverty trap as the susceptible condition for those to plunge into poverty and hard to escape. Robert Chambers simply catergorised the main factors which contribute to the poverty are physical weakness, isolation, vulnerability and powerlessness (Clark, 1991: 21).
2.1.2 The important of financial accessibility
In order to solve the poverty, there is a need to attack on one or more factors that contributing the poverty cycle. Since, they initially had no enough money or start-up assets, they are not able to smooth consumption, run small businesses to earn income or engage in regular educational system to get a job. Moreover, the sickness and the natural disaster which lead to the sudden loss in income also made them so vulnerable (Magner, 2007: 11-12).
Therefore, one way to help the poor is to let them access the source of income or promote financial accessibility. Zander (1997:47) points out the importance of the both short term and long term increasing in income for the poor in order to reduce poverty and build up the asset for sustainably effects. Thus, the access of credit market is an acceptably one opportunity for the poor to get out of poverty.
A numbers of scholars stress how the accessibility to the financial market especially the credit market is relevance to the development in countries. Gangopadhyay and Lensink (2005: 2) convinces that since the valuable opportunity in the market are not being utilized suitably, the failure in accessibility to the formal credit market means a vanishing in national output. Furthermore, the inability to access to the credit market is the main barrier for the development in many poor counties (Aghion, 1999: 79). Shabana, Kaur and Litt (2011: 90) suggests that the credit is one of the essential components in the route of economic development.
However, to get the poor access the credit market is not an easy task .The financial accessibility promotion is apparently obstructed by the problem of market failure.
2.2 The failure in credit market for the poor and the microfinance
The neoclassical regime has been broadly accepted since 1980s. It embraces the free market and believes that the information is able to move freely among actors in the market.
However, what really happen is not very appealing. The market showed many disorders and cannot work properly corresponding to the free market. Stiglitz (1986) explained in Lepenies (2008: 22) that due to the fact that asymmetric information is prone to take place in most market, the neoclassic hypothesis seems to be useless. The imperfect information affects on individuals decision and may cause the market failure. Lepenies (2008: 20) stated that, it may lead to high transaction cost.
The market failure as a result of asymmetric information is a common phenomenon in the credit market for the poor. It is usually happens when one actor has no enough information about the other actor to make correct decision (Mishkin, 2008: 37). The inequality which is likely to take place before the transaction is made is called the adverse selection. It happened when the prospect borrowers have tendency to construct an unwanted behavior and outcome which called the bad credit risk (Mishkin, 2008: 37). On the other hand, the trouble produced by asymmetric information after the transaction has been taken place is called the moral hazard. It is the risk that the borrowers may employ in actions which are harmful since it may increase the potential to default (Mishkin, 2008: 38). Both of these situations are the asymmetric information which is the major problem leads to the failure in the credit market.
The adverse selection happened when the bank has no enough information of poor costumers. The poor who have a few assets like land or houses as necessary collateral made the bank hardly able to estimate their financial status. So, the bank cannot guarantee their repayment ability. As a result, they hesitate to provide the loan which is the barriers for the poor to access to the formal credit regime (Zander, 1997: 45; Lepenies, 2008: 22-23)
Moreover, the screening and monitoring the using of the loan by the poor is also problematic because it reflects the ability to pay back the loan. The difficulty in loan repayment can be resulting from the non-productive use by the borrowers (Zander, 1997: 46). Stiglitz (1990: 351) explains that “[A]a major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced”. Thus, if the bank (mistakenly) lend to the one who is genuinely too poor or lacks of financial discipline, it might lead to the defaults. The success and failure of the loan mainly depends on the quality of the pre-evaluation (Zander, 1997: 46). As convincing by Gangopadhyay and Lensink (2005: 2), in many poor areas the moral hazard is dangerous when borrowers do not have sufficient and adequate collateral to cover the borrowers’ behavior.
Therefore, the formal credit system calls for the collateral and complex processes and procedures because the bankers do not assure in the poor’s credit-worthy and the ability to repay the loan (Singh, 2003: 2). Although the formal credit system charged low interest rate comparing to the informal system, the poor still cannot access to the formal credit market because of the fact that they had no enough required collateral. Singh (2003: 3) verifies that very small part of the poor is supplied by the formal credit system.
Another way for the poor to get the money is that they turn to the informal credit market. Borrowing- lending mechanism often construct within family members or communities. Singh (2003: 2) stated that the informal lending which contain of traditional moneylenders, pawnbrokers and trade specific lenders is comparatively simple and fast for emergencies uses. However, they are regularly come with the high interest rate, which reflects the cover the estimated default risk or the exploitation of the lender (Singh, 2003: 2; Stiglitz, 1990: 351).
As mentioned above, the access of credit market is very important for the poor as a one opportunity to get out of vicious cycle. As stated by Haque (2000: 234), credit is a relevant instrument for poverty reduction. However, there is a dominant problem in the lending market. The ideal loan for the poor should be cheap, simple and collateral free which is the combination of the characteristics of both formal and informal systems. This concept originates the microfinance scheme.
2.2.1 The concept of Microfinance
To provide the credit market for the poor, the microfinance is developed. It is a kind of financial intervention that is likely to use to fight with the poverty and encourage the economic growth in the many developing areas. The role and principle of microfinance is described by many scholars.
Shabana, Kaur and Litt (2011: 90) refers it as a small scale financial services such as micro-saving and credit. Khandker (2001: 1) describes that microfinance means transactions in small amounts of both credit and saving, involving mainly small-scale and medium-scale businesses and producers. Ghosh (2005) also elucidates the role of microfinance that it tries to promote small scale financial service both credit and deposit to the poor who operated enterprise. The similar explanation of concept is given by Singh (2003: 2), Shabana, Kaur and Litt (2011: 90) and Sims (2006) that the microfinance is provided to support poor in their usual activities, emergencies and help them to set up and expand micro-enterprises. Importantly, it is provided to whom is not qualified for the traditional banking (Haque, 2000: 228).
Moreover, Singh (2003: 4), Shabana, Kaur and Litt (2011: 90) and Haque (2000: 228) also mention about long term development objectives of the microfinance apart from the ‘credit’ issues. They agree that microfinance also combine to promote other social aspects which are aiming to improve the quality of life and living standard of the poor. It is not only providing credit but also help to promotes in the long term beneficial things for poor (Denham, 2012: 5; Haque, 2000: 228). It is one of the greatest social programme.
To summarise, the microfinance is another important tool to relief the poverty problem in the developing countries. Its impact goes further than the capital accessibility and covers to promote the increasing in income and assets (Magner, 2007: 7). The service recognises that both income and social conditions are important component for the development in the society. Many microfinance institutes are established in rural areas, The Foundation for International Community Assistance (FINCA) in Peru, The Banco Solidario (BancoSol) in Bolivia, The Bangladesh Rural Advancement Committee (BRAC), including the famous Grameen bank in Bangladesh, a successful pioneer. The great accomplishment of microfinance that allowed millions of the poor to find the way out of poverty with dignity was praised by the president of the World Bank, James D. Wolfensohn in 1996 (Yunus and Jolis, 2011).
2.3 Neoliberalism and poverty reduction through NGOs participation
The microfinance achievement is under the support of the local government, international donors and NGOs because it is the new hope to solve their main concern –poverty. It lead to largest financial intervention in history (Arora and Meenu 2010: 44).This kind of intervention is considered to be a new tool following the neoliberal schemes which encourages the third sector, NGOs, civil society social capital to be the main engine for poverty alleviation. This section will explain some brief history and the background of this concept in order to understand the characteristic and the reason behind the operation of microfinance.
After the failure of the modernisation to solve the poverty in developing counties, the world is influenced by new development discourse, ‘neoliberal’, under the globalisation. In the 1980s, many countries embraced neoliberal and free market as a mainstream for development. The core concept is to reduce government intervention support privatisation, deregulation, infrastructure and increasing role of NGOs. The neoliberal discourse was promoted by the president Reagan of United States of America (USA)’s the Washington consensus through the IMF and the World Bank operation in term of promoting the good governance and sound macroeconomic in the market. Since the old large government is a default, the good governance is raise up to take over the role (Hettne, 2008: 9)
The good governance is promoted to dissolve the poverty problem in many developing countries through since 1990s. Jenkins (2008: 516) defines it as a prevail pattern by which public power is applied. The World Bank reviews that, their official aim is to implant the disciplines of capitalist competition and encourage the transformation in developing countries by enhancing NGOs workers and civil society which is the strategies behind those aim. Neoliberalism is likely to solve the poverty through the NGOs supports (Cammack, 2004: 206; Jenkins, 2008: 516). Especially for the fragile government with lacking of authority sovereignty efficiency in many post colonial countries, the NGOs role is more dominant (Karim, 2008: 6).
2.3.1 Social capital, civil society building and NGOs
Following the neoliberal concept, the third sectors (NGOs), the civil society, are seen as useful for the economic growth and development in developing countries. Therefore, in this section will explain about the working of NGOs and civil society building. However, we cannot able to understand them clearly without understanding in the social capital concept as a root of the explanation.
Social capital
Social capital is defined by some scholars. World Bank defined it as ‘the norms and social relations embedded in the social structures of societies that enable people to coordinate action to achieve desired goals’ (Ito, 2003: 333). Fukuyama (2001: 7) describes that “social capital is an instantiated informal norm that promotes co-operation between two or more individuals”. Moreover, Bebbington (2008: 132-133) points out the effect of social capital that have to make benefit for both individual and community level in economical, social and political dimension. However, the definition which is the acceptable and more comprehensive is defined by famous Robert Putnam in his book, Making Democracy work in year 1993 .He describes that” Social capital here refers to features of social organisation, such as trust, norms and networks that can improve the efficiency of society by facilitating coordinated actions” (Putnam, 1993: 167). From all views, they stress some important factors which are trust norms and network that encourage the relationship and collaboration among people. These three are collective stocks that tend to be self-reinforcing to making the work success (Putnam, 1993: 167- 177).
The first thing to mention here is the network in civic engagement, Putnam (1993: 173) states that the network which brings together people from comparable status and power called horizontal network, conversely, the connection between the unequal agents is called vertical network. This network is important and necessary pattern for the social capital because it allows the people to engage, communicate and collaborate for their mutual interests which may encourage the information-flow and the advancement in trustworthiness (Putnam, 1993: 174).
The norm is a fundamental component to support the social capital. Wide ranges of the norms can constitute social capital, from two people to complicated cooperation Fukuyama (2001: 7). Almost everyone, complies with it. The norm especially comprehensive reciprocity is considered to be useful and important element because it helps to decrease the uncertainty, lower transaction costs and produce a good example in the prospect collaborations (Putnam, 1993: 172, 177).
The trust is a product of the strong establishment of norms and networks. One who is to be trusted is due to the arising of both conditions (Putnam, 1993: 171, 177). The powerful norms and intense network help to build up the trustworthiness of other players through the interaction in the individual level. Trust can spread in the mechanism of ‘I trust you, because I trust her and she assures me that she trusts you’ (Putnam, 1993: 169). It can easily generate the reputation among actors. Group applicants absolutely need this good reputation in honestly and reliability (Putnam, 1993: 168).
The relationship of three factors of social capital is complementary. The greater trust helps to build more collaboration and the collaboration itself also supports trust (Putnam, 1993: 171). The strong social network is usually associated with the efficient generalised reciprocity norm which generates the minimising in uncertainty and building up the trustworthiness (Putnam, 1993: 168,172). However, the horisontal network is more consistent to maintain social trust than the vertical network (Putnam, 1993: 174; Lewis, 2011: 128).
After identifying the social capital concept, it is important to mention how the social capital is built. Fukuyama (2001: 17) points out that the social capital is the feature or product that lies outside the government authority. Hence, it will be benefit for the poor countries if the social capital was building up strongly because it is able to act as a substitution for the fragile government. For poor countries, where the institutions for contract enforcement is mostly malfunction and weak, the social capital specifically crucial (Feigenberg, Field and Pande 2010: 2; Ito, 2003: 322). As a result, this advantage of social capital is being utilized as an instrument of the neoliberal to enhance the development.
Social capital is an important source of the poor to get access to the service which is important to the development and poverty reduction. The social capital make the poor able to get accesses the financial, educational and health service (Bebbington 2008: 135). Harriss (2001: 84-89) states that the connection enhances the information sharing which increases the chance to engage in the important service. The one good example is the accessibility in group lending of the Grameen Bank.
Civil society and NGOs
Social capital contributes to explain the success of NGOs and civil society building. The form of horizontal trust and reciprocity which produced in the civil society is called social capital (Rooy, 2008: 520; Putnam, 1993: 177; Lewis, 2011: 128; Kabeer and Mahmud, 2010: 48).
The civil society is usually associated with the international aid and NGOs sponsorship. Mohan (2008: 47) proclaims it as the kingdom of NGOs. It is the product of the neo-liberal schemes which aim to promote the good governance in the developing countries. The civil society and NGOs, thus, have become primary component of the donor-led ‘good governance’ promotion (Kabeer and Mahmud, 2010: 49). They are part of the World Bank international development agenda in poverty reduction (Lewis, 2011: 131).
The idea of civil society becomes more popular in 1980s-1990s. It is under the assumption that the civil society is voluntary actors or groups which emerges between the gap of market, state and households and acts as a watchdog or an alternative to correct the imperfection roles in those actors (Rooy, 2008: 520; Kabeer and Mahmud, 2010: 48-49 ; Lewis, 2011: 125-126; ADB, 2012)
As mention earlier, the failure in the formal credit market lead to the rise in the role of social capital, NGOs working and civil society. Microfinance is the one form that NGOs used to cope with the poverty reduction. Ito (2003: 322-323) and Rankin (2002: 4) point out that where both the state and the market and have not worked functionally, microfinance is a very good example of the successful case in the use of the social capital for poverty alleviation.
However, the form of third actors to promote the good governance is considered to be the new way to embed the capitalism regime in the third world. The rent-seeking behavior is rooted in the developing countries due to the rise of the neoliberal regime (Kabeer and Mahmud, 2010: 48; Karim, 2008: 7). It is a western discourse which tries to export to other countries. Furthermore, aid and funding from donors create the relying condition of southern to northern countries (Mohan, 2008: 47). It distorts the third world economy by favouring the government who is likely to satisfy the donors (Yunus and Jolis, 2011).
2.4 Women’s empowerment
In this section, we will move to discuss the issue of women’s empowerment. Due to the fact that the women are the major clients of the microfinance (about 94 % of the Grameen Bank participants) and women’s empowerment is one main aim of the microfinance, the definition and the concept of women’s empowerment are essentially concerned.
The women’s empowerment initiative is absolutely rooted from the problems against the women. Trotz (2008: 352) convinces that the women especially in the third world are the victims of the colonialism culture and violence within families. Thus, there is a growing attention from international organisations in the issue of women’s empowerment. The 1990s UN development program, World Bank, Oxfam and NGOs serve women’s empowerment as the essential components of the development (Parpart, 2008: 355).
The definitions of the indicators of women’s empowerment are not very different within the scholars. The United Nations Population Information Network (POPIN) clarified that the empowerment consists of five elements, “Women’s sense of self-worth, their right to have access to opportunities and resources, their right to have the power to control their own lives, both within and outside the home, their right to have and to determine choices, their ability to influence the direction of social changes to create a better social and economic order, nationally and internationally” (Denham, 2012: 7). Schuler and Hashemi (1994:67) states in Bernasek (2003 : 374) that the women has been empowered when they has been promoted in the “relative mobility, economic security, ability to make various purchases on her own, freedom from domination and violence within her family, political and legal awareness, and participation in public protests and political campaigning”.
From the above instances, the way to estimate the women’s empowerment is able to be clarified and summarised and into some aspects. Firstly, there should be the rising in the power, right and freedom to make own decisions. It includes the power and right to be against violence in households and the freedom of mobility or called by Denham (2012: 12) as the independency. Secondly, there should be the rising in the right to access to the economic resources for their security and stability. Finally, there should be the increasing in an ability to participate in public space and influences political and economical dynamics.
In the next chapter, it will explain some apparent and relevant background in Bangladesh which are the poverty problem, the women status, the development of NGOs and the credit market in Bangladesh. Moreover, the birth of the Grameen Bank and how the Bank operates will be also elucidated in the following chapter.
Chapter 3: The poverty, credit system, the development of NGOs and women status in Bangladesh and the birth of Grameen Bank
In several decades ago, many development institutes have turned to spot on Bangladesh, one of the poorest countries in the world, when the new innovative microfinance service ‘the Grameen bank’ showed the success in their operation. The Grameen Bank experiment which was established in Chittagong in 1976 by Muhamas Yunus, Nobel peace prize winner, finally became a bank in 1983 (Singh, 2003: 3). The Grameen bank not only serves as a new hope for the poor within the countries, this new service makes the microfinance system become more broadly acceptable as the international model to resolve the poverty (Barr, 2005: 273; Develtere, 2005: 165; New York Times, 1997; Amin et al., 2003: 59-60).
However, before explaining the birth of the Grameen Bank, it is necessary to mention and understand some relevant situations like the poverty problem after the independence, an inefficiency financial market, the inferiority of women in society and the development of NGOs in Bangladesh because they are the important initiative ideas for the operation of the Grameen Bank and the underlying factors which determines the Bank’s desire outcome.
3.1 The situation and the problems in Bangladesh
3.1.1. The poverty and the credit market in Bangladesh
Bangladesh is the landlocked country which locates in the south Asia. After the independence in the 16th December 1971, Bangladesh has suffered a lot from the poverty problem which rooted from the long colonial war period against Pakistan. This country was claimed as one of the poorest countries in the world (Develtere, 2005: 165). Most of Bangladeshi people were poor and possessed a few assets. It reflected over half of the total population (Hague, 2000: 228). Lewis (2011: 14) reviews that in 1980s no less than half of the total population was the landless. Most of them were unskilled and also illiterate (Auwal and Singhal, 1992: 9). Moreover, due to the fact that the country always got attacked by the cyclone and natural disasters, the famine was commonly found in many areas (Lewis, 2011: 17). It made the people became more vulnerable. The massive poverty was everywhere.
Furthermore, the basic institutions that suppose to take a main role in the country are significantly weak. The financial institution is considerably one of the concerns. The formal financial system showed lack of efficiency when the poor especially in rural area are not able to access to the financial service. The availability of the credit was restricted due to the backward in financial market (World Bank, 2005: 38). Haque (2000: 229) points out that the formal banking system mainly concentrates and favors the urban class who is considered to be the privilege. As a result, the poor especially the small entrepreneurs had no chance to set up their small businesses to earn income. The system often undertreated this particular group (World Bank, 2005: 38).
Nevertheless, the failure of the formal credit market is taken over by informal actors in rural areas. The poor who feel hopeless for the formal banking in Bangladesh turned to borrow the money from the informal lenders despite the massive high interest rate. Auwal and Singhal (1992: 9) reviews that they are forced to pay that expensive due to the claim of the people who acted as the middleman to provide the easy money to the poor. In addition, the theory goes; it is because of the asymmetric information that happens in the market.
3.1.2 The international aid and development of NGOs in Bangladesh.
What the long colonial root left behind was the fragile state and turmoil in the country. This situation attracted some outside assistances and the expansion of the NGOs. Karim (2008:7-8, 11-12) and Lewis (2011: 17) explain that due to the inefficiency and corruption of the failed state to solve the poverty, the western donors considered serving the NGOs to take the role as the mainstream suppliers of aid service in the many rural areas of Bangladesh. Furthermore, the expansion of NGOs in Bangladesh was claimed to constitute with the democratisation process in grassroots level (Karim, 2008: 11-12). It serves to protect legal voices and rights for the poor (White, 1999: 308). This movement fits the aim of Neoliberalism to promote the good governance to solve the poverty in the third world society. Owing to the weak state combines with the rise of Neoliberal scheme which promotes the market driven and the limitation of the state power, the NGOs then becomes an active route to solve the poverty (Nazneen, Hossain and Sultan, 2011:19).
Since 1980s, there was the growing attention from the western donors to Bangladesh. The country itself considered the NGOs service more reliable and effective than the weak state. Therefore, NGOs serves as the main engine in providing the public services to the poor in many rural areas. Since then the external assistances have taken the central position in Bangladesh economy both financing and authority (Lewis, 2011: 143). World Bank (2005: 16) suggests that the Bangladesh government admit in their inefficiency in providing the public service hence the state have chosen to leave a space for the NGOs to convey in many services. The main focuses are on the basic service for example, education, health, clean water, hygiene, human development, women’s empowerment , social safety development and including the microfinance (World Bank, 2005: 16; World Bank, 2010: 43-44; Nazneen, Hossain and Sultan, 2011: 19,26).
The operation of NGOs in Bangladesh shows a good accomplishment. World Bank (2005: 118,126) and White (1999: 307) assert that NGOs are the reason behind the Bangladesh developmental success which made this countries becomes a leading in NGOs. The one good example is the microfinance service which a success in their operation attracts the support and funding from donors. The advancement of the microfinance has been in the World Bank development framework (World Bank, 2005: 39). Karim (2008: 7) reveals that about millions dollars of external aid flow to support the NGOs work of microfinance. Furthermore, the system is able to reach about 65% of the poor in rural areas (World Bank, 2005: 16). The NGOs microfinance program including the Grameen bank is the main source providing the money to the poor. The Bank is considered to be one of the important agents to resolve the poverty (Lewis, 2011: 135).
3.1.3 The women status
Another important issue of consideration is the women situation in Bangladesh. In the rural society, the women are inferior against men both the social status and the opportunity to access the economical resources which comply with the traditional norms. Because the Bangladesh is an Islamese country, the women have to admit and live with the compulsory custom norms. For example, the women can be abandoned by her husband if the dowry does not sufficiently pay (Auwal and Singhal, 1992: 9).
Moreover one dominant norm is the ‘Purdah’. This norm strictly restricts in the women behavior and activities. The women’s actions reflect the family image and status in the rural society. Bernasek (2003: 370-371) and Karim (2008: 11) point out that the men have to take responsibility to certify the proper behavior of the women; consequently unsuitable activities of women are claimed as the men and families failure.
Furthermore, the Purdah norm creates a form of social control especially for the women. The shame is used as a powerful tool to control women behavior in the society. Karim (2008: 10) confirms that the women embarrassment has been rooted in rural Bangladesh society for a long time. In the rural face-to-face community, the honor is an important treasure of the poor; they are likely to protect a good reputation and avoid the shame (Karim, 2008: 10). In short, the norm of maintaining the honor which is a result of the Purdah is one factor for the social capital building.
The direct effect of the Purdah norm is the limitation of women lives both socially and economically. They only engage with housework and sometimes are judged by their parents as burdens (Auwal and Singhal, 1992: 9) .The women are poorer than men. They cannot be able to contact with non-family members; get the regular education and health service as same as men; participate in market and economic activities to earn money; involves in external work or get a regular job (Denham, 2012: 5; Lewis, 2011: 15 ; Mayoux, 2005). Bernasek (2003: 370-371) and Selinger (2008: 28) also state that the women are not able to access to the credit market and have their own account due to the lack of collateral like saving or assets, even they want a loan, it have to be under the agreement of male. Kabeer (2001: 83) verifies that the gender inequality in Bangladesh is the main obstacle to maximize the productivities gain within the households.
3.2 The birth and the operation of the Grameen bank in Bangladesh
The state breakdown, massive poverty, the inefficient in formal credit and the exploitation against women after the independence in 1971 are the main reasons for the Grameen experiment in one rural village Jobra in Bangladesh in 1976. This experiment was finally become a successful Grameen Bank in 1983.
After complete the PhD from Canada, Professor Mohamud Yunus went back home and took a job at Chittagong University. He was attracted by the famine in year 1973-1974 within the country, so he decided to conduct a survey in one rural village near the university. He examined the extreme poverty within the women and their inability to access to the formal banking service due to the lack of required asset. In addition, he found the exploitation in informal credit market with very high rate of borrowing (Auwal and Sighal, 1992: 10). Yunus and Jolis (2011) and Magner (2007: 14) add that they are poor because of the inefficiency in financial foundation not their laziness. Therefore, he established the Grameen research project as a one division of the local Bank in Jobra village in Chittagong in December 1976 .It started to offer collateral-free loan to the poor especially women (Dowla, 2006: 105).He wants The experiment lie in the Yunus’s belief that the credit is the most simple way to bring the poor out of the poverty cycle, the women have a potential to employ in productive jobs and be independence with a little support in the necessary capital (Hashemi ,1997: 109; Hossain 1988 in Auwal and Sighal, 1992: 11).
From 1976, the Grameen project was able to expand branches to other 363 villages in Tangail and Chittagong with the impressive loan recovery rate (Auwal and Singhal, 1992: 11). Due to a high success in the operation, the project can be able to get an acceptance and attention from the government. In October 1983 the Grameen project was finally become a fully independence bank with the assistance from Bangladesh bank, IFAD (International Fund for Agricultural Development), Ford foundation and others (Bernasek, 2003: 372).
The Grameen Bank organisation structure and lending pattern are organised to provide the loan to the poor who are lack of necessary collateral. The first main concept is the decentralise structure and the groups-centers relationship (Sarker, 2001). The Grameen will go to the people if the people will not come to them (Haque, 2000: 230; Karim, 2008: 9). Secondly, the Grameen also supports in long term productive gains through the social engagements in the Sixteen Decisions.
The decentralised structure has been developed and implemented over the years in order to devote to the needs of all clientele. At the bottom of the Grameen hierarchy lies in the branch office which is considered the main operational organ of the bank, the profit-accountability unit. The branch office serves a cluster of centers, staffed by a manager, eight or ten workers. The second tier is the area office, zonal office which positioned at the top of the hierarchy in the field level. The top tier is the head office which is a secretariat or information clearing house, responsible for monitoring and evaluation, research and development, supervision of training, and similar activities that is a direct benefits from access to information from different operational levels. Moreover, the Grameen Bank board composed of 13 members, nine selected from the borrower shareholders and four appointed by the government (Hashemi, 1997: 109). The board of governors will approve bank policies and serves as liaisons between the bank and government institutional.
The relations between groups and centers remain the most crucial institutional element of organising the operating units to implement the designated activities. Organising groups and federating them into centers are considered the building blocks of the Grameen receiving system (Sarker, 2001). The lending pattern of Grameen Bank is a self-formed group. Five like-minded individuals from similar socio-economic standing with no fixed assets or assets not exceeding the value of half an acre of cultivable land (per family), are asked to form groups with common interest in mutual trusts (Hashemi, 1997: 110; Auwal and Singhal, 1992: 15). Within a group, only one member will be representing its household, members can be either male or female but not both. The small loans are provided to members in a group at an interest of 20% (Haque, 2000: 231).They share the responsibility in the every member’s loan and pay the old loan in order to get a new loan. Members may conduct businesses and pay the installment with a bank representatives only at weekly meeting held at the center with member’s full attendance. A is a federation of a number of groups with weekly meetings held at the center level.
Moreover the concern on social development is also the unique concept of the Grameen Bank. Yunus wants to resolve the instant problems rather than being another lender (Yunus and Jolis, 2011). So the loan providing by the Grameen Bank is focus on the participants’ ability to earn more income and the long term profitable impacts for the poor. The relevant feature is to help them to be self employed and set up their own small businesses (Karim, 2008: 14). Loans are offered for the productive used activities which certify the capital accumulation in the future, for example the manufacturing, agriculture, service, trading, shop-keeping (Haque, 2000: 231). Moreover, the borrowers have to contribute in saving and buy shares in order to receive the loan.
The Bank’s aim of the long term profitability leads to the decision to target on women clients. They are the prime customers who are more responsible in the loan than and men. Bernasek (2003: 373), Denham (2012: 6) and Selinger (2008: 33) convince that the women are more likely to generate their income to family welfare and more determined to resolve the poverty within the family. So the Grameen Bank would focus on the increasing in women income to solve the poverty.
The Grameen Bank realised the competency of the women in both the income generation and the social contribution. In the weekly meeting, it is compulsory for the members to remember and comply on ‘The Sixteen Decisions’, the social development program of the Bank. Haque (2000: 232) describes that it is the Grameen’s intention to create the sustainable effects in poverty reduction by covering the social, economic and mental dimensions. Auwal and Singhal (1992: 18) illustrates the detail of ‘The Sixteen decision’ which is showed the figure I.
Figure I
Source: Auwal and Singhal (1992: 18)
The Decisions cover the social aspects which are important to improve the quality of life. It consists of the commitment to the upgrading in shelter, the support in the income-generated agricultural activities, the contraceptive and health concern, children education, sanitation, water quality, the environmental care and the participation in economic and social activities.
Bernasek (2003: 373) notices that the key factor of many goals directly aims to promote the women’s empowerment. Therefore, the Grameen Bank considers the women as the main driver for the social development and the poverty alleviation. The Grameen Bank aims to develop the women social status, the women’s empowerment and bring their family out of poverty (Bernasek, 2003: 383).
Where the Grameen bank get money from? The sources of income are the shares ownership and external funding. The main stake ownership of the Grameen Bank is separate into two parts; the participant shares and the government. At the beginning, the government owned the major proportion. However, recently, only about 10 to 20% possess by the Bangladesh government while almost 90% is owned by the members of the Grameen bank in a form of the Bank shares (Haque, 2000: 230). Moreover, the Grameen Bank also got the inexpensive funding from the Bangladesh government and external organizations, for example the government of Norway, Sweden, Canada and Germany and other international institutes like the UN, IMF and World Bank
The Grameen Bank is very successful in term of the huge expansion in number of participants, villages, amount of loans over time and the high repayment rate. The numbers of participants increase from 42 to about 2.1 million and 2.3 million in the year 1976, 1995 and 2000 respectively (Hashemi, 1997: 109; Yunus and Jolis, 2011; Bernasek, 2003: 373). Moreover, it has been able to spread the operation to around 40000 villages in the year 2000 (Dowla, 2006: 169; Bernasek, 2003: 373). The average size of loan is seventy dollars (Stiglitz, 1990: 352). The loan amount has boosted from $27 in1976 to $1.6 billion in 1995, $2.3billion in 1998 and $2.8 billion in 2000 (Yunus and Jolis, 2011; Bernasek, 2003: 373). Importantly, the Grameen Bank service proclaims their achievement in the high repayment rate of 98% and 94% are female clients (Hashemi, 1997: 109,120; Auwal and Singhal, 1992: 8).
The Grameen bank has international accepted as the tool to solve to poverty. In 1998, the ‘Yunusonomics’ was a latest panacea for the international development which at The Grameen’s success which attracted President Clinton and Queen Sophia of Spain to Bangladesh (Karim, 2008: 24- 25). The fame of the bank has spread to many counties in the world. The Grameen has been adopt in from the area of the urban cities like Chicago to the small remote areas of Nepal or Papua New Guinea, finally in 1998 Grameen copies are found in fifty-eight countries (Yunus and Jolis, 2011). World Bank (2005: 118) serves the Grameen as the most effective NGOs to solve the poverty.
The claim of success of the Grameen Bank in this chapter leads to the examination the reasons behinds of their achievement. Thus, in chapter four will analyse the strengths of the Grameen Bank.
Chapter 4 The strengths of the Grameen bank
This chapter examines the strengths of the Grameen bank both the strength of management system and the impacts. The strength in management is important because it made the Grameen Bank able to provide the loan to the poor, maintain a good repayment rate which leads to the success in their mission. Moreover, the strengths in impacts are focused mainly on the poverty alleviation. It will analyse some incidents or benefits which contribute to the reduction of poverty.
4.1 The strengths of management and operation
The strength of the management and operation of the Grameen Bank is their managerial ability to maintain the mission and overcome the apparent barriers. The concern is providing the lending to the poor and gets rid of the imperfect information. The key factor for the Grameen Bank is the used of the theory of social capital in form of group lending and meeting to support their operation to resolve the poverty. Moreover, the decentralised structure is also the factor which contributes to their success.
4.1.1 The Grameen bank and the social capital
The Social capital supports the Grameen bank activities; at the same time the Grameen Bank operation also encourages the establishment of new social capital. Ito (2003: 322) explained that the ‘various types of social interactions that are generated around successful microfinance are randomly called ‘social capital’’. For the Grameen Bank, the concept of the social capital is a tool which is the key factor for their achievement. The group lending and the weekly meeting are the activities that replicate this concept.
The Grameen Bank makes a success in a group lending. They are able to provide the loan to the poor with a high repayment rate. Besley and Coate (1995: 2) states that the group lending has gained more attention recently due to the operation of the Grameen bank. The concept behind the success group lending is the social capital. The Grameen uses the pre- existing social capital to mitigate the imperfect information in lending to the poor. It is able to act as collateral against the lacking of physical collateral in the lending process (Rankin, 2002: 12). The fundamental key point behind the success is the joint-liability within a group lending.
The group members share the responsible in the loan, one’s default means the group’s default. The group has to responsible for all payment (Denham, 2012: 5). So, the participants are likely to choose the people they have known very well to join a group. Hashemi (1997: 110) describes that due to the joint liability, the self selection of members in the group is the primary screening process of each borrower. In this process, the network and trust do applied. The information-flow and trustworthiness lead to the sensible selection of group members which is the pre-conditional for the accomplishment of group lending. The precedent social connection within the community mitigates the adverse selection problem (Putnam, 1993: 169; Fukuyama, 2001: 17). The self-formed group is one relevant component of Grameen Bank success (Stiglitz, 1990: 362).
When the group is formed and the lending is made, the social capital also supports the success of group lending through the peer monitoring. The joint liability of group lending creates an incentive for the each member in the group to monitor other members’ behaviors; this incentive is called the peer monitoring (Stiglitz, 1990: 361). Besley and Coate (1995: 16) and Bernasek (2003: 378) explain that the strong social connection and network made the peer monitoring becomes more powerful. In highly-connected society, the members are closed and know each other very well, so they are likely to behave and maintain a good relationship, reputation, and trustworthiness among others. They try to comply with the traditional norm of the society, especially the women participants who are strictly conform to the Purdah. The strong social pressure like the shame, family dishonored, gossip, rumor and social sanction are avoided by the women (Karim, 2008: 10; Bernasak, 2003: 371). So, the social capital in form of the good relationship guarantees the loan repayment which makes the peer monitoring becomes successful (Putnam, 1993: 170; Bebbington, 2008: 135; Stiglitz, 1990: 351; Rankin, 2002; 12). This can imply the reducing in the moral hazard from the group pressure (Gangopadhyay and Lensink, 2005: 2).
Furthermore, the social capital supports the success of the Grameen Bank through the weekly meeting. The Grameen meeting constitutes personal network, trust and collective social ties within the group members (Auwal Sighal, 1992: 16; Feigenberg, Field and Pande, 2010: 1). Thus, the collaboration enhances the informational sharing among the members which mitigate the imperfect information and build up the power of peer monitoring.
So, the strength of Grameen Bank operation is the use of the existing social capital and a new one in the group lending activities to overcome the market failure in the credit market. Putnam (1993: 169) explained that the social capital can help to increase the credit availability and enhance credit market efficiency. The group interactions or horizontal relationships within the borrowers boost up the information-flowing (Ito, 2003: 324). So, the social capital can help to overcome the problem of imperfect information both the adverse selection and moral hazard through the screening and peer monitoring to maintain a good reputation and avoid social sanction.
This form of social capital is collateral of lending for the poor. The ‘social collateral’ successfully acts against the missing of physical collateral (Lepenies, 2008: 23; Denham, 2012: 4; Putnam, 1993: 169). Therefore, the social collateral made the Grameen bank able to reduce the screening and monitoring cost (Ito, 2003: 325; Hashemi, 1997: 110; Fukuyama, 2001: 10).It made the Bank able to provide the collateral- free loan to the poor. The bank is able to get rid of the main barriers and succeed in the lending with high repayment rate. The social collateral is an important factor for the sustainability of financial services to the poor (Ito, 2003: 326).
4.1.2 The decentralised structure and client-based approach
Another technique of the Grameen Bank is the decentralised organization and client-based service. Grameen excellent organisational management is the main factor of their accomplishment (Sarker, 2001). It is strength of the Bank which helps to overcome the imperfect information and contribute to the Bank success. The decentralised structure is organized aiming to work closely with the clients. Auwal and Singhal (1992: 15) points out that 90% of the Grameen bankers are assigned to work directly to solve personal problem of their clients. The closed relationship between bankers and the clients make it easier for the bankers monitor the clients’ behavior. In addition, the poor also benefits from the specific type of services providing by the officers. The advantages the poor received is very important component which contributing to their repayment ability. Hashemi (1997: 114) states that the training, the bank density and basic infrastructure supplied by the Grameen’s staffs are responsible for the low default rates.
To say, the client-orientation service and decentralised structure are the strength of the Bank. The bank is able to use the concept of the social capital to overcome the barriers which contribute to the poverty alleviation. Moreover, the closed relationship between workers and participants are able to mitigate the imperfect information and the poor are able to get direct benefits from the Bank which supports their repayment capability. All in all, the bank recognised the role of the poor to take part in resolving the poverty.
The strength of the management and operation contribute to the success of the Bank. The next section will analyse the strengths in impact which resulting from those strengths in the operation. The theory of social capital goes to solve to poverty.
4.2 The Strengths in the impacts of the Grameen Bank
The aim of the Grameen Bank is to provide the collateral-free loan and support the long term effects in resolving the poverty. So, the main concern is absolutely the factors which impacts on the poverty alleviation.
The strength in the poverty reduction of the Grameen Bank is the increasing in income and investment among the participants. The Grameen activities and the rising in income especially women clients lead to the women’s empowerment which is an important factors that create the benefits to members in the households. The women participants are likely to follow Sixteen Decisions and contribute the income to family welfare and social development.
4.2.1 The strengths in poverty reduction
The Grameen’s loan can help solving the poverty within the clients through the engaging in the productive activities and jobs to earn more wages and finally contributes to increase in the clients’ overall income.
The ability to engage in productive stable activities and jobs leads to the higher wage and income earning. The barriers to access to the inputs and useful activities are reduced through the loan and training provided by the Grameeen Bank. Hashemi (1997: 115) states that the Grameen bank makes the poor able to access to the raw materials which are necessary for their productions. They got the benefits from the support of the Grameen in small productive activities like fishery, cultural group, cultivating, new houses, innovative farming equipment, education and training (Auwal and Singhal, 1992: 16). Therefore, it helps to increase the employment and wages within the Grameen clients. The average wage rate has risen 19% among the Grameen communities (Hashemi, 1997: 113). Moreover, Hossian 1988’s experiment in one rural village reveals that Grameen members’ income per capita rise about 40% compare to the non-members with the same qualified criteria (Hashemi, 1997: 113; Auwal and Singhal, 1992: 21).
Women’s empowerment
As mentioned earlier, the majority of the clients of the Grameen Bank are the women who responsible for the high repayment rate. This is one reason that leads to the consensus to emphasis on women’s empowerment for poverty alleviation strategies in the 1990s (Mayoux, 2005). Bernasek (2003: 378) explains that the accessibility in credit and the increasing in income of the women through the process of contact and group participation empowered the women clients. To say, the strengths of group lending and meeting lead to the increasing in income of women and support the women’s empowerment. No matter how small the total effect, it is significantly empowered the poor women in Bangladesh (Khandker, 2001: 14). The Grameen Bank makes the women in Bangladesh able to participate in the economic activities and have a significant role in the society for the first time. The Grameen Bank allows the strengths in women’s empowerment to take a role in the poverty reduction.
The group lending and the compulsory regular meeting support the women to take an important role outside their family for the first time. As mentioned earlier, the women activities limit within the households and are in under control of husbands. The Grameen Bank made them able to participate in the group and improve their managing skills. One female clients of the Grameen Bank stated that she has learned to talk through the weekly group meetings (Denham, 2012: 24). According to Rahman (1999)’s interview, the Grameen women are less shy comparing to non Grameen borrowers (Dowla, 2006: 162). Moreover, the group meeting encourages the women to learn to manage the money and expenditures and deal with others .It supports their self-esteem, confident and identity beyond their husband’s influences (Karim, 2008: 13; Mayoux, 2005).The activities also make them more mobilised and able to observe their village for the first time (Hashemi, 1997: 115).
When the women engage in important activities and resources, they gain more authority in the households. Bernasek (2003: 377) states that the accessibility of the women in the relevant capital strengthened their decision-making power. They have more negotiating power against their husbands and able to take part in the relevant tasks. About 60 % of the women are able to responsible for managing the properties and schooling of their children (Shabana, Kaur and Litt, 2011: 92). The power in decision making that women have gained showed that the Grameen bank has succeeded in the women’s empowerment. Hashemi (1997: 115) also supports this argument.
Loan accessibility and meeting not only supports the decision making power, but also indirectly reducing the violence against the women. Auwal and Singhal (1992: 21) convinces that there are the decreasing in the violence in the Grameen households due to the reducing in the case of the wives are beaten within members. The women’s ability to get access to the credit is the main key of the reduction in aggression. The loan and income earning which leads to falling in scarcity is the major reason for the enhancing in women’s value and declining in violence against women in the families (Kabeer 1998 states in Dowla, 2006: 165; Denham, 2012: 11). The access to credit helps to lift up the status of the women within the families (Shabana, Kaur and Litt, 2011: 92).
In conclusion, the women clients of Grameen Bank are able to engage in the important activities outside their families which are the process of empowerment. The group meeting make them learn how to talk, manage money and able to move around the village for the first time. Furthermore, they are able to take part in the decision making in the household which lead to the negotiating power against husbands and reduction in violence within the families. Moreover, the women are more independent and respect in herself (Auwal and Singhal, 1992: 21-22). Shanida Begum, one of the Grameen Bank clients stated that after she has been abandoned by her husband, she has been able run her business and buy house for her children with the support from Grameen loan (Auwal and Sighal, 1992: 21). Bernasek (2003: 381) convinces that the Grameen loan provides the power to women to mitigate the suppression role under the traditional ‘Purdah’ norm. Because of this reason, Yunus has won the Nobel Prize in peace (Sims, 2006).
The positive social impacts to the households
The women’s empowerment creates to the positive effects to other members in the households. The strength of the poverty reduction is also the benefits to other family’s members which are resulting from the social program of the Grameen Bank – the Sixteen Decision. Bernesak (2003: 373) states that the poverty reduction is driven by the women, so the social development claims the women’s empowerment as an essential source of success.
The concept of women’s empowerment which impacts on other members in household are lies on the fact that they are likely to generate their income to families’ welfare. Bernasek (2003: 371), Kabeer (2001: 83) and Selinger (2008: 33) support that the households have a tendency to get more benefit from women rather than men because they prioritised their earning to the children and households necessity. Combining with the fact that the women clients are committed for the Sixteen Decision, the women then strictly promotes the improvement in families’ well-being. Auwal and Singhal (1992: 19) and Bernasek (2003: 377) illustrates that the women clients clearly recognise the benefits of the Grameen social program and implement it in households.
As a result, there is the improving in health and hygienic condition of women and children, the education of the children, age of marriages daughters and family planning within Grameen’s families. Bernasek ( 2003: 377-380) and Auwal and Singhal (1992: 21) reveal that the Grameen’s women are more likely to eat better food, care more about nutrition during pregnancy, consult the doctor during sickness and promote the hygiene by supporting the use of sanitary latrines. Moreover, the children of the Grameen members are in better health condition comparing to non-Grameen families in term of the completed course immunisation (Bernasek, 2003: 377).
Furthermore, the Grameen children both girls and boys are able to access and engage more on the education. Bernasek (2003: 380) states that the rate of the boys of Grameen families schooling is higher than the boys of non-Grameen families for about 30 % and for the girls, it shows more satisfied proportion at 40%. In addition, there are slowly changes in the use of dowry within the Grameen families. Bernasek (2003: 381) explained that the Grameen mothers concern more about their daughters’ future life so they are willing to pay high dowry for good husbands; as a result, there is the increasing in the age of daughter marriages among Grameen families of 15 years instead of 14 of daughters of non-participants.
Not only the benefits for their own and their children, the women also concern on the family planning. The Grameen women are aware of the contraceptive issue and the power that they gained made them able to take a decision on the control of the fertility. The Grameen members show more than 15 % of contraceptive use comparing to the non members (Bernasek, 2003: 379). Haque (2000: 234) and Auwal and Singhal (1992: 21) so, reveal that the family planning rate of the Grameen members are far higher than the national rate.
To conclude, the strengths in the poverty reduction originated from the increasing in income among members especially women. The Grameen loan helps to increase the income which leads to women’s empowerment and effects on social development. The bank activities make the women able to take important role outside family and more mobilise. The rising in income makes them able to engage in a decision making in household which leads to the reduction in violence. Moreover, the process of women’s empowerment also benefits to other members in the households because the women likely to generate income to household. Combining with women participants are likely to follow Sixteen Decisions, consequently, the strengths in impact of the Grameen bank also cover the improvement in children mortality, health, education, fertility rate, and the wisely use of dowry. These factors mitigate the vulnerability of the poor and strengths the quality of lives which is important to the development.
Chapter 5: The weaknesses of the Grameen bank
In the previous chapter, the Grameen bank shows the wonderful strengths in both operation and the impacts on poverty reduction. However, this chapter will illustrate another side of the coin. The Grameen bank shows some of the weaknesses in both of the operation itself and impacts.
The critique of the operation lies on the fact that the Grameen bank is supported by the funding from many donors. So, it leads to the concern on the self-sustainability of the Bank. There is the tradeoff between their long term goal on the financial sustainability and poverty alleviation.
The weakness in impact of the Grameen Bank is the long term effect on poverty reduction and negative effects in women’s empowerment. The Grameen loan may not be used in productive way and lead to the capital accumulation. It enhances the loan rotating cycle and traditional money lenders. Moreover, the Grameen loan might induce the violence over the women. Because the women are forced by their husbands to join the Grameen bank and the Bank and group pressure to repay the loans are too strong, it may lead to the tension and severe violence within the household in communities.
5.1 The weakness in operation: the sustainability of the Grameen Bank
The long term sustainability of the Bank is certainly a major concern. It reviews the long term direction of the bank and how far that the bank continue their operation to help the poor.
5.1.1 The reliance on the subsidy
The concern of the sustainability of the Bank originated from the fact that it relied too much on the government subsidies and donor supports. Since the beginning of the Grameen Bank, Yunus used his own saving and his personal connections to gain privileges from massive subsidies. The government and external funds are the major subsidiaries. Tucker (1995) reviews that 60% of the income of operation of the Grameen bank is supported by the government and enormous external grants from government of Norway, Sweden, Canada and Germany and other international institutes like the UN International Fund for Agricultural development (UNFAID), World Bank and International Monetary Fund (IMF). Therefore, the Grameen Bank is a large ’top down’ operational system from international development communities (Rozario, 2002).
Although, there has been the decreasing in share of foreign funding in income over years from 20% to 3.8 % in 1989 and 1994 respectively, the Grameen Bank still need a high subsidy to cover the cost of operation (Hashemi, 1997: 120). The Grameen bank would faces the lost without subsidy. Varghese (2001) Morduch 1999 explains that in order to cover the full cost with subsidy-free, the Grameen bank has to raise the interest rate 12%. So, to reduce the dependent condition, the interest rate has to be risen or the unnecessary cost has to be cut. However, Hashemi (1997: 122) convinces that this strategy is hard to implement because the poor was harder to the pay back to loan and the Grameen workers have already worked hard. So, the amount of the subsidy is so important to the Bank. Sarker (2001: 4) mentions that until recently the Grameen intervention has still been an essential job of the state. Moreover, because the subsidy is strongly relied on Yunus’s personal connection, the Grameen future depends too much on Yunus’s leadership (Auwal and Singhal, 1992: 25).
The external grants reliance not only leads to the concern of the financial sustainability of the Bank, but also leads to the critique as the establishment of dependent state of the western in the developing countries. As mentioned earlier, the aid and funding from donors create the relying condition of southern to northern countries (Mohan, 2008: 47). The donor supports the Grameen bank through the NGOs works to serves the poverty reduction mission of in the third world. Hence, Yunus’s model is the top down approach run by the NGOs and associated with the western neoliberal development regime (Selinger, 2008: 27). Tucker (1995) raises up one important example that the regular staffs of the Bank mostly are westerners not the local people. So the Bank is so fragile because it is driven by the foreigners not the local. The Bank is hard to stand alone in the long term.
So, the problem of self-sustainability of the Grameen bank is the weakness which is in a serious concern. The dependence condition affects the mission of the Bank in poverty reduction. Zander (1997: 48) stated that the Grameen Bank might only create the temporary effects in the increasing in income of the poor. The end of subsidies and supports may imply of the end of the poverty reduction mission.
5.1.2 Financial sustainability and the poverty alleviation mission
The next issue concern of the sustainability of the Bank in term of the conflict in the long term direction of the Bank. On the on hand, the Grameen Bank is formal bank which provide the loans to the clients and aim mainly keep up a good repayment records, make profits to maintain the sustainability . On the other hand, they are the developmental and social workers who try to make to the poor access to the credit market and generate the impacts to resolve the poverty. There is the trade-off between the sustainability and the poverty reduction mission.
The Grameen Bank operates like a formal bank which profit and repayment rate are the main concern. However, in practice, it contradicts with their ideal goal of poverty reduction and social development. Rahman (1999: 79) explains that the Grameen bank’s success is focused on the financial sustainability which estimates by some quantitative indicator for instance the repayment rate, the numbers of participants and amount of loan generated. It is the demand of donor to see a good looking numbers that grown each year despite abandoning the original lending spirit (Denham, 2012: 26). Therefore, the Grameen staffs are likely to concern more on the good operational records to achieve the claim of program success and over look the mission of poverty alleviation. Dowla (2006: 167) supports that they are prone to approve the loan only to people who qualified and have a repayment ability to keep up with a satisfied recovery rate. So, it is the weakness of the Bank that the workers are force to maintain a good rate and finally ignore the aim to eradicate the poverty though the credit support.

5.2. The weakness in impacts on poverty reduction and women’s empowerment
The weakness in impacts of The Grameen bank is the long term poverty reduction and the negative effects of the women’s empowerment. The Grameen Bank loan may not lead to the capital accumulation in productive activities. However, it enhances the exploitation and rent seeking behaviors in the communities. Moreover, the women are not the end users of the loan, they are force by her relatives especially husbands to join the Bank and get access to loan. They are pressured by the bank and group the pay the loan on time. Consequently, new form of the tension and violence are increasingly established as tool to control the women.
5.2.1 The impacts on long term poverty reduction
The Grameen bank success usually concern of the numbers of participants and the high repayment rate. However, it ignores some more unimpressive effects behind the claim of achievement. The increasing in participants especially women and high repayment rate does not reflect the accomplishment in long term poverty reduction.
The weekly repayment and the small loan cannot lead to the capital accumulation which is important long term effects in reducing the poverty. Ghosh (2006) explains in Selinger (2008: 30) that the loan only induces the short term consumption or mitigates the shortage of money due to the shocks, thus, it is just a form of income redistribution. In addition, the Grameen clients do not engage in productive activities as committing with the Bank and the Bank rarely able to monitor their behaviors. Although it is compulsory to commit to the Sixteen Decision, the clients are rarely remembered and understand it all (Karim, 2008: 15). Almost 80% of the loans in one Grameen village were used for unproductive proposes which do not approved by the Bank (Rahman 1999 in Dowla, 2006: 161). Karim (2008: 16) explained that the workers have to focus the repayment process and have little time to monitor how the loans are used. One Grameen clients’ husband stated with a smile that full amount of loan is spent to pay to old debt and invested in money lending, he borrows his neoboiurs cows in case the officers visit him for checking, (Karim, 2008: 16). Therefore, the Grameen loan is used for unproductive activities including repaying the old debts and lending to others. Rahman (1999: 67) implies it as a process of loan-recycling of individuals.
Since the Grameen loan facilitate relending process, the form of exploitation traditional money lenders are apparently brought back to the community. The neoliberalism and NGOs micro credit like Grameen bank do support the capitalism and rent seeking behaviors in rural economy. Karim (2008: 18) stated that the Grameen clients especially women relend the loan with 120% higher than the original rate. Karim (2008: 21-22) adds that they are able to operate the large money lending business for example the case of Jahanara, the female Grameen’s client, famous money lender in Krishnagar, who provides the loan to traders and supports their children to leave school to becomes money lenders.
Thus, the Grameen bank may not able to create a long term impact in increasing in income for the poor. Nevertheless, it enhances the non-productive used and rent seeking behaviors. Mayoux (2000: 3) asserts that some might consider the microcredit as a waste of resources.
5.2.2 The women’s empowerment and negative effects
The Grameen Bank proclaims the success in the numbers of women participants and good repayment rate. Moreover, the women’s empowerment are proved in term of the taking role outside their families , rising in income made them engage in decision making and reducing the violence in the households. However, Mayoux (2005) convinces that the number of women members, the loan size and recovery rate cannot reflect the empowerment. The success in impact of women’s empowerment is not impressive as it looked. It was the men who control loan leads to new form dominate and over women. Moreover, the strong peer pressure to pay the loans and severe violence are also considered as negative effects of the Grameen Bank in women’s empowerment. The tension and violence are likely to increase than decrease.
As we know from the previous chapter that one way of the Grameen bank helps to empower the female clients is through the increasing in income and decision making. However, some evident showed that the loan and income of women is under the control of the men especially husbands. 60% women reports that it is her husband that forces her join the Bank (Rahman, 1999: 70). The high repayment rate and increasing numbers of women clients does not imply her control and right over that loan at all (Mayoux, 2005). The women tend to pass their loan to husbands who assert a right over this money. They claim that “‘since their wives belong to them, the money rightfully belongs to them’” (Karim, 2008: 15). Hence, 95% of loans are used by means of the husbands (Karim, 2008: 15). The women are just representative their husbands not the end user. Only a few case that the women can able to use the loan in their own activities (Mayoux, 2005).
As a result, there is the increasing in tension in households since the women are forced mainly by their husbands to join the Grameen Bank to get the loan. Rahman (1999: 67) expresses that the women’s ability to access the loan leads to the new form of dominance over women. The rising in loan demand can be the signal of the high pressure over the women not the empowerment (Mayoux, 2005). The access in Grameen loan, so, worsen the women lives by support the women to be under control of men and some form of tension in households. The first example is the case of Bahar who is forced by the husbands to get a Grameen loan, unless he will leave her, send her back home and remarry (Rahman, 1999: 71).The second example is the case of one old widow which reveals that although she has no husbands, the family also hardly put pressure on her to give a loan to her nephew to fund his business (Karim, 2008: 16).
Furthermore, the aim of the bank to maintain a good record in repayment rate combining with the peer monitoring may lead to some strong pressure on women and violence in households. Rahman (1999: 67) states that the bankers and group put great force over women clients to ensure the on-time payment. The bankers want to maintain profit and good profile, while the group wants to avoid the default to take responsible for all loans. The pressures can be in form of the fright and violence. The shame of women and violence both verbal and physical are used as tools to guarantee on the loan payments (Rahman, 1999: 123–124 states in Dowla, 2006: 161).
If some women do not pay the loan on time or default, there leads to the severe tension and violence. The women who defaults are pilloried in public place, took all her properties and gold nose-ring (marital symbol), forced to leave family and committed in some suicide of men due to the shame (Karim, 2008: 16 -19). Other members in a group would do everything to make sure that the loan are repaid .One Grameen women clients is so ready to break someone house to force her to pay the loan, she states that “‘[T] this is how we get loans from Grameen Bank and other NGOs…[W]we don’t care how we do it.’” (Karim, 2008: 23)
Consequently, there is the increasing in violence in the community. Varghese (2001) found that 70% of the household are experienced with the greater violence after engaging with the Bank.
Chapter 6 Conclusion
The Grameen Bank in Bangladesh is one innovation of the micro finance to fight with the poverty. The Grameen Bank not only provides the collateral free loan to poor but also promotes the social development through the Sixteen Decisions. Moreover, due to majority client is the women, the Grameen Bank also focuses to promote the women’s empowerment.
The success in growing number of participants especially women, the high repayment rate and the expansion in braches to many villages lead to the acceptance the Bank as a new tool for poverty alleviation and women’s empowerment. The Grameen Bank enjoys the internationally fame and serves as a model of microfinance system in many countries.
The reason behind their achievement claims to be the strengths in operation of the Grameen Bank. The Grameen Bank used the social capital in form of group lending and regular meeting to support the power in peer monitoring and overcome the imperfect information. The network and trust are the social collateral which acts against the absence of psychical collateral. Moreover, the decentralised structure and client-based approach enhance the closed relationship between the bankers and clients and support the information flow in the lending process. Therefore, the Grameen Bank can be able to provide the collateral-free loan to the poor and succeed in the high repayment rate. However, the weakness in the Grameen operation is the concern on the sustainability of the Bank. The Bank relied too much on the subsidy both from the government and international donors in the operation, unless the bank may face financial difficulty. It creates the dependent condition in the Grameen Bank which effects on the long term sustainability of the Bank. Moreover, there is the tradeoff between the financial sustainability and the poverty alleviation mission. In order to maintain profit and good operational records, the bankers might abandon their ideal goal of lending in poverty alleviation. So, the financial sustainability may exchange with the drop in the initial goal of Grameen Bank.
To conclude, the strength in operation is the use of social capital in form of the group lending and the clients-based structure to cope with the market failure. The weakness, moreover, is the concern on future of the bank in term of the sustainability.
The Grameen Bank strengths in impact on the poverty reduction is through the increasing in income and wage within the Grameen clients. The rising in income is due to the ability to access the important resources and activities. Nevertheless, the impact on poverty reduction might not be effective in the long term. The increasing in income is only used for short term consumption and non-productive way. The loan might be used for rent-seeking in the traditional money lending business. The capitalism under the neoliberal era is finally embedded in the third world society due to the Grameen’s loan. So, the effect is only in the form of increasing in short term income but might not lead to the capital accumulation in productive activities in the long term. It claims as the weakness in impact of the Grameen Bank.
Moreover, the participation in group activities and the increasing in income of female clients lead to the process of women’s empowerment. The women learn to talk, manage money and able to have dominant role outside families. Because the women tend to contribute the income to families welfare combining with the committing to the Sixteen Decision, they take in charge in some important decision in households for example the children education, health, dowry and family planning. Thus, the women’s empowerment also leads to the improvement in the quality of life which is considered to be strength in the impact of the Grameen Bank. However, some scholar mentions that the women’s empowerment is not that successful. Although, there is the decreasing in the violence against women in the households due to the reducing in scarcity in the households, there is the new form of violence that emerged. The men force the women to join the Bank and control over the uses of the loan together with the group and Bank pressure on the women’s clients lead to the dominance and violence over the women. So, the effect on women’s empowerment in term of the violence is still unclear. Denham (2012: 11) states that the effect can be both because the factors contribute to violence is quite complicated, it is up to each women personality and diverse families’ background.
In summary, the Grameen bank shows both the strengths and weaknesses in the impact on the poverty reduction and the women’s empowerment. The strength in increasing in income may not lead to the long term poverty reduction. The effect in women’s empowerment is also mixed. The women are able to take a role outside families and in household’s decision making which enhance their confidence and the improvement in household’s welfare. However, the pressure and violence against the women can be increased or decreased.
From the above instance, the Grameen Bank alone cannot able to resolve the poverty or support the women’s empowerment in the long term. It is not Panacea (Bernasek 2003 383). It is one important tool that has to be used in a combination with other strategies to resolve the poverty (Denham, 2012: 1; Sims 2006. The support in the education for the poor in order to promote business skill, the use of the money in the productive ways and the recognising the importance of social development is one important policy. Furthermore, the sense of acceptance in the role of women in the culture has to be developed. So, the use of Sixteen Decisions will be more effective. Finally, the donors and government should support in the Bank’s operation and consider more on poverty or social impacts apart from the repayment rate and number of participant as the indicators of Bank success in order to reduce pressure on participants and affirm in the goal of Bank’s lending.

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