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The Poor Always Pay Back: The Grameen II Story

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No two people hold a more appropriate position to write about Grameen Bank than Asif Dowla and Dipal Barua. As former students of 2006 Nobel Peace Prize Winner and Grameen Bank founder Muhammad Yunus, Dowla and Barua have been apprised of the logic behind small loans since the Bank's inception. They have Yunus's trust and approval when it comes to sharing Grameen with the world, which readers can see in his found appraisal of Dowla and Barua in the preface.

"The Poor Always Pay Back: The Grameen II story" is a comprehensive account of the overhaul of the world's premier micro credit institution and it is suitable for novice students of economics, masters of the field, and everyone in between who may be curious about microcredit. The central tenet of the text is that the poor are bankable--despite the fact that they lack liquid capital, they can be trusted to repay loans and to use money in an enterprising fashion if given a fair opportunity and clear terms.

The book begins with a review of Classical Grameen and its effects on the poor in Bangladesh, focusing on the Bank's structure and clearly explaining the terms of micro loans (such as the "Sixteen Decisions" which are both described and illustrated). However, the majority of this work, as its title suggests, is devoted to explication and analysis of the advanced terms and products of Grameen II. Claims and conclusions are well supported with both quantitative and qualitative evidence, to which the two authors have prime access through their ties to the Bank, granting a great deal of authority to the book. Tables and appendices are nicely tied in with the text, and citations allow readers to conduct their own research on individual aspects of Grameen and microcredit if they so desire.

"The Poor Always Pay Back: The Grameen II story" is a good way to begin study of the growing institution of microcredit and the assumption that there is financial potential among the poorest of the poor.

"The Poor Always Pay Back" tells how Grameen Bank in Bangladesh modified its loan programs after the great flood of 1998 to better accommodate customers and the reality of dealing with catastrophes. Repayment rates had dipped to 80%, down from the 97% prior. En route, readers learn of the impressive repayment record of its poor customers, despite their lacking ready collateral and the lack of a credible threats by the banking system.

The Grameen Bank model is currently replicated in more than 100 countries. Those interested in the details of how this works are well served by reading both this book and its predecessor, "Creating a world Without Poverty."

A major reason for the prior failure of credit cooperatives in Bangladesh was that the groups were too large and included people with varied economic backgrounds. Thus, Grameen Bank evolved to a group size of 5, with a maximum amount of land ownership to be eligible for membership. Another limitation was one member per household to prevent a particular family from exerting undue influence. Initially, loans were given to the two neediest members; depending on their performance, two more received loans, and generally the elected chairperson was last.

Income generation and housing, rather than consumption, were allowed purposes. Borrowers were required to save a fixed amount weekly plus 5% from the loan. This created a group fund that paid 8.5% interest. The group fund could be used for multiple purposes (eg. paying school tuition, buying food in lean times). In cases of disaster, the entire amount could be used - normally it was limited to less than half. Borrowers paid only a 5% group tax.

Each borrower must buy one share of the bank (100 taca - $1.47 currently). A majority of the initial loans were used for safe and quick returns - cattle fattening, hand looms. Now, large loans also support purchases of agricultural equipment, small irrigation equipment, etc. Leasing of cattle and power looms are another option - usually on 6-month terms.

Group loans (eg. to acquire a field, power looms) were abandoned because of group conflict over the amount of work contributed by each member. Housing loans (8%) of up to 25,000 taka are made as long as the facility meets required standards and are located on land in the woman's name. (Avoid divorce and other family problems.) Home repair loans are also granted for up to 12,000 taka and 5 years duration.

Grameen Bank employs 16,000 FTE staff, and has 5.7 million members. Branch managers (1,781) must have a master's degree.

Pension savings are required of all borrowers with loans over 8,000 taka; these pension savings require a minimum of 50 taka/month contribution for 5 or 10 years. Paid 10% for a 5-year period, 12% for 10 years. Those that lapse over 4 months turn into regular accounts paying 8.5%.

Groups are no longer liable for individual loans. New individual borrowers are rewarded for the success of the group as a whole in terms of the amount of loan they are eligible for. Group meetings lower the cost of collecting loan repayments, promoting norms of good behavior, sharing information. Missing meetings lowers a member's loan ceiling.

Those with repayment difficulties can convert outstanding loans to flexible repayments, with constraints on added borrowing. Deaths create a major repayment problem - loan insurance (included in interest rate) now covers for either the husband or wife's death. Loan terms are typically for 1 - 3 years.

A 1988 survey in rural Bangladesh found the poor save 2-12% of their income, and the moderately poor 12-14%. Buying land is the first priority, then security against unforeseen contingencies, and education and marriage of their children.

Grameen Bank strongly supports education of its members' children. Fifty-thousand scholarships/year for primary-high school are granted, loans granted for coaching to improve scores on college admission exams, and loans also granted for college attendance. (More expensive private colleges/universities are also covered if they grant the student a discount.)

Grameen Bank 2010 goals include 15 million members (including all rural beggars), 50,000 scholarships/year, 100,000 medical, engineering, and master's degrees funded by education loans.