The Grameen Bank
Author(s): Muhammad Yunus
Source: Scientific American , Vol. 281, No. 5 (NOVEMBER 1999), pp. 114-119
Published by: Scientific American, a division of Nature America, Inc.
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114 Scientific American November 1999
The
Grameen
Bank
A small experiment begun in
Bangladesh has turned into a major
new concept in eradicating poverty
Over many years, Amena Begum had become resigned
to a life of grinding poverty and physical abuse. Her
family was among the poorest in Bangladesh—one of
thousands that own virtually nothing, surviving as squatters on
desolate tracts of land and earning a living as day laborers.
In early 1993 Amena convinced her husband to move to the village
of Kholshi, 112 kilometers (70 miles) west of Dhaka. She
hoped the presence of a nearby relative would reduce the number
and severity of the beatings that her husband inflicted on her. The
abuse continued, however—until she joined the Grameen Bank.
Oloka Ghosh, a neighbor, told Amena that Grameen was forming
a new group in Kholshi and encouraged her to join. Amena doubted
that anyone would want her in their group. But Oloka persisted
with words of encouragement. “We’re all poor—or at least we all
were when we joined. I’ll stick up for you because I know you’ll
succeed in business.”
Amena’s group joined a Grameen Bank Center in April 1993.
When she received her first loan of $60, she used it to start her own
business raising chickens and ducks. When she repaid her initial
loan and began preparing a proposal for a second loan of $110,
her friend Oloka gave her some sage advice: “Tell your husband
that Grameen does not allow borrowers who are beaten by their
spouses to remain members and take loans.” From that day on,
Amena suffered significantly less physical abuse at the hands of her
husband. Today her business continues to grow and provide for the
basic needs of her family.
Unlike Amena, the majority of people in Asia, Africa and Latin
America have few opportunities to escape from poverty. According
to the World Bank, more than 1.3 billion people live on less
than a dollar a day. Poverty has not been eradicated in the 50
years since the Universal Declaration on Human Rights asserted
that each individual has a right to:
A standard of living adequate for the health and well-being
of himself and of his family, including food, clothing, housing
and medical care and necessary social services, and the right
by Muhammad Yunus
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Scientific American November 1999 115
WEEKLY VILLAGE MEETING of Grameen Bank borrowers ends
with a recitation of pledges for better living, along with a salute. The
gatherings are venues in which members request, receive or repay
loans, as well as relate the status of the businesses they have set up.
This revolutionary bank, based in Bangladesh, now boasts 39,000
such village centers and 2.4 million borrowers, most of them women.
Even though the recipients are too poor to offer collateral, the
repayment rate for the loans varies between 96 and 100 percent.
KARENKASMAUSKIMatrix
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to security in the event of unemployment, sickness, disability,
widowhood, old age or other lack of livelihood
in circumstances beyond his control.
Will poverty still be with us 50 years from now? My own
experience suggests that it need not.
After completing my Ph.D. at Vanderbilt University, I
returned to Bangladesh in 1972 to teach economics at
Chittagong University. I was excited about the possibilities
for my newly independent country. But in 1974 we were
hit with a terrible famine. Faced with death and starvation
outside my classroom, I began to question the very economic
theories I was teaching. I started feeling there was a
great distance between the actual life of poor and hungry
people and the abstract world of economic theory.
I wanted to learn the real economics of the poor. Because
Chittagong University is located in a rural area, it was easy
for me to visit impoverished households in the neighboring
village of Jobra. Over the course of many visits, I learned
all about the lives of my struggling neighbors and much
about economics that is never taught in the classroom. I
was dismayed to see how the indigent in Jobra suffered because
they could not come up with small amounts of
working capital. Frequently they needed less than a dollar
a person but could get that money only on extremely unfair
terms. In most cases, people were required to sell their
goods to moneylenders at prices fixed by the latter.
This daily tragedy moved me to action. With the help of
my graduate students, I made a list of those who needed
small amounts of money. We came up with 42 people.
The total amount they needed was $27.
I was shocked. It was nothing for us to talk about millions
of dollars in the classroom, but we were ignoring the minuscule
capital needs of 42 hardworking, skilled people next
door. From my own pocket, I lent $27 to those on my list.
Still, there were many others who could benefit from access
to credit. I decided to approach the university’s bank
and try to persuade it to lend to the local poor. The branch
manager said, however, that the bank could not give loans to
the needy: the villagers, he argued, were not creditworthy.
I could not convince him otherwise. I met with higher
officials in the banking hierarchy with similar results. Finally,
I offered myself as a guarantor to get the loans.
In 1976 I took a loan from the local bank and distributed
the money to poverty-stricken individuals in Jobra.
Without exception, the villagers paid back their loans.
Confronted with this evidence, the bank still refused to
grant them loans directly. And so I tried my experiment in
another village, and again it was successful. I kept expanding
my work, from two to five, to 20, to 50, to 100
villages, all to convince the bankers that they should be
lending to the poor. Although each time we expanded to a
new village the loans were repaid, the bankers still would
not change their view of those who had no collateral.
Because I could not change the banks, I decided to create
a separate bank for the impoverished. After a great deal of
work and negotiation with the government, the Grameen
Bank (“village bank” in Bengali) was established in 1983.
From the outset, Grameen was built on principles that
ran counter to the conventional wisdom of banking. We
sought out the very poorest borrowers, and we required no
collateral. The bank rests on the strength of its borrowers.
They are required to join the bank in self-formed groups of
116 Scientific American November 1999 The Grameen Bank
HOUSEHOLD WELL-BEING BEFORE AND
AFTER PARTICIPATION IN GRAMEEN
Before program After program
PERCENT
0 20 40 60 80 100
TAKA (40 taka equaled approximately $1 in 1991)
0 20,000 40,000 60,000 80,000 100,000
Household
net worth
Moderate
poverty
Extreme
poverty
Per capita yearly
consumption
a
b
d
PHOTOGRAPHSBYSALAHUDDINAZIZEEGrameenBank;LISABURNETT(graphs)
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five. The group members provide one another with peer
support in the form of mutual assistance and advice. In addition,
they allow for peer discipline by evaluating business
viability and ensuring repayment. If one member fails to
repay a loan, all members risk having their line of credit
suspended or reduced.
The Power of Peers
Typically a new group submits loan proposals from
two members, each requiring between $25 and $100.
After these two borrowers successfully repay their first five
weekly installments, the next two group members become
eligible to apply for their own loans. Once they make five
repayments, the final member of the group may apply. After
50 installments have been repaid, a borrower pays her
interest, which is slightly above the commercial rate. The
borrower is now eligible to apply for a larger loan.
The bank does not wait for borrowers to come to the
bank; it brings the bank to the people. Loan payments are
made in weekly meetings consisting of six to eight groups,
held in the villages where the members live. Grameen staff
attend these meetings and often visit individual borrowers’
homes to see how the business—whether it be raising goats
or growing vegetables or hawking utensils—is faring.
Today Grameen is established in nearly 39,000 villages
in Bangladesh. It lends to approximately 2.4 million borrowers,
94 percent of whom are women. Grameen
reached its first $1 billion in cumulative loans in March
1995, 18 years after it began in Jobra. It took only two
more years to reach the $2-billion mark. After 20 years of
work, Grameen’s average loan size now stands at $180.
The repayment rate hovers between 96 and 100 percent.
A year after joining the bank, a borrower becomes eligible
to buy shares in Grameen. At present, 94 percent of the
bank is owned by its borrowers. Of the 13 members of the
board of directors, nine are elected from among the borrowers;
the rest are government representatives, academics,
myself and others.
A study carried out by Sydney R. Schuler of John Snow,
Inc., a private research group, and her colleagues concluded
that a Grameen loan empowers a woman by increasing her
economic security and status within the family. In 1998 a
study by Shahidur R. Khandker, an economist with the
World Bank, and others noted that participation in
Grameen also has a significant positive effect on the schooling
and nutrition of children—as long as women rather
than men receive the loans. (Such a tendency was clear
from the early days of the bank and is one reason Grameen
lends primarily to women: all too often men spend the
money on themselves.) In particular, a 10 percent increase
in borrowing by women resulted in the arm circumference
of girls—a common measure of nutritional status—expanding
by 6 percent. And for every 10 percent increase in borrowing
by a member, the likelihood of her daughter being
enrolled in school increased by almost 20 percent.
Not all the benefits derive directly from credit. When
joining the bank, each member is required to memorize a
list of 16 resolutions. These include commonsense items
about hygiene and health—drinking clean water, growing
and eating vegetables, digging and using a pit latrine, and
so on—as well as social dictums such as refusing dowry
and managing family size. The women usually recite the enThe
Grameen Bank Scientific American November 1999 117
LOANS RECEIVED from the bank (a) are used for a variety of
small ventures, including raising chickens (b) and making the earthen
pots that villagers use to store drinking water (c). The income
from such a business has a significant effect on the well-being of a
borrower’s household (d). Before joining the bank, 83 percent of the
members were moderately poor and 33 percent were extremely
poor. But a fifth of the members were able to lift themselves out of
poverty after participating in the bank.
c
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tire list at the weekly branch meetings, but the resolutions are
not otherwise enforced.
Even so, Schuler’s study revealed that women use contraception
more consistently after joining the bank. Curiously, it
appears that women who live in villages where Grameen operates,
but who are not themselves members, are also more
likely to adopt contraception. The population growth rate in
Bangladesh has fallen dramatically in the past two decades, and
it is possible that Grameen’s influence has accelerated the trend.
In a typical year 5 percent of Grameen borrowers—representing
125,000 families—rise above the poverty level.
Khandker concluded that among these borrowers extreme
poverty (defined by consumption of less than 80 percent of
the minimum requirement stipulated by the Food and Agriculture
Organization of the United Nations) declined by more
than 70 percent within five years of their joining the bank.
To be sure, making a microcredit program work well—so
that it meets its social goals and also stays economically
sound—is not easy. We try to ensure that the bank serves the
poorest: only those living at less than half the poverty line are
eligible for loans. Mixing poor participants with those who
are better off would lead to the latter dominating the groups.
In practice, however, it can be hard to include the most abjectly
poor, who might be excluded by their peers when the borrowing
groups are being formed. And despite our best efforts,
it does sometimes happen that the money lent to a woman is
appropriated by her husband.
Given its size and spread, the Grameen Bank has had to
evolve ways to monitor the performance of its branch managers
and to guarantee honesty and transparency. A manager
is not allowed to remain in the same village for long, for fear
that he may develop local connections that impede his performance.
Moreover, a manager is never posted
near his home. Because of such constraints—and
because managers are required to have university
degrees—very few of them are women. As a result,
Grameen has been accused of adhering to a paternalistic
pattern. We are sensitive to this argument and
are trying to change the situation by finding new
ways to recruit women.
Grameen has also often been criticized for being
not a charity but a profit-making institution. Yet that status, I
am convinced, is essential to its viability. Last year a disastrous
flood washed away the homes, cattle and most other
belongings of hundreds of thousands of Grameen borrowers.
We did not forgive the loans, although we did issue new ones
and give borrowers more time to repay. Writing off loans
would banish accountability, a key factor in the bank’s success.
Liberating Their Potential
The Grameen model has now been applied in 40 countries.
The first replication, begun in Malaysia in 1986,
currently serves 40,000 poor families; their repayment rate
has consistently stayed near 100 percent. In Bolivia, microcredit
has allowed women to make the transition from “food
for work” programs to managing their own businesses.
Within two years the majority of women in the program acquire
enough credit history and financial skills to qualify for
loans from mainstream banks. Similar success stories are
coming in from programs in poor countries everywhere.
These banks all target the most impoverished, lend to groups
and usually lend primarily to women.
The Grameen Bank in Bangladesh has been economically
self-sufficient since 1995. Similar institutions in other countries
are slowly making their way toward self-reliance. A few
small programs are also running in the U.S., such as in innercity
Chicago. Unfortunately, because labor costs are much
higher in the U.S. than in developing countries—which often
have a large pool of educated unemployed who can serve as
managers or accountants—the operations are more expensive
there. As a result, the U.S. programs have had to be heavily
subsidized.
118 Scientific American November 1999 The Grameen Bank
Increase in arm
circumference*
Increase in
height*
IMPACT OF GRAMEEN ON NUTRITIONAL
MEASURES OF CHILDREN
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Girls Boys
PERCENT
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
PERCENT
*Barsreflectchangesaccompanyinga10percentincreaseincredittowomen.
EMPOWERMENT OF WOMEN is one consequence
of providing caregivers with capital. A woman’s income—whether
it be from weaving baskets (a), runa
b
e
SALAHUDDINAZIZEEGrameenBank
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In all, about 22 million poor people around the world now
have access to small loans. Microcredit Summit, an institution
based in Washington, D.C., serves as a resource center
for the various regional microcredit institutions and organizes
yearly conferences. Last year the attendees pledged to
provide 100 million of the world’s poorest families, especially
their women, with credit by the year 2005. The campaign
has grown to include more than 2,000 organizations, ranging
from banks to religious institutions to nongovernmental
organizations to United Nations agencies.
The standard scenario for economic development in a poor
country calls for industrialization via investment. In this “topdown”
view, creating opportunities for employment is the
only way to end poverty. But for much of the developing
world, increased employment exacerbates migration from the
countryside to the cities and creates low-paying jobs in miserable
conditions. I firmly believe that, instead, the eradication
of poverty starts with people being able to control their own
fates. It is not by creating jobs that we will save the poor but
rather by providing them with the opportunity to realize their
potential. Time and time again I have seen that the poor are
poor not because they are lazy or untrained or illiterate but
because they cannot keep the genuine returns on their labor.
Self-employment may be the only solution for such people,
whom our economies refuse to hire and our taxpayers will
not support. Microcredit views each person as a potential entrepreneur
and turns on the tiny economic engines of a rejected
portion of society. Once a large number of these engines
start working, the stage can be set for enormous socioeconomic
change.
Applying this philosophy, Grameen has established more
than a dozen enterprises, often in partnership with other entrepreneurs.
By assisting microborrowers and microsavers to
take ownership of large enterprises and even infrastructure
companies, we are trying to speed the process of overcoming
poverty. Grameen Phone, for instance, is a cellular telephone
company that aims to serve urban and rural Bangladesh. After
a pilot study in 65 villages, Grameen Phone has taken a
loan to extend its activities to all villages in which the bank is
active. Some 50,000 women, many of whom have never seen
a telephone or even an electric light, will become the providers
of telephone service in their villages. Ultimately, they will become
the owners of the company itself by buying its shares.
Our latest innovation, Grameen Investments, allows U.S. individuals
to support companies such as Grameen Phone while
receiving interest on their investment. This is a significant step
toward putting commercial funds to work to end poverty.
I believe it is the responsibility of any civilized society to ensure
human dignity to all members and to offer each individual
the best opportunity to reveal his or her creativity. Let us remember
that poverty is not created by the poor but by the institutions
and policies that we, the better off, have established.
We can solve the problem not by means of the old concepts
but by adopting radically new ones.
The Grameen Bank Scientific American November 1999 119
The Author
MUHAMMAD YUNUS, the founder and managing director of the
Grameen Bank, was born in Bangladesh. He obtained a Ph.D. in economics
from Vanderbilt University in 1970 and soon after returned to his
home country to teach at Chittagong University. In 1976 he started the
Grameen project, to which he has devoted all his time for the past decade.
He has served on many advisory committees: for the government of
Bangladesh, the United Nations, and other bodies concerned with poverty,
women and health. He has received the World Food Prize, the Ramon
Magsaysay Award, the Humanitarian Award, the Man for Peace Award
and numerous other distinctions as well as six honorary degrees.
Further Reading
Grameen Bank: Performance and Sustainability. Shahidur
R. Khandker, Baqui Khalily and Zahed Khan. World Bank Discussion
Papers, No. 306. ISBN 0-8213-3463-8. World Bank,
1995.
Give Us Credit. Alex Counts. Times Books (Random House),
1996.
Fighting Poverty with Microcredit: Experience in Bangladesh.Shahidur
R. Khandker. Oxford University Press, 1998.
Grameen Bank site is available at www.grameenfoundation.org
on the World Wide Web.
ning a village store (b), crafting handloom textiles (c) or providing
phone service to her neighbors (d)—enhances her status
within her family, gives her more control over her fertility and
allows her to take better care of her children (e). Women are also
more conscientious about repaying the loans. For all these reasons,
microcredit programs lend primarily to women.
c d
SALAHUDDINAZIZEEGrameenBank
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