|Grameen Bank II|
Lessons Learnt Over Quarter of A Century
Grameen Bank has come a long way since it began its journey in the village of Jobra in 1976. During this quarter of a century it has faced many operational and organisational problems, gained a lot of experience through its successes and failures. It incorporated many new features in its methodology to address various crises and problems, or utilise new opportunities; discarded and modified the features which became unnecessary or less effective. There were a number of major natural disasters in Bangladesh during the life span of Grameen Bank. The 1998 flood was the worst of all. Half of the country was under flood-water for ten long weeks. Water flowed over the roof-tops for a prolonged period.
Grameen borrowers, like many other people of Bangladesh, lost most of their possessions including their houses because of the flood. Grameen Bank, which is owned by the borrowers, decided to take up a huge rehabilitation program by issuing fresh loans for restarting income-generating activities and to repair or rebuild their houses. Soon borrowers started to feel the burden of accumulated loans. They found the new installment sizes exceeded their capacity to repay. They gradually started to stay away from weekly centre meetings. Grameen Bank repayment started to show quick decline. We tried to improve the situation, but it did not produce desired result. Impact of the post-flood repayment crisis was compounded by its overlap with a recovery problem from an earlier crisis. In 1995, a large number of our borrowers stayed away from centre meetings and stopped paying loan installments. Husbands of the borrowers, inspired and supported by local politicians, organised this, demanding a change in Grameen Bank rules to allow withdrawal of "group tax" component of "group fund" at the time of leaving the bank. It continued for months. At the end we resolved the problem by creating some opening in our rules, but Grameen's repayment rate had gone down in the mean time. Many borrowers continued to abstain from repaying their loans even after the matter was resolved.
These external factors reinforced the internal weaknesses in the system. The system consisted of a set of well-defined standardised rules. No departure from these rules was allowed. Once a borrower fell off the track, she found it very difficult to move back on, since the rules which allowed her to return, were not easy for her to fulfill. More and more borrowers fell off the track. Then there was the multiplier effect. If one borrower stopped payments, it encouraged others to follow.
When the repayment situation did not improve as desired, we thought this would be a good opportunity to be bold, and to dare to design a new Grameen methodology, incorporating all the lessons learnt, and the wishes and the desires that we accumulated during the quarter century of Grameen's operation. We debated about it. But finally we decided in favour of it. We sat down to design it part by part, piece by piece, then pilot-tested the system quietly in a few branches to fine-tune the design; tried again in larger number of branches; reworked it; and in the end, came up with the architecture of a new system that we all liked. All the 12,000 staff participated very actively in designing the product at all the stages of its development. Some were critical in the beginning, but by the time it was ready, everybody loved it. The staff was electrified with enthusiasm - because response from the borrowers was so positive. Borrowers who did not show up at their centre meetings for years, started showing up to talk about the new system. Soon they were signing up to start all over again and repay the old loans with the accumulated interest. No reduction in the debt was offered. Still they opted to return.
The designing process formally began on April 14, 2000 (Bengali New year's day). Field-testing began immediately. By the beginning of 2001, the new system, "The Grameen Generalised System" or GGS was ready for launching. We undertook an intensive staff training program for all the 12000 staff. Initially there were signs of reluctance from some staff. There were grumblings, negative jokes, and expressions of frustrations. Some of it we expected, but some we did not. Top management went ahead with understanding and patience. Training continued cycle after cycle. Soon uneasiness about the new system disappeared. Staff became great admirers of the GGS and wanted to put it into immediate implementation in their branches. All the while we were busy designing and debugging the system, our real worry was how to manage the transition from the Grameen Classic System (GCS) to GGS in 41,000 villages without subjecting hundreds of thousands of illiterate borrowers to a big shock, and messing up the accounts in 1175 branches. Transition was very carefully and meticulously choreographed, and put into action by March, 2001. By April, 2002, two years after we began the process, Grameen Bank II has emerged. The transition is now complete. The last branch of Grameen Bank switched over to Grameen II on August 7, 2002, completing the process of transition. The new Grameen Bank II is now a real and functioning institution. This second generation microcredit institution appears to be much better equipped than it was in its earlier version.
In the Grameen Bank II, gone are the general loans, seasonal loans, family loans, and more than a dozen other types of loans; gone is the group fund; gone is the branch-wise, zone-wise loan ceiling; gone is the fixed size weekly installment; gone is the rule to borrow every time for one whole year, even when the borrower needed the loan only for three months; gone is the high-level tension among the staff and the borrowers trying to steer away from a dreadful event of a borrower turning into a "defaulter", even when she is still repaying; and gone are many other familiar features of Grameen Classic System.
Central assumption underlying GGS still remains the same as it was behind GCS - the firm belief that the poor people always pay back their loans. On some occasions they may take longer time to pay back than it was originally stipulated, but repay they will. There is no reason for a credit institution dedicated to provide financial services to the poor to get uptight because a borrower could not pay back the entire amount of a loan on a date fixed at the beginning of the disbursement of the loan. Many things can go wrong for a poor person during the loan period. After all, the circumstances are beyond the control of the poor people. We see no reason why the sky should fall on anybody's head because a borrower took longer time to pay back her loan. Since she is paying additional interest for the extra time, where is the problem? We always advocated that microcredit programs should not fall into the logical trap of the conventional banking and start looking at their borrowers as some kind of "time-bombs" who are ticking away and waiting to create big trouble on pre-fixed dates. Please rest assured that the poor people are not going to create any trouble. It is us, the designers of institutions and rules, who keep creating trouble for them. One can benefit enormously by having trust in them, admiring their struggle for and commitment to have decent lives for themselves. It is very easy to appreciate the architecture of GGS if one keeps in mind this central assumption behind the system.
GGS has been built around one prime loan product - called Basic Loan. In addition, there are two other loan products : 1) the housing loan, and 2) the higher education loan which run parallel to the basic loan. All borrowers start with a basic loan (in Bangla we call it "Shohoj" or "Easy" loan). Most of the borrowers will continue with this basic loan, cycle after cycle, without any difficulty, and meet all their credit needs in the most satisfactory manner. But life does not proceed smoothly for any human being, let alone the poor women. It is likely that some borrowers will run into serious problems, and face difficulties, somewhere along the cycles of loans, in repaying the basic loan according to its repayment schedule. For them GGS has a very convenient arrangement. In GGS, basic loan comes with an exit option. It offers an alternative route to any borrower who needs it, without making her feel guilty about failing to fulfill the requirement of the basic loan. This alternative route is provided through "Flexible Loan". In Bangla, we call it "Chukti" i.e. "contract" or "Renegotiated" loan, because the bank, the group, and the borrower have to go through a process of renegotiation to arrive at a new contract with a fresh repayment schedule for a borrower entering into the flexible loan.
Flexible loan is simply a rescheduled basic loan, with its own set of separate rules. I have been describing the basic loan as "Grameen micro-credit highway". As long as the borrower keeps her schedule, she moves forward uninterrupted with ease and comfort on the micro-credit highway. She can pick up speed according to the rules of the highway. If she drives well she can shift to higher and higher gear. In other words, on the Grameen highway, a borrower can routinely upgrade her loan size at each cycle of loan. This is done on the basis of
predetermined rules. She knows ahead of time how much enhancement in loan size is coming, and can plan her activities accordingly. But if a borrower faces engine trouble (business slow-down or failure, sickness, family problems, accidents, thefts, natural disaster, etc.) and cannot keep up with the highway speed, she has to quit the highway and take an exit on to a detour called a "flexible loan" or "flexi-loan". This detour will allow her a slower speed consistent with her situation. Now she can reduce the installment size that she can afford to pay, by extending the loan period. Taking a detour, however, does not in any way imply that she has changed the objective of her journey. She still proceeds with the same objective, but only through a winding narrow road for a while. Her immediate goal is to overcome her problems and take as short a detour as possible to get back to the highway quickly. A borrower may be lucky and succeed in getting back to the highway (i.e. the basic loan) quickly, or she may have sustained problems and the best she can do is to move from one detour to the next (i.e. moving from one flexi-loan to the next flexi-loan, working out an easier repayment schedule than the previous one), delaying the re-entry into the highway.
One big disincentive for a borrower to take the flexi-loan detour is that the moment she exits from the basic loan highway, her loan ceiling, that she has built over years, gets wiped out. When she'll re-enter the highway after completing her detour, her loan ceiling will have to be re-constructed. This will be nearer to her entry-level loan ceiling than the loan ceiling she enjoyed immediately before going into the flexi-loan.
Flexi-loan is not an independent loan. It is only a temporary detour from the basic loan. A borrower will always make efforts to re-enter the basic loan, because under flexi-loan a borrower can only work within a non-expansionary loop - that is, a borrower can borrow, only the same amount or less, cycle after cycle. Given this unattractive feature of flexi-loan, a borrower would be working hard to get back to the highway to enjoy its facilities. Flexi-loan works as a shoe-horn to get a borrower back to the highway. As soon as the initial amount of flexi-loan is repaid fully, the borrower re-enters the highway. She carries with her all the new loans she took while she was on flexi-loan. It normally takes six months to two years to get back to the highway. That's not a bad deal for a borrower who would otherwise be almost marked for expulsion from the system. Under GGS the borrower continues to remain a valued client all through the process of going in and out of flexi-loan. But there is a cost factor attached to this. Every time a borrower takes the exit from the highway the bank will be required to make 50 per cent provision against the amount of flexi-loan. This is an additional cost to the bank. The bank staff will try to bring this cost to the minimum by designing the basic loan creatively to best fit the borrower's credit need and cash flow. GGS offers this option. This was not available in GCS. Because of this feature of GGS, if experience tells us that the risk of a flexi-loan becoming overdue is very small, we can reduce the percentage of provisioning. If the percentage of flexi-loan is rather small, say, less than 5 per cent, of the total outstanding loan, even 50 per cent provisioning will not show up as a big item of expenditure, compared to the usual alternative of making provisions in a system without flexi-loan.
If a borrower cannot stay on the highway (i.e. cannot repay the basic loan installments as per schedule), there is now no need for the bank to trigger actions to mobilise the group and the centre pressure on her to avert an immediate danger for the group. By providing exit route for borrowers GGS has changed the situation dramatically. Now both the bank and the borrowers can be free from all tension - no more chasing of the problem-borrowers or defaulters. Nobody needs to look at anyone with suspicion. Group solidarity is used for forward-looking joint-actions for building things for the future, rather than for the unpleasant task of putting unfriendly pressure on a friend.
If a borrower fails to repay the basic loan and is unwilling to go into the flexi-loan, she becomes a willing defaulter. If a borrower takes the flexi-loan option and tries again and again to repay the money, but still does not succeed, she becomes an unwilling defaulter. Any amount of flexi-loan which does not get paid back within two years it becomes overdue, and 100 per cent provision is made for that amount. Amount that does not get paid back in three years, becomes bad debt, and is written off entirely.
Under GGS loans are written off as a part of financial prudence, but the amount is neither forgotten nor forgiven. GGS treats all written-off loans as recoverable loans. My guess is, under GGS, nearly 90 per cent of written-off loans and interest will ultimately be recovered, because the borrowers will pay them back, in their own interest, as and when opportunity arises. Poor people always need money. Their interest is to keep the door to money open. If this door shuts down for any reason, they'll do their best to reopen it - if that option is available. GGS provides this option.
There are many exciting features in GGS, but I think removing tension from micro-credit and permanently establishing full dignity to the poor borrowers, are the two most important features of them all. Tension-free microcredit is a great gift of GGS. Now both sides in the micro-credit system, the lender and the borrowers, can enjoy micro-credit, rather than having occasional nightmares created by one for the other.
Custom-made Credit Service
GGS has created a methodology which can provide custom-made credit to a poor borrower. GCS is still a powerful methodology which demonstrated its ability to deliver microcredit in all types of countries, economies, and cultures. It has done its job in making microcredit a serious business. GGS takes off from where GCS left off. GCS is a "single-size-fits-all" kind of methodology. This feature gives GCS the simplicity which was most needed for the implementation of an idea which was totally unknown to the world. Now microcredit has matured. The world is ready to afford a methodology which can provide custom-made microcredit to the poor. GGS allows loans of any duration, such as, 3 months, 6 months, 9 months or any number of months and years. In its reduced form it can be as simple as GCS. GCS was designed to be operated mechanically. There is only limited scope in GCS for the exercise of judgment by the foot-soldiers of microcredit. GGS is different. It allows a staff to be creative. He can design his loan product to make it a best fit for his client in terms of duration, timing of the loan, scheduling the installment, etc. The more a staff becomes a creative artist, the better music he can produce. The institution can identify the levels of creativity among its staff. GGS allows space for the growth of the staff. An initial level user of GGS can use it almost as GCS by restricting it to one-year loans only. As the user gathers experience he can widen the number of options offered within GGS. Besides duration, size of weekly installments can be varied. A borrower can pay more each week during peak business season, and pay less during lean period. In an extreme case, each installment can be of different size. In the other extreme, all installments can be exactly equal, like in GCS. An agreed repayment schedule is signed by both the lender and the borrower, before the loan is disbursed. The borrower is obliged to follow the schedule during the loan period. If she fails, she is required to take the detour and move to flexible loan.
When a borrower moves to flexi-loan she gets a second chance to work out another repayment schedule, one that is more do-able than the previous one. Suppose a borrower starts with a basic loan for a duration of one year. During the loan period she develops some problem in paying the installments according the schedule she had committed to. No problem. She moves to flexi-loan and converts the one-year loan into, say, a three year loan, making the installments very small and affordable. Even if she has extended the loan period to three years, she does not have to wait three years to access fresh loans. In both basic and flexi-loans, a borrower can borrow after each segment of six months is completed as per schedule. She can borrow exactly the amount she has paid back during the six months - it is like having a cash credit limit with a bank. In case of flexi-loans, a borrower can borrow, after the first six months, as much as twice the amount that she has paid back, if she fulfils certain stringent conditions. She can borrow exactly same amount she has paid back in each subsequent six months.
One most visible change everybody notices in GGS is the disappearance of Group Fund. Grameen Bank had to keep on defending Group Fund ever since it was created twenty five years back. Now we let it go. There are no more joint accounts. Each borrower will have three obligatory savings accounts - a) Personal savings account, b) Special savings account, and c) Pension deposit account (obligatory only for borrowers borrowing above Tk 8,000).
GGS continues with five percent obligatory savings, deducted from the loan amount, at the time of disbursement. But it is no longer called a "group tax". New name is "obligatory savings". Half of this five percent obligatory savings goes to a personal savings accounts, the remaining half goes to a "special savings accounts". A borrower can withdraw any amount from her personal savings account any time she desires. There is no restriction on her withdrawal. Weekly saving still continues. This goes to personal savings account. Special savings account is non-withdrawable for the first three years. Then withdrawal is allowed generally once in three years keeping a minimum balance of Tk 2,000 or half the amount in the account, whichever is larger. Under special circumstances the entire amount in the special savings account can be withdrawn. Some money from this account will be used to buy shares of Grameen Bank.
Pension Fund: Leading to Financial Self-Reliance
GGS requires all borrowers with loans above Tk 8,000 (US $ 138) to contribute a minimum of Tk 50 (US $ 0.86) each month in a pension deposit account. After ten years a borrower will receive a guaranteed amount which is almost double the amount she has put in during 120 months. This has become an amazingly attractive feature of GGS for the borrowers. Many are coming forward to save more than Tk 50 each month. There are borrowers who are saving Tk 500 per month. While it has become popular with the borrowers, it is generating a huge cash in-flow for the bank. Each month it is now bringing in over Tk 100 million (US $ 1.75 million) as deposits on account of pension savings. Grameen Bank can now rest assured that it will have enough of its own money to expand its lending operation in future. By the same token, branches will now have enough money to carry out their lending programs with their own deposits. All GB branches can look forward to becoming self-financed. While the institution moves towards financial self-reliance, the borrowers also move to financial self-reliance as old age approaches. They can have monthly income at retirement out of the accumulated savings in the Pension Fund. For a poor woman, it is a very comforting news.
The new pension fund has become an important savings instrument. GGS emphasizes on receiving deposits from both borrowers and non-borrowers. A variety of savings products has been incorporated in the system. Total amount of deposits account for 67 per cent of the total outstanding loans of Grameen Bank in July, 2002, after paying back Tk 3.3 billion (US $ 60 million) of its loans to the central bank, local commercial banks and the foreign lenders, which fell due during the past 18 months.
Grameen Bank has been subjected to sharp criticism for its provisioning and write-off policies under GCS. We always defended ourse
lves that our policies are more generous than the standard set by the central bank of the country. Also we find both policies very satisfactory for the financial prudence required in our business.
GGS has made these policies still more generous. "Overdue" is defined in a very sharp manner. If a borrower fails to repay her installment for ten consecutive weeks, or if she fails to repay the total amount she is required to pay within a six month period, and she does not move into flexible loan, she becomes a defaulter. If she becomes a defaulter, 100 per cent provisioning must be made for the unrepaid principal and interest. Exactly one year later, the amount must be written off. Writing off will be done on a monthly basis, rather than at the time of annual account closing. If a borrower is on flexible loan, generally the same policy will hold. Fifty per cent provision must be made for the total balance amount of flexible loan and accrued interest on the annual closing date, even if the repayment rate of flexible loan is 100 per cent for the whole bank.
Borrowers always worry what will happen to their debt if they die. Will the family members pay off their debt ? They believe that if their debt remains unrepaid after their death, their soul cannot rest in peace. Inclusion of loan insurance program in GGS has made them very happy. This has become another popular feature of GGS.
The insurance program is very simple. Once a year, on the last day of the year, the borrower is required to put in a small amount of money in a loan insurance savings account. It is calculated on the basis of the outstanding loan and interest of the borrower on that day. She deposits 2.5 per cent of the outstanding amount. If a borrower dies any time during the next year, her entire outstanding amount is paid up by the insurance fund which is created by the interest income of the loan insurance savings account. In addition, her family receives back the amount she saved in the loan insurance savings account. Borrowers find it unbelievably generous. Everybody loves it.
If the outstanding amount remains the same on two successive year-ends, the borrower does not have to put in any extra money in the loan insurance savings account in the second year. Only if the balance is more she has to put in money for the extra amount. Even if the outstanding amount happens to be several times more at the time of her death than what it was on the preceding year-end, under the rules of this program, the entire amount will still be paid off from the insurance fund.
The borrowers have good reasons to be happy.
Loan Ceiling Grows with the Borrower
GCS operated with a loan ceiling for the whole branch. No borrower can take a loan above the ceiling fixed for the branch. On top of it there was a ceiling for the whole zone. Branch ceilings were below or equal to the zone ceiling. GGS has replaced it with a up- gradable able loan ceiling for each borrower. Under GGS there is no ceiling for the zone, and no ceiling for the branch. For basic loan, the ceiling is fixed each time a borrower requests a new loan. It is calculated in two different ways. Higher amount between the two is accepted as the ceiling. Under the first method the ceiling is worked out on the basis of performance (regularity in repayment, attendance in weekly meetings etc) of the borrower, her group, and centre. Under the second method the ceiling is fixed on the basis of the total amount of the savings (excluding personal savings). Ceiling is equivalent to 150% of the total savings. If a borrower has a total saving of Tk 10,000, her loan ceiling will be Tk 15,000. There are many borrowers who have accumulated quite a good amount of saving in their various saving accounts. They can now take large loans too. Under the first method ceiling can go up or down depending on the performance. For example, loan ceiling diminishes by Tk 500 for each day of borrower's absence in the weekly centre meeting. If the repayment record of the entire centre is perfect, her loan ceiling goes up by a fixed percentage. A borrower can enhance her loan size by increasing her savings, or by making sure she, her group, and the centre do all the right things.
In flexi-loan, a borrower has no opportunity to enhance her loan size. She can borrow only what she has paid back, except after the first six months, when she can borrow twice the amount she has paid back if she fulfills some stringent conditions.
Then there is the gold membership ! It is a very respectable position to achieve. A borrower who had maintained 100 per cent repayment record (never got off the highway!) for seven consecutive years, is given the status of a gold member. A gold member goes into a faster track of loan enhancement, besides getting special honours and privileges.
To encourage destitute members to join Grameen Bank and make them feel comfortable within Grameen Bank, GGS relaxes all the basic rules of GB. A destitute person does not have to belong to a group, no saving is necessary, no weekly repayment is necessary, her loan terms are decided by her, in consultation with her mentor. Centres will be encouraged to list destitute families in their respective areas, groups will be encouraged to take destitute members "under their wings" and mentor them to help them overcome their fears and inhibitions, give them required business skill, and help them take up income generating activities. Bringing a destitute woman to a level where she can become a regular member of a group will be considered as a great achievement of a group. Groups and centres that accomplish this, will be given special awards, privileges, and honours. In addition to loans, GB will also offer them "venture capital" to partner with them in their micro ventures.
Studies show that Grameen borrowers are steadily moving out of poverty. According to one study, 5 per cent of the borrowers move out of poverty each year (Shahidur R. Khandker, 1998). GGS extends its attention to the children of Grameen families as a part of Grameen strategy to build capacity within families to keep them out of poverty once they have moved out. No slipping back.
Grameen Bank has introduced higher education loans for all students from Grameen families who can enter into the higher educational institutions (medical schools, engineering school, universities, professional schools, etc). Loans are given to the students directly, without going through their parents. Student are made responsible to repay the loans when they start earning.
Scholarships are awarded every year to the school students from Grameen families, on a competitive basis. Half the number of scholarships are reserved for girl students. Remaining 50 per cent is open for both boys and girls. Each year Grameen Bank gives out 3,704 scholarships, and makes sure each branch can provide at least one scholarship. Gradually the number of scholarships will be increased as more and more students are available to compete for these scholarships.
Computerization of Grameen Accounting and Monitoring System
GGS got a big boost from a new program to computerise the branch level accounting and MIS for all the branches. It is being done through setting up of "Information Management Centre" at the area level. All information from the branches are fed into the computers located at the area office. Branch staff is freed from the heavy load of book-keeping and filling-in of the MIS blanks. Now that computer does all the work, staff can concentrate on improving the quality of lives of the borrowers. 67 per cent of the branches are now computerised. By the end of 2002, this percentage will rise to 85 or more.
Since many branches are connected by mobile phones, we are looking forward to taking the next logical step to integrate the entire information system through intranet. Already most of the zones are connected with each other and the head office through intranet.
I have never seen Grameen staff charged with so much enthusiasm and energy, than what I noticed after the introduction of GGS. You just can't stop them. They were all captivated by the idea of creating Grameen II. This is now done. Grameen II has brought tension-free microcredit. Grameen's repayment rate is now over 98 per cent. Staff energy level is at the peak. Every time you talk to them they appear as if they are having the biggest fun of their lives, working for Grameen.
One feature of GGS that really caught their imagination is the idea of creating Five Star branches. Each staff wants to create his/her own five star branch. Under GGS a branch earns a colour-coded star for one particular achievement. If a branch has 100 per cent repayment record it is awarded a star - a green star. Eligible staff of a star-winning branch can put on a badge displaying this star on his dress. If a branch earns profit, it is awarded a blue star. A branch having more in deposits than their outstanding loans, gets a violet star. If all the children of the borrowers are in school or completed at-least primary school, the branch gets a brown star. If all borrowers of a branch cross over the poverty line, the branch gets a red star. Each staff can earn his stars even when the branch is yet to receive any star, by simply fulfilling the same conditions for the centres for which he is responsible.
A Grameen staff proudly displays his stars on formal occasions. Looking at the colours of the stars one can easily figure out the area of his accomplishments. Those who got one star, are working hard to get the second star. Those who do not have any star at all, are working very hard to get to their first star. It has generated a burst of energy all around. They are not doing it for any monetary benefit, they are doing it in the spirit of competition - to be ahead of their peers, to create a record for his branch, or area, or zone, to make a personal contribution in changing the economic and social condition of the poor families he is working for, and, above all, to prove their worth to themselves. It is fun to watch them. Observing this phenomenon, one cannot but wonder how one environment makes people despair and sit idle, and then by changing the frame conditions one can transform the same people into matchless performers.
Now looking back I feel that it was lucky for us that Grameen was faced with a crisis. This crisis led us to create Grameen II, which has the built-in capacity to handle crises and disasters in a much better way than ever before. Under normal conditions, GGS is not only a powerful and efficient system, capable of providing custom-made financial services to support the economic and social upliftment of each individual borrower family, but also it frees micro-credit from the usual stresses and strains.
Welcome Grameen Bank II.
Congratulations to the Grameen staff who created it.