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Q & A with WSJ Reporter- Part-I

Q & A with WSJ Reporter- Part-II

E-mail to Mark Philip, WSJ Reporter

Op-ed:Terrorism can be won only by love not by war, Pablished in the Yomiuri, Tokyo, Japan on 5th October, 2001

Professor Yunus's Letter to the WSJ Editor Published on
Dec 12, 2001


Annual Report 2000

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To : Daniel Pearl
From :

Muhammad
Grameen Bank

Date : September 8, 2001

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Q & A -- Part II
WSJ: How old are you?
YUNUS: I am sixty-one.
WSJ:

On subsidies, I've looked closely at Grameen's 2000 and 1997 borrowings statements and can't see how the soft loans have been reduced. The IFADs have been reduced. Payments haven't begun on 2% loans from Norway and Sweden. The Japanese 2% loan is bigger now than in 1997, and there is a new loan from Grameen Fund. So, by my calculations, 2% loans account for 52% of outstanding borrowings, compared with 47% in 1997. Even if Grameen is paying market rates on the new bonds, at least half the outstanding borrowings reflect effective subsidies, right? If we cite the Khalily study, should we say Grameen disagrees with its methodology/conclusions and doesn't think it has any subsidies? Should we say Grameen says it is moving away from subsidies?

YUNUS:

2.1 I am attaching several tables showing the amounts outstanding against borrowings from abroad and local banks during 1997-2005. I have divided them into two categories, soft loans (defined as loans at interest below bank rate), and market-interest loans. (All loans with market-interest will be repaid by 2002.)

Please notice that soft loans declined in amount from Tk. 11.06 billion in 1997 to Tk. 7.24 billion in 2000. (I hope now you can see the point I was making.)

2.2 NORAD and SIDA loans that you refer to are loans given at perpetuity. So, they'll always be there.

2.3 Last trance of JBIC loan was received in 1998. This is the reason why JBIC loan was bigger in 1998 than in 1997. JBIC was ready to give us another loan, twice as much as the first loan. But we decided in 1995 that we are not going to take any more grants or soft-loans. So, we did not accept it. They were unhappy with our decision since they already had gone through their preliminary approval process on the second loan.

Let me also draw your attention to the fact GB gives housing loan at the subsidized rate of 8 per cent. JBIC loan was primarily for housing loans. This was a case of subsidized loan for GB to be used for subsidized loan for GB borrowers. When we discuss subsidy for GB we can also mention that GB has a large component of its outstanding loans devoted to subsidized loan programme given at a rate 60 per cent below the regular interest.

2.4 Grameen Fund loan has an interesting background. We had to accept the loan at the Finance Ministry's pressure. This was an international loan which government had accepted, but could not utilise. Government requested GB to take this loan from a government-owned bank. We came up with a proposal for the government. Grameen Fund will receive the loan from the government bank, Grameen Fund will lend the entire amount to Grameen Bank at 10 per cent interest. Government agreed. That's how this loan came to GB.

2.5 Please notice the 2% loans as percentage of total borrowing in Table 1(last line). It has steadily increased. By definition that's what will happen. In 2005 it becomes 100% of total borrowings ! The reason is we are paying off the loans whenever they fall due, and we are not taking any fresh loans (soft or full-cost). Ultimately total borrowings get reduced to only long-term soft loans.

2 per cent loan from IFAD will be entirely paid off in 2039. Only 2 per cent loan that will remain after that year will be the perpetual loans.

If we look at 2% loan as percentage of total borrowing it will give misleading conclusion. This percentage will become larger because denominator is becoming smaller faster than the numerator. I think the meaningful information can be produced by taking 2% loan as percentage of annual outstanding loans, or as percentage of total financing (borrowings + deposits + capital + reserve). Alternatively, looking at the absolute amount of 2% loan will immediately give the real picture.

2.6 We did have some comments on Khalily study. I'll try to dig up some of these comments later.

2.7 Yes, indeed, Grameen is moving away from subsidies. GB is not taking any new grants or loans (soft or full-cost) and is paying back old subsidized loans. Please see the Tables. (This year we excused ourselves from receiving a soft loan of $ 4.0 million offered to us by the Government of Spain at their own initiative.)

WSJ:

Is Grameen Bank requiring its employees to make up personally any unpaid balance of the contract loans? When employees retire, do their benefits depend on whether their borrowers achieved 98% loan repayment?

YUNUS:

3.1 That would be a self-defeating (even suicidal) step to take. If I were a branch staff and I was told that I'll have to pay the unpaid installments of a loan that I gave, out of my own salary, I would not give this loan in the first place. I would do everything in my capacity to make excuses why I could not give that loan.

Secondly, the staff will rebel in a body if GB asks for that. Who would use up their small salary, on which their families depend, without protest, just to keep the job ? Practice in Bangladesh is to make extra money in bribes and other benefits when you get a job. People expect as if right to accepting bribes comes as a built-in privilege with a job. We are lucky that the Grameen staff put in hard work for their salary alone --- they have learned to live with no bribes, no illegal extra money. On top of it if they have to give up part of their salary to compensate for a borrower's failure to pay back her loan, it will be asking too much.

Even if by some magic they agree to do that how deep is their pocket ? How many loans can they finance from their own pocket ?

My answer to your question is : No, it is not correct.

3.2 No, that's not the rule. Anybody who puts in service in GB for ten years or more, gets retirement benefits in cash, and gets it pretty quickly. No other conditionality is attached with it. We are the speediest paymaster in Bangladesh in handing over pension money. In 90 per cent of the cases maximum time needed to get the pension cheque would be less than a month. We have instances where we handed over the money as fast as within 24 hours in cases of emergency.

If we put a condition that the staff must have "X" per cent of repayment record, what will happen ?

a) Nobody will work in a weak branch.
b) Which repayment record should we consider ? Repayment record of the entire life time of the staff ? Last year of his service ?
c) How do we keep records for each staff, each year ?
d) Staff will be enormously encouraged by this rule to manipulate repayment record so that he can get the retirement benefit.

Last year 1477 staff took retirement and got a total pension benefit of Tk 680 million (more than the amount we put under loan-loss provision !). Average pension benefit came to nearly half a million taka for each staff retired. A similar number will retire this year. Every one of them will get his retirement benefit. If we applied the crazy rule that you suggest ---- make a guess how of many of these retiring staff will get retirement benefits ?

Our retirement benefits are so attractive many of the staff retire just to get that benefit. That's a large amount of cash to have to start a life all over again. Sometimes they put the entire pension money in a fixed deposit account and earn a monthly income of over Tk 1100 from interest. This is almost one-third of their present salary ! This they find very attractive.

So far we have paid out Tk 1.4 billion in retirement benefits !

WSJ:

We understand that Grameen makes a loan-loss provision of 100% for loans 2 years overdue, as do PKSF borrowers. I see 623 million taka in provisions on the income line in 2000. Following PKSF guidelines of an additional 50% provision for 1-year overdue loans would have meant an additional provision in roughly the same amount, right? (1-year overdue loans being twice as much as 2-year overdue, and the percentage being half as high). So is it correct to say Grameen would have shown a loss of about 600 million taka in 2000 had it followed PKSF guidelines?

YUNUS:

4.1 Yes, of course, you are correct. If GB doubles its loan-loss provisioning, GB would incur a large loss in 2000.

But the real issue is, why must GB double its loan-loss provision ?

GB's total expenditure in 2000 was Tk 3.0 billion including provision. Expenditure for provisioning was Tk 0.62 billion. This accounts for 21 per cent of the total expenditure for the year 2000.

If GB doubles the provisioning by another Tk 0.62 billion, the total cost will be Tk 3.62 billion. Provisioning as percentage of total expenditure will be 34 per cent.

Your way of posing the question only detracts us from the essence of the issue, that is, financial vulnerability of GB arising out of non-repayment of loans and interest by the borrowers.

One advantage with GB is, it is an institution with a long history. We can check with historical records. Purpose of provisioning is to make sure we do not show in our books some assets that we do not have, and not create a false feeling of having them.

By provisioning we wish to dispel from the minds of the owners of the company false sense of security and expectation of income. But it should not encourage us to create over-zealous provisioning by making provisions also for good loans.

Under-provisioning leads to exposure to risk. That's why it is not a prudent practice. Over-provisioning is also not a prudent practice. It adds to the cost unnecessarily. We should aim at optimal provisioning. While we should be keeping the organisation out of financial vulnerability, at the same time we should not get it involved in increasing the cost requiring an increase in price.

Under any scenario of non-repayment of loans, GB is well-equipped today, with its existing provisioning policy, to maintain its financial health. Why add further cost by making superfluous provisioning ? Why position ourselves to raise interest rate for no good reason ? Interest rate is already high.

I am insisting that GB is in sound financial health. It is adequately protected from financial vulnerability with the existing provisioning policy. Now, prove me wrong. That's the real challenge. Not whether GB is following somebody's grammar of provisioning or not. GB, by its very nature, has to be creative, not follow blindly something which has been designed in another world of banking. Our basis of banking is different, our clients are different, our relationships with borrowers are different, the premises on which we built our system is different.

Are we looking for a grammatical mistake, or we have a substantive cause for concern --- that's what we'll have to sort out. As I see it, there is absolutely no basis for concern. We are generously covered for possible eventualities of non-repayment.

Making 100 per cent provisioning for passed 52 weeks amounts puts too much pressure on the staff and the organisation. This may encourage the staff to seek artificial redress to overcome this pressure by wiping out "overdue" amount by issuing new loans. (In that case monitoring of number of "missed weekly installments" becomes very important.)

As long as we can take care of all potential bad debts without unnecessarily raising the cost of operation, we think that would be the optimum strategy. We find our procedure completely satisfactory from all points of view.

4.2 PKSF

You mention that PKSF's partner organizations follow a provisioning rule of 50% for 1-yr overdue loans.

You may have misunderstood PKSF. None of the large NGO's funded by PKSF (such, BRAC, ASA, Proshika) follow that rule. Their provisioning is done on the basis of disbursement. Following are their provisioning rules :

ASA 1 per cent of annual disbursement

BRAC 2 per cent of annual disbursement

Proshika 3 per cent of annual disbursement. Proshika raised this percentage from 2 to 3 per cent last year.

If you check BRAC's annual report of 1999 you'll notice that the following provisions were made for 1998 and 1999 :

1998 : Tk 250 million
1999 : Tk 220 million

Cumulative disbursement of GB from inception to 2000, stands at Tk 138.07 billion. Net provision (gross provision minus amount written off as bad debt) made during this period is Tk 3.78 billion. The percentage of loan-loss provision over the cumulative disbursement comes to 2.74 per cent.

BRAC's cumulative disbursement from inception to 1999 comes to Tk 41.0 billion. (source : Annual Report 1999). Net provision made during this period is Tk 0.47 billion. The percentage of loan-loss provision over the cumulative disbursement comes to 1.15 per cent.

GB has made Tk 0.62 billion loan-loss reserve in 2000 against the total disbursement Tk 14.04 billion in that year. It works out to be 4.45 per cent of disbursement. (Please see the Table for year-by-year percentages.)

No matter which way you look at it, our provisioning policy is quite robust and reliable.

WSJ:
Apart from the loan request after the flood, Grameen approached the IFC before the 1998 flood, about turning some of Grameen's portfolio into securities, right? Is it correct that Grameen wasn't willing to provide all the account information the IFC requested?
YUNUS:
That's a crazy thing to say. No, this is absolutely incorrect. (I never heard such a thing before.)

IFC team came on May 13, 1998.

Sharing our information is nothing new for us. We started publishing our Statement No. 1 from 1980 at our own initiative. In our Annual Report we gave minute details of our loans since inception. Nobody had faintest idea what can poor people, particularly poor women, do with their money. We published all these details without anybody asking for it.

Then came the donors. A "Donor Consortium" was formed in 1984. This continued until 1996. Members of the consortium were :

NORAD
SIDA
CIDA
KfW
GTZ
IFAD
Ford Foundation

They set up a separate office call "Donor Liaison Office" under a coordinator with full-time staff to monitor GB on a day-to-day basis. Consortium members regularly met to review GB performance. Consortium wanted to have every bit of information on GB. Frequently they brought in high-powered "Supervision Missions", "Technical Missions", "Review Missions" and other missions to go through our books and procedures.

Our accounts were never secrets to anybody. In addition, we have gone through questions like the following all our life :

a. Are the books manipulated ?
b. Are the loans real ?
c. Are the repayments real ?
d. Are the borrowers real ?
e. Do the women really use the money, or they are just conduit for their husbands ?

GB always attracted all sorts of researchers. In the process GB became the most researched institution in the world !

IFC sent a five member team to examine whether Grameen loans can be securitized. I remember meeting an expensive New York lawyer in the team. He met me separately to understand what I had in mind. He explained to me he had no experience of any third world country. He never visited one.

He was quite at a loss how to deal with $ 50 to $ 100 loans with no legal papers in securitizing them in the US market ! On top of it he was shocked to see Bangladesh had no legal framework for securitization !

I told him that I was not concerned with in the "amount" of the money to be raised through securitization, I was interested in setting up of the "procedure" for it. If GB can securitize even $ 25,000 for the first time, that will hit the history of financial market of Bangladesh like landing on the moon !

I remember the lawyer saying : Do you know how much fee IFC is paying me for this trip ? It would be bigger than the amount you want to securitize !

I made it clear to the IFC team that they can pick the best branch or branches of GB --- the branches which never had less than 100 per cent repayment in their entire life, for securitization purpose.

From GB side we constituted team headed Mr. A. A. Qureshi, Managing Director of Grameen Fund, the most admired banker in Bangladesh, who headed the largest commercial bank in the country for many years, before his retirement and joining Grameen Fund as its CEO.

I recall, as the discussion continued, we saw two major problems : 1) High cost to IFC to work out a procedure; and as a result, high cost to GB for securitization which must include IFC's fee, and the foreign exchange risk, 2) legal issues.

As discussion progressed, securitization lost all its attractiveness to both IFC and Grameen.

Book-keeping issues, and disclosure issues, never got a chance to be discussed.

IFC suggested that local securitization may be a better option for GB.

I am faxing some letters exchanged between IFC and GB. That will throw some lights on the nature of discussion. I am also faxing the memo from the management of GB to the GB board briefing the board on the progress of the discussion with IFC on securitization.

Grameen's New Features
I thought this would be a good occasion to brief you on our new system. We are in transition now. We are moving into a new system from this year. Since you did not write to me before you came to Dhaka or explained to me, when we met, the reasons for your visit to Grameen, I did not get a chance to explain the new system. I would have loved to do that. Now I am taking this opportunity to do that.

Only question you asked me in Dhaka was about "contract loan" (that is the literal translation from Bangla, but we put an English name to it --- calling it "Flexible Loan"). The other loan is "Basic Loan" (in Bangla we call it something which will translate as "Easy Loan").

We have consolidated all loans (general, seasonal 1, seasonal 2, etc) into one loan called "Basic Loan".

Unlike old procedure where all loans, except housing loans, were two year loans, basic loan can be of variable duration. If somebody borrows an amount for a duration of less than one year (three, six, or nine months), and cannot pay back exactly within that period then the remaining amount becomes overdue. She can no longer continue with her basic loan. She is shifted to flexible loan. Total outstanding amount of flexible loan on 31st December, will be considered as loans at risk. 50 per cent provision will be made for that amount.

For a basic loan with a duration of one year, if the borrower does not repay half the amount of the loan by the end of the first six months, the entire remaining amount becomes overdue. Her balance amount is converted into a flexible loan.

For a loan longer than one year duration (18 months, 24 months or more), if the borrower does not pay back the amount she has agreed to pay back within each six monthly interval, the balance amount is converted into a flexible loan.

In other words, basic loan will always mean a loan with 100% repayment. Flexible loan will always mean a loan which could not maintain 100 percent repayment record as per her original schedule, but now has come to an agreement to pay according to a new weekly payment schedule. However, this loan will be designated as a loan at risk. 50 per cent provisioning will be made against it.

If a flexible loan does not get repaid in 3 years, 100 per cent provision will be made for the balance amount.

We can look at our monitoring report at any time and find out quickly which part of our outstanding loan is at 100% repayment level, how much is at risk.

We have some built-in attractive features in the flexible loan to keep the borrower remain within GB discipline. These feature are :

If repayment for first six months is exactly on the dot, never failed a single weekly installment, a weekly saving deposit, and never missed a weekly meeting, a borrower will get a loan twice as much as the total amount paid during the first six months. This facility of receiving twice the amount repaid (after fulfilling all the stringent conditions), is available only at the end of the first six months. From the following six months one can usually borrow only the amount repaid during that six months.

During the first six months if a borrower misses even a single weekly meeting, or savings deposit, or repayment installment, she'll not qualify for double the amount repaid. If a borrower misses weekly installment, and/or weekly savings, and/or meeting attendance, the amount of loan she can receive becomes smaller and smaller, 175%, 150%, 125% or merely 100% of the amount repaid depending on the nature of her performance.

If a borrower on flexible loan successfully repays the "overdue" amount, she is shifted back to the basic loan.

This is working very well. Borrowers have reacted very positively to both of these loans.

40% of the old loans exceeding 52 weeks are now being paid back by the borrowers under flexible loan programme. We expect 60% of these loans will come under this programme by the end of the year. Many of these borrowers are moving into basic loan programme after paying back their previous loans.
Another interesting feature is our new savings mobilisation programme called deposit pension plan. If a borrower borrows more than Tk 5,000 she is required to deposit Tk 50 a month into her pension deposit account. This has become a very popular programme. There are 5 year pension deposit plan and 10 year pension deposit plan.
Already over one million borrowers have moved to basic loan programme. Each month more and more are joining this programme. Nearly Tk 1.0 billion has been deposited in the pension deposit plan. This becomes an important source of internal fund from within the Grameen borrowers themselves. Our pension deposit plan has become very popular to both our borrowers and non-borrowers. But at the moment we accept deposits under this plan ONLY from our borrowers. They feel very privileged that they get this opportunity

We estimate that by 2005 we'll have more than Tk 7.5 billion in pension deposits. Question of GB borrowing money externally will not arise again.

While I am at it, let me also mention two other new features that we have introduced.

One : Loan repayment insurance savings : If a borrower has a saving of Tk 25 in her insurance savings account against each Tk 1000 of her outstanding amount on December 31, in case of her death her entire outstanding loan on the day of her death will get paid back even if it is several times bigger than the amount on the 31st December. She also gets back the amount she has saved in her insurance savings account, without any interest. Pooled interest of all the borrowers is what finances the repayment of her loan.

Two : We have introduced a system awarding "Star" to our branches. Status of a branch from now on will be denoted by the number of stars it has received. One star, two star ..., five star. If a branch maintains 100% repayment record it gets a green "star". If a branch becomes a profit-earning branch it gets a blue "star". If a branch can finance its entire loan operation with its own deposits it gets a violet "star". (I guess you know that GB branches borrow from head office at 12% interest for all their fund requirements, for lending or for covering expenses. Any fund they send to head office they receive 12% interest if they do not have any loan balance with the head office.) If all the children of the borrowers in a branch are in school or finished at least primary school, the branch gets a brown "star", if all the borrowers in a branch have moved out of poverty it gets a red "star".

Imagine a "Five Star" branch ! What a story it tells. Branches will be allowed to display their stars in their sign-boards, and the staff of the branch can wear the stars.

I am happy to see that many branches are already applying for their stars, some for one star, some for two and three stars, some even for four stars !

I hope you'll come back soon and visit us to look at the changes in Grameen Bank.

This transition process will cross half-way mark this year, and it will be completed next year.

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Graphs & Tables

Repayment Rates: Graph

(1983 - 1986)
(1987 - 1991)
(1992 - 1996)
(1997 - July 2001)

Borrowing from Banks & others
(1997 - 2000)
(1997 - 2005) Block
(1997 - 2005) Bar

Repayment Rates:
Data Series
1983 - 2001
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