'A Grounded View of How Grameen's New Initiative is Progressing in the Villages'

By Rutherford, S., Maniruzzaman, M., Sinha, S. K. & Acnabin & Co. (Jan and April 2004)

http://www.safesave.org/GRAMEEN%2011%20Status%20report%20Final%2019%20Apr%202004.pdf

Abstract

After a few years that Grameen decided to change its methodology to what is now known as Grameen II, the author researched the impact of the implementation of the new policies.  He takes particular interest in understanding what Grameen II means for its members, clients and local staff as well as for microfinance practice in Bangladesh and worldwide. This is a preliminary report, since the research project will continue until the end of 2005.

The main takeaways of this exercise are:

• Loan officers and staff on the ground have been reluctant to implement the more flexible philosophy embedded in Grameen II.  They believe that being more lax on the Grameen discipline will get the system in trouble.
• Capturing savings from the public seems to be having a positive impact on Grameen's local branches.  Although it is too soon to attribute the better stance of the branches' accounts to GrameenII, the amount of savings have been increasing rapidly (mainly due to the new Pension Scheme) and the quality of the portfolios' is also better.
• Grameen's Pension Scheme (GPS) has had an impressive response.  The massification of this savings product, could change the demand side of microfinance dramatically, since clients in the future could prefer to build up savings than to get small loans.

Summary

Grameen's new rules aim to eradicate the tension from micro-credit by providing more flexible schemes that meet the individual needs of the clients through changes to the traditional model and introducing new products.

Among the innovations to the model are:

• Individual savings accounts (vs. group savings accounts in the original model)

• Loans can be disbursed to more than one member of a group at a time
• Non-members can save but cannot borrow
• Pension Scheme (GPS) is compulsory for those taking larger loans (above 7,000 taka).
• Explicit removal of joint-liability or group-guarantee practices
• Introduction of the flexi-loan concept (or long-term loan) for lenders who fall into difficulty

On the management side, GrameenII emphasizes the benefits from a greater use of Grameen's formal status and its right to mobilize deposits. Also, it includes stricter procedures for monthly recognition of loans at risk, for provisioning them and for writing them off. 

In practice, changes to the model have not yet been fully implemented. The authors have found that field staff has resisted to allow clients to withdraw their savings at any point in time, nor have they introduced more flexibility into their lending activities.  They mostly continue to provide fix term loans with fix repayment schedules.  Also, the authors found evidence of loan officers continuing to put pressure on clients to meet their fix term commitments, before considering to give a flexi-loan.

The management changes seemed to have had a better impact.  Based on the study of the balance sheets of three branches, the author has found that at the branch level, savings deposits have grown remarkably and that growth is strongest in member-owned GPS accounts and in the new public deposits.  One of the three branches tripled its savings portfolio in a three-year period.  The loan portfolio has not changed significantly over the 3 year period of analysis.  Profitability results are mixed, but the quality of the portfolio seems to be improving significantly.  The ratio of doubtful loans to total outstanding loans in 2001 was 12% and 21% in two of the branches and by June 2003, it was 8% and 6%, respectively. The authors warn that it is too early to attribute these improvements to Grameen II.

In order to understand the results presented above, the authors present the views on Grameen of the different stakeholders:

Headquarters staff: 

After the 1998 floods Grameen faced a repayment crisis, which exposed weaknesses in the its classic model, above all its inflexibility in responding to the repayment difficulties of its members.  This was the main motivation to introduce Grameen II.  However, in the field, inflexibility of loans continues and Dr. Yunus' explanation is that Grameen's classic product needed limited scope, but has now evolved to one that allows the staff to be creative and design their own products.  When the staff faces a situation of repayment difficulties, they will understand the advantages of the flexible options and will then begin to use their creativity to develop flexible products. 

Field staff:

They consider themselves as guardians of Grameen's interests and of the interests of their members.  That is why they have welcomed some aspects more than others. For example, the introduction of the pension system is considered a way to reduce loses caused by loan default and safeguards members by forcing them to hold reserves they can use if they're in trouble.  The field staff's self-image as guardians also makes them cautious. They have been reluctant to take the risks from the more the flexible terms and conditions allowed, a view also shared by some senior staff at headquarters. Besides, they see some problems with the withdrawal of savings, which could lead to ‚Äòbad habits' such as customers constantly withdrawing to make their weekly payments.

Villagers:

They are aware rules have changed but some of them are understood better than others.  It is not surprise that the least understood areas are those of loan-flexibility, variable terms and conditions and savings withdrawals (the areas not particularly liked by the field staff).  In general, issues to do with savings are highly regarded.  For many, the shift to Grameen II did not make a big difference in the way loans are dealt with, however, the GPS caused a big stir and was immediately welcomed by many.  Some members joined only to be able to open a GPS and others hold several GPSs or GPSs bigger than required. 

Competitors:

The competition doesn't seem to be very aware of the changes  in Grameen loans. Only one of the interviewed staff from other NGO's had heard about Grameen's GPS.

The Pension System's success

One of the main findings of the author's exercise seems to highlight that Grameen is currently leading the massification of contractural savings products like GPS and has been having an impressive response.  Although other NGO's had tried it before, it is Grameen who is making it available to the masses.  Instead of setting aside a small amount each week to pay down loans, the poor seem to be beginning to prefer to build up savings with a rock-solid deposit-taking institution.  The GPS done at the Grameen scale could change the demand side of microfinance dramatically.  A caveat with the GPS is in regard to the high rate of interest it pays (12% per year for the ten-year term) relative to other providers.  Dr Yunus maintains that as long as cost-covering margin is maintained between loans and savings interest rates, the absolute values of these rates are not a matter of concern.  However, if the GPS turns out to be extremely popular it might displace some borrowing, potentially leading to a mismatch between a growing savings long-term portfolio and a static or even shrinking short-term loan portfolio.