Session 12, Case study

The Grameen Bank, Bangladesh: Mizapur Branch (disguised branch name)

The Mizapur branch of Grameen bank was established in 198! si" #ears after the bank itself was started$ %t
was the &nd branch of Grameen Bank to be set up$ Mizapur is a t#pical densel# populated area in rural
Bangladesh! about 1'' km from (haka$ Most of the )illagers ha)e )er# small landholdings! and man# ha)e
no land at all* the# subsist on the meagre dail# wages the# can earn b# working on the land belonging to the
few larger farmers$ +earl# e)er# household also earns e"tra mone# through non,farm acti)ities! which are
usuall# run b# the women$
+ir-ahan Begum is one of the 1!.'' customers of the branch$ /he has no land! and her husband was an
agricultural labourer$ /he used to earn a little e"tra mone# b# wea)ing mats! but the trader who sold her the
material on credit! and bought back the mats! allowed so small a margin that the business earned practicall#
nothing$ 0er husband died in 1991! and a neighbour in)ited her to -oin a Grameen Bank group shortl# after
he died$ 2)er the ne"t two #ears! she took three loans to finance her mat,making business$ /he has made all
the repa#ments when the# are due! and in addition to taking care of her three children! she has also been
able to repair the roof of her house and to bu# a calf and some chickens$
B# 1998! the branch ser)ed about 1!.'' members in &83 4groups5! which were in turn organised into .'
4centres5$ %n addition! some &'' customers who were not members of groups used the bank for deposit
account facilities$ 2)er 91 per cent of the clients of the branch were women! and the# took loans for a )ast
range of different purposes! such as pett# trading! li)estock! padd# processing! and man# others$
The branch had 11 staff members! two of whom were women$ The# were all uni)ersit# graduates from
urban areas$ The staff members were paid at the same rates as go)ernment emplo#ees! and trained for si"
months! largel# in the field$ Man# recruits resigned during this training because the# decided that the#
would prefer to work in the cit#! but -obs were scarce! and those who sta#ed said the# are proud to belong
to the Bank! and that the# gain a great deal of satisfaction from their work$
The Mizapur staff was proud of the results of its branch$ %t was one of the most profitable of the Bank5s
o)er 1!''' branches* 6rof$ Mohamed 7unus! the founder of Grameen Bank! had )isited the branch on
se)eral occasions to congratulate the staff on its work$ 8isitors from o)erseas also came to the branch from
time to time! because it was reasonabl# accessible! and because it e"emplified the success of the Bank$
6rof$ 7unus established Grameen Bank in 19.9$ Teaching economics at a local rural uni)ersit#! he had
obser)ed how difficult it was for landless )illagers to earn enough to li)e on$ The# could not e)en afford
the tin# amounts of capital needed to undertake their
non,farm acti)ities! and the mone#lenders5 loan interest rates were so high that the# absorbed most of
whate)er the people could earn$
6rof$ 7unus began b# lending a small sum from his own mone# to a small group of women! and when the#
paid it back e"actl# as agreed! he e)entuall# managed to persuade the local commercial bank to lend him
mone# for more loans of this t#pe$ The# said that the# could not lend directl# to illiterate )illage women!
who had no collateral! could not possibl# cope with the formalities of borrowing! and would certainl# not
be able to repa#$
6rof$ 7unus was con)inced that the traditional bankers were wrong! and he e"tended his own e"periments$
%n spite of his efforts to work with the e"isting commercial banks! it e)entuall# became necessar# to set up
a completel# new bank* hence! Grameen Bank was incorporated in 198&$
The Grameen Bank s#stem! which has e)ol)ed o)er time and is still de)eloping! is based on groups of fi)e
members! organised into centres of about se)en groups$ 2nl# the )er# poorest people are eligible for
membership! and the bank workers )isit e)er# prospecti)e member5s home to ensure that s:he does not
ha)e more than ; 1' or <s !1'' worth of assets or half,an,acre of land$ Traditional bankers are astonished
at a bank! which insists that its borrowers should not ha)e collateral! but the# are also astonished b# the
a)erage on,time repa#ment rate of 98 per cent! which Grameen Bank achie)es$
The group members ha)e to learn the simple procedures of the bank! and to sign their names! but the# do
not recei)e an# training in business or in the acti)ities the# wish to undertake$ =fter the# ha)e
demonstrated their solidarit# b# meeting promptl# at a fi"ed time and sa)ing a small sum regularl# e)er#
week for a short period! the# become eligible for loans$ The# also ha)e to learn some simple ph#sical
e"ercises and a drill! which the# go through at e)er# meeting$
The members themsel)es decide what acti)ities the# will undertake! and how much mone# to borrow$ The
a)erage loan is around ; 1'' or about <s 1!'''! while the ma"imum is ; .1'$ Members are eligible for
increasing loan sizes o)er time! depending on their repa#ment performance$ The members know what
acti)ities are )iable in their communities! and what their fellow )illagers can do! and the bank has so far
financed o)er 1!''' different t#pes of micro,enterprises$
The bank worker! who bic#cles out to attend their weekl# meeting in the )illage to collect member5 sa)ings
and repa#ments and to recei)e new loan applications! merel# checks that the application is in order and that
the whole group! and the centre! are in fa)our of it$ This is )ital! since e)er# member of a group! and
e)entuall# a centre! is responsible for e)er# other member5s repa#ments in case of default! and no member
of a group can appl# for a new loan if an# other member is in arrears$
>oan applications are appro)ed and disbursed within 1' da#s at most! and the onl# time that the members
ha)e to )isit their branch is when their loans are disbursed$ =ll their other banking business is transacted at
the weekl# meetings! which usuall# take place earl# in the morning before farm work begins$ (iscipline
and punctualit# are strongl# enforced! b# the members themsel)es* if a member! or the bank worker! is late
for a meeting b# e)en a few minutes! s:he pa#s a fine into the centre5s fund$
?)er# loan has to be repaid in 1' weekl# instalments! starting the week after it is disbursed$ %nterest is
charged at the rate of ' per cent per #ear! but when the total of the )arious sa)ings and emergenc#
insurance fund contributions that members ha)e to pa# is added to the interest! the total actuall# amounts to
o)er &' per cent of the loan amount$ This is well o)er the rate charged b# commercial banks but the
members pa# without difficult# and the high rate! as well as the small loans and regular repa#ment! ensure
that onl# people who reall# need the mone# will tr# to -oin* richer people can get larger loans more cheapl#
elsewhere$
The bank has grown rapidl#$ B# 1998! it had well o)er 1!''' branches and o)er million members! 93 per
cent of whom were women$ There were about 1!''' staff members$ Monthl# financial accounts for the
whole bank! and for each branch! are produced and circulated within three weeks of the end of each month!
and the manager and staff of particularl# successful branches recei)e substantial bonuses$ /taff members
who fail to perform are warned and ma# e)entuall# be dismissed$
%n the earl# #ears! the go)ernment contributed substantial capital and was the ma-orit# shareholder! but
later on the Bank5s capital re@uirements e"ceeded the go)ernment5s abilit# to subscribe! and the members
now own 88 per cent of the shares! through con)erting a part of their sa)ings into share capital$ =lso! nine
of the 1 directors are women members from )illages! elected b# their fellow members$ %n 199.! Grameen
Bank as a whole had some ; 1' million of loans outstanding$ =bout ; 111 million of this was financed b#
the members5 sa)ings and e@uit#! and the balance of the funds came from loans to the bank from o)erseas!
which are generall# made on concessional terms but ha)e to be repaid* Grameen Bank is a bank! not a
pro-ect$
The following simplified set of the accounts of the Mizapur branch for 199. shows the sources and uses of
mone#! and the operating income and e"penses$
Grameen Bank Bangladesh, Mizapur Branch
Simplified alance sheet, as on 1 !anuary 1""#
Assets Liabilities
Aash negligible
>oans and interest outstanding ; 1!&1!''' Members sa)ings and funds ; 8'!'''
Bi"ed assets ; 1.!''' 2wed to head office ; .!'''
Total assets ; 1!1!''' Total liabilities ; 1!1!'''
Simplified income statement, for the year ending $1 %ecemer 1""&
Income Expenses
%nterest on loans ; 19!''' %nterest on deposits and loans ; 1!'''
Total income ; 19!''' %nterest on funds from head office ; &!'''
2peration e"penses ; 9!'''
Total e"pense ; 13!'''
Branch profit ; !'''
The Bangladesh taka amounts ha)e been con)erted at the appro"imate e"change rate of 1' taka = ; 1$
Session 12, Case study
Bank 'akyat (ndonesia: Aontoh Cnit
Note: The US dollar amounts mentioned in this case study have been converted from the Indonesian rupiah
at the rate of Rp !"" D #$ or Rs !"% &hich &as the approximate exchan'e rate in (ecember $))*+
Eith a population of &' million in less than 1'!''' km

! the %ndonesian pro)ince of ?ast Fa)a is a densel#

populated area with man# bustling cities and towns$ +e)ertheless! the region remains primaril#
agricultural! with numerous small towns and )illages dispersed among carefull# culti)ated rice fields$ 2ne
such town is Aontoh (not its real name)! located about 1' km south of /uraba#a! the pro)incial capital of
?ast Fa)a$
/urrounding the town of Aontoh are 3 )illages! which make up the sub,district of Aontoh$ Eithin the
Aontoh sub,district li)e about &'!''' familiesGmore than 1!'!''' people$ The )ast ma-orit# of the
population depends on agriculture for its li)elihoodH either b# farming or b# transporting and:or trading
crops$
=lthough rice is b# far the largest crop! corn! cassa)a! sweet potatoes! and other fruit and )egetables are
also grown$ There is also some small industr#! much of it home,based! and trading in coffee! soap!
shampoo! and other cosmetic goods$ =bout 1 km from Aontoh is the district capital of Malang! a hill town
established in the late 18th centur# as a coffee,growing centre$
There are three commercial bank offices in Aontoh! which ser)e the sub,district$ Two of them primaril#
ser)e larger, and medium,sized borrowers! while the third! B<%! primaril# ser)es smaller borrowers$ %n
addition to the banks! there are also indi)idual mone#lenders who work in the market or offer door,to,door
credit$ 0owe)er! the interest rates charged b# the mone#lenders are usuall# substantiall# higher than the
rates offered b# the banks$ B# one account! B<% has about 1'I9' per cent of the market of small borrowers
in the area$
B<% is a centur#,old! state,owned! commercial bank whose traditional mission was to pro)ide financial
ser)ices to rural areas of %ndonesia$ 0ead@uartered in the capital cit# of Fakarta! B<% is %ndonesia5s largest
bank in terms of total emplo#ees and number of banking offices$ B<% has && branches in %ndonesia!
located in large cities and district capitals$ Cnder each B<% Branch is an e"tensi)e network of local banking
offices! or 8illage Cnits$
The Aontoh B<% office has been in Aontoh since the earl# 19.'s and is t#pical of the &!191 B<% Cnits!
which are usuall# located in sub,district towns or small commercial centres throughout %ndonesia$ There
are also more than 3'' B<% ser)ice posts! which operate under particular Cnits in areas where there is not
enough )olume to warrant opening a Cnit$ These posts are manned b# two people! and are open for one or
more da#s a week* the Aontoh Cnit does not ha)e an# of these posts attached to it$
The Aontoh Cnit is one of 18 Cnits under the Malang Martadinata Branch! which in turn is one of &1
branch offices under the /uraba#a B<% <egional 2ffice$ There are ; 9 working in the CnitH a Cnit Manager!
two Aredit 2fficers! two (eskmen:Book,keepers! and a Teller$
2ne of the Aontoh Cnit customers is Mr Easis$ 0e and his wife li)e with their three children about 1 km
from the Cnit$ Mrs Easis makes meatballs and soup at their home e)er# da#! which her husband sells door,
to,door in the surrounding )illages$ %n 198.! to help him bu# raw materials! he borrowed ; ' or about <s
1!''' from an informal mone#lender! who offered door,to,door credit in his )illage$ 0e immediatel# had to
repa# two dollars! followed b# &' dail# instalments of 8' cents! making a total of ; 9! or ; 9 interest for
the use of ; ' for -ust one month$ Ehen his uncle! a former
B<% Cnit customer! heard about this loan he recommended that Mr Easis go to B<% to get a loan$
0e went to the B<% Aontoh Cnit! and was told that the B<% Cnit /#stem had onl# one t#pe of loan called
4Jupedes55 (an abbre)iation for General <ural Aredit)$ These loans! from as little as ; 1' up to a ma"imum
of ; 1'!''' (about <s 1'' to 1 lakh)! were a)ailable to support an# ongoing! credit,worth#! producti)e
acti)it#$ Mr Easis would ha)e to pro)ide collateral! for which he was prepared to hand o)er his title deed$
0is uncle had told him! howe)er! that B<% was willing to accept less formal documents! such as ta" bills or
receipts! if borrowers did not ha)e title deeds! and the# would also accept other fi"ed or mo)able assets
from borrowers who did not own their own land$
The term of most Jupedes loans was between a #ear and three #ears! depending on whether the# were for
working or fi"ed capital! and most loans had to be repaid with monthl# instalments$ Mr Easis was told that
the interest rate was a flat per cent per month based on the original balance of the loan$ 0owe)er! if he
repaid the loan on time within a si",month period! he recei)ed half of 1 per cent back! as a 4prompt
pa#ment incenti)e5$ This meant that the loan would actuall# cost 1$1 per cent per month! on a flat basis$
This 1$1 per cent Jupedes interest rate works out to an effecti)e annual interest rate of & per cent on a
declining balance basis$
Mr Easis filled out a loan application! gi)ing the purpose of the loan! his borrowing histor#! the amount
and terms re@uested! and a brief description of how the mone# would be used$ Mr Easis worked with the
Cnit Aredit 2fficer to figure out what his loan repa#ment capacit# was! based on his current income and
e"penses$ The B<% Aredit 2fficer )isited Mr Easis5 home to get more information about his business! and
he also spoke to a )illage official who could )ouch for Mr Easis5 character$ =bout a week later Mr Easis
recei)ed a ; 1' Jupedes loan! which he had to repa# in 1 e@ual monthl# instalments$ =s long as he could
make his monthl# pa#ments on time! the Cnit staff did not attempt to dictate! or closel# monitor! how he
used the loan$
0is business progressed well! and in 1991 he took out another Jupedes loan in order to bu# a market stand$
0e paid back this loan in 18 e@ual monthl# instalments! after which he immediatel# recei)ed another loan$
Mr Easis also opened a sa)ings account at the Cnit to safeguard his mone#$ The Cnit
staff suggested that he open a /impedes account! which allowed an unlimited number
of withdrawals! and offered a competiti)e interest rate$ =s a /impedes customer! he was automaticall#
eligible for semi,annual lotteries in which motorc#cles! tele)ision sets! radios! and other prizes were
awarded$ Mr Easis used the account regularl#Gwith the account balance fluctuating between ; 1'' and ;
1!'''Gfor his changing cash needs$
%n the 1' #ears that Mr Easis has been a customer of the B<% Aontoh Cnit! he has recei)ed si" Jupedes
loans$ =t the beginning of 199.! he borrowed ; !3''! which he was repa#ing in 3 monthl# instalments of
about ; 13' each$ (uring that same period! his sales grew at least se)en,fold and at the time of his se)enth
loan! the# a)eraged about ; 8' per da#$ Ehile he still works in the market from about 9$'' a$m$ till &$''
p$m$ e)er# da#! he now emplo#s two relati)es to assist him$
B'( )nit history, structure, and performance
Mr Easis was -ust one of the .18 outstanding loans in the portfolio! )alued at about
; 9!''!'''! which the Aontoh Cnit staff managed as of (ecember 1999$ 2f the Cnit5s loan portfolio! about
two,thirds were classified as trading loans and ' per cent were for agriculture$ %n addition! the Cnit had
more than si" times as man# sa)ing accounts! which totalled almost ; 8!''!'''$
The Aontoh Cnit was among the first B<% Cnits established when the Cnit Banking /#stem was initiall#
de)eloped in order to pro)ide subsidised go)ernment credit to rice farmers$ %n 19.&! a network of almost
&!9'' B<% Cnits was established in rural areas of %ndonesia
to carr# out the credit component of a go)ernment fertiliser,intensi)e rice culti)ation programme$ Cnder
this programme! the Cnits were a t#pical e"ample of targeted subsidised rural finance with little sa)ings
mobilisation$ The# did not charge interest rates high enough to co)er their costs! e"perienced high default
rates! and conse@uentl# incurred losses in all but one #ear from 19.' until 1983$
B# the earl# 198's! it was clear to polic#,makers that the credit component of the programme should be
discontinued and that the Cnits would either ha)e to be closed down or fundamentall# restructured$ <ice
culti)ation was also becoming proportionatel# less important to the rural population as the# became more
prosperous! and there were more opportunities in other areas$ =t about the same time! the %ndonesian
go)ernment announced financial reforms! which allowed banks to set their own interest rates$ The Ministr#
of Binance encouraged B<% to commercialise the Cnit Banking s#stem b# setting interest rates high enough
to co)er the cost of funds! o)erheads! and loan losses! and return a profit$ This! followed b# B<%5s
successful efforts at sa)ings mobilisation! led to the creation of one of the most wide,reaching sustainable
and indeed profitable rural banking networks an#where in the world$
Between 1983! when Jupedes loans were first introduced! and the close of 1999! B<% Cnits had lent out the
e@ui)alent of almost ; 1' billion! or about <s 1'!''' crore$ >osses were small$ The long,term loss ratio of
Jupedes loansGthe ratio of the cumulati)e amount due but unpaid! to the total amount dueGfor that
period (1983I99) was onl# $ per cent$
?ach Cnit is )iewed as a separate profit centre! has separate financial statements! and is e"pected to co)er
its costs and earn a profit$ %n 1999! 91 per cent of the Cnits were profitable$ =t the end of 1999! there were
$1 million Jupedes loans outstanding! totalling about ; 1$9 billion$ B<% Cnits made an a)erage of o)er
1!1'!''' loans per month in 1999! with an a)erage loan size of ; 9'' or <s 31!'''$
=bout a @uarter of all the borrowers are women! but it is estimated that a somewhat greater proportion of
the total amount borrowed is actuall# used b# women because man# loans which are taken b# husbands!
because land is usuall# registered in their names! are actuall# used b# their wi)es$ Ehen the 8illage Cnit
s#stem was introduced! the management had considered using some form of group mechanism! but it
realised that there was no local tradition of loan guarantees outside the famil#$ The#! therefore! decided to
lend onl# on an indi)idual basis! and the# ha)e maintained this polic# since$
=t about the same time Jupedes was introduced! B<% conducted e"tensi)e studies on rural sa)ings
potential* shortl# after! it began pilot sa)ings pro-ects$ %n 1989! B<% introduced a new sa)ings instrument at
Cnits across the nation$ This new sa)ings instrument! /impedes! was designed to meet customer
preferences$ Eith a combination of appropriate products differentiated to appeal to )arious market
segments! and effecti)e incenti)es and marketing efforts! the Cnit Banking /#stem has been remarkabl#
successful in mobilising sa)ings$ =t the close of 1999! there were more than 19 million sa)ings accounts at
the &!191 Cnits! representing almost &' per cent of the total number of sa)ings accounts in %ndonesia$ These
accounts had an a)erage balance of ; 1.1! and at the end of 1999 totalled almost ; & billion$
2)erall! the 8illage Cnit network deposits are almost double the total outstanding loans$ The B<% s#stem
allows Cnits with a surplus of sa)ings to deposit e"cess funds with their super)ising branches! while Cnits
with more outstanding credit than deposits can borrow from their super)ising branch to meet their loan
demand$ Bund transfers between the B<% Branches and Cnits recei)e interest e@ual to the 4transfer price5!
which is set on a monthl# basis b# B<% and is usuall# slightl# abo)e the top sa)ings rate offered$
The organisation of B<% Cnits is purposel# kept )er# simple and transparent$ ?ach Cnit has at least four
staff membersH a Cnit Manager! a Aredit 2fficer! a (eskman:Book,keeper! and a Teller$ =s the business of a
Cnit grows! upto 11 staff members (additional credit officers! book,keepers! and tellers) are added
according to predefined! acti)it#,based personnel standards$ Cnits with more than 11 emplo#ees are split
into two or more Cnits$ The immediate super)isors of the Cnits are located at the branch le)el! with each
branch super)ising about 11 Cnits$
The B<% Cnit staff is recruited from the areas where the# work$ The# are onl# re@uired to ha)e completed
secondar# school! but an increasing number now ha)e uni)ersit# degrees$ =ll Cnit staff members start as
deskmen or tellers! and promotions are made from within$ Ehen the# -oin! all staff members recei)e a one,
month basic training course about the Cnit products and procedures! at one of the fi)e regional training
centres operated b# B<%$ The# recei)e further training when the# are promoted* the centres train about
.!''' personnel e)er# #ear$ Cnit staff members also recei)e on,the,-ob training from their Cnit managers$
The staff recei)es a bonus of 9 per cent of their Cnit5s annual profit as an incenti)e! up to a ma"imum of
one to two,and,a,half months5 salar#! depending on their position$ /ince 91 per cent of all Cnits are
profitable! this bonus is recei)ed b# the same proportion of the staff$ %n addition! staff members are eligible
for semi,annual cash prizes for particular Cnit achie)ements! such as sa)ings mobilisation or loan @ualit#!
depending on the needs of the Cnit s#stem and the B<% as a whole$
The financial position of the Aontoh Cnit was appro"imatel# as follows in 1999$
Bank 'akyat (ndonesia: Contoh )nits
Simplified alance sheet, as of $1 %ecemer 1""*
Assets Liabilities
Aash ; 8!''' /impedes deposits ; 9!&&!'''
Jupedes outstanding ; 9!1!''' 2ther deposits ; !..!'''
/urplus lent to branch office ; &!1'!''' 2ther liabilities and e@uit# ; 83!'''
2ther assets ; 3!''' Total liabilities ; 9!93!'''
Total assets ; 9!93!'''
Simplified income statement, for the year ending 12 %ecemer 1""*
Income Expenses
%nterest on Jupedes loans ; !13!''' %nterest e"pense ; 1!18!'''
%nterest income from branch ; 11!''' 2peration e"pense ; 3'!'''
2ther income ; 11!''' Bad debt reser)e ; 1!'''
Total income ; !.9!''' Total e"pense ; !19!'''
Cnit profit ; 1.!'''
The figure for operation e"penses also includes the cost of branch super)ision$ The bad debt reser)e was
calculated on a standard formula of & per cent of the current loan portfolio plus 1' per cent of all balances!
which were o)erdue up to three months past the final due date! plus 1'' per cent of all balances! which
were more than three months o)erdue past the final due date$ =n# loan balances! which were more than 1
months o)erdue! were automaticall# written off$
(This case stud# is adapted fromH 0arper! Malcolm! 1998! ,rofit for the ,oor! >ondon! %T 6ublications!
(elhi! 2"ford and %B0 6ublishers$ This case stud# was contributed b# 6atricia Marko)ich of the 0ar)ard
%nstitute for %nternational (e)elopment! who is a 6ro-ect =d)iser to the B<% %nternational 8isitor
6rogramme$)