Grameen Bank: Taking Capitalism to the PoorEvaristus Mainsah* MBA ’04Schuyler R. Heuer MBA ’04Aprajita Kalra MBA/MIA ’04Columbia Business SchoolColumbia University School of International and Public AffairsQiulin Zhang MPA ’04Columbia University School of International and Public AffairsThis paper was written as part of the course Emerging Financial Markets taught by David O. Beim, professor ofprofessional practice, at Columbia Business School in fall 2003. The authors are grateful for his invaluablefeedback.© 2004 by The Trustees of Columbia University in the City of New York. All rights reserved.CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS SPRING 2004 www.gsb.columbia.edu/chazenjournal * Corresponding author ([email protected]).SPRING 2004 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 1Executive SummaryIn the early 1970s, Professor Muhammad Yunus envisioned a means of alleviating povertyby circumventing the major impediment to lending to the poorest in society—the needfor collateral. He tested this instinct in an experiment in 1976, when he lent about $27 to42 women in an ordinary Bangladeshi village. Just 30 years later, Grameen Bank has morethan 3.2 million borrowers (95 percent of whom are women), 1,178 branches, services in41,000 villages and assets of more than $3 billion.This paper explores Grameen Bank’s origins, structure, culture, performance andefforts to expand and broaden the microfinance agenda. The authors evaluate Grameen’ssuccess in implementing Yunus’s vision in the light of various challenges and conclude thatthe short-run effects of microcredit have been positive and that microfinance will continueto make important contributions to poverty reduction. Admittedly, an assessment ofGrameen solely in terms of financial viability—that is, without also taking into account thesocial benefits in terms of the empowerment of women and its positive impact on humancapital—must question whether such an institution will ever generate sufficient returns toprofit-driven shareholders to attract the sort of capital required to enable it to reach allsegments of the poor. The legacy of Grameen Bank will ultimately be not what it has donefor shareholders, but how it has impacted society.1. Introduction: The Origins of Grameen BankThe story behind the first concerted effort to make financing accessible to the world’spoorest is the stuff of folklore. Befitting the goal of poverty alleviation, the setting for thisearly experiment was a time of great tragedy in Bangladesh, one of the poorest countriesin the world. A small country in the Indian subcontinent with a population of 130 million,a gross national product (GNP) per capita of about $300 and a literacy rate of only38 percent for those over 15 years of age,1 Bangladesh experienced drought and famine in1974 that killed 1.5 million people (Macfarlane 2002). Having recently completed studies asa Fulbright scholar in the United States, Professor Mohammad Yunus was lecturing oneconomic theory at Chittagong University (see exhibit 1) and growing increasinglyfrustrated at his inability to ease his neighbors’ suffering.Yunus attributes the origin of his vision to a chance encounter in Jobra with SufiaBegum, a 21-year-old woman who, desperate to support herself, had borrowed about25 cents from moneylenders charging exorbitant interest rates approaching 10 percent perday. Ms. Begum used the money to make bamboo stools that, as a condition of the loan,she sold back to the moneylenders at a price well below market value for a profit of about 1 CIA, World factbook 2003, s.v. “Bangladesh,” http://www.cia.gov/cia/publications/factbook/.SPRING 2004 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 2of 2 cents (Yunus 2003). Ms. Begum’s desperate position could best be described asbonded labor.Yunus found 42 people in Jobra in the same poverty trap, and in 1976 heexperimented by lending them small amounts of money at reasonable rates. Yunus lent atotal of $27—about 62 cents per borrower. To his pleasant surprise, all the borrowersrepaid the loans, in the process convincing him that this success could be replicated acrossBangladesh.From these humble efforts emerged a new industry: microcredit—the extension ofsmall loans and other financial and business services to entrepreneurs too poor to qualifyfor traditional bank loans. Microcredit has since proven to be an effective tool foralleviating poverty and, in addition to creating wealth, generating positive externalities,such as better education and improved health.2Yunus carried his success story to traditional banks and proposed that they could alsomake uncollateralized loans to society’s poorest. In response, the banks asserted thatborrowers would never sufficiently organize themselves to repay, that proceeds from suchloans were too small to cover administrative costs and that female borrowers would simplyhand over the funds to their husbands. Early critics argued that even if lenders avoidedthese pitfalls, the last thing the poor needed was the added burden of indebtedness(Yunus and Jolis 1998).Yunus answered these challenges by founding an institution of his own, GrameenBank, the name of which derives from gram, the Bengali word for “village.” He did so inthe belief that capital is a friend of the poor and that its accumulation by the poorrepresents their best means of escaping the abject poverty that the welfare state andwasteful, corrupt and incompetent international aid organizations have failed to combat.3Yunus’s vision was of a bank that would address all aspects of rural life and supportcommercial activities ranging from manufacturing to retail, including even door-to-doorsales. The bank would require no collateral and would prove once and for all what Righterlater referred to as “the bankability of the unbankable.”4 In 1983, Grameen wasincorporated as a bank after the government had passed legislation allowing GrameenBank to accept deposits. 2 The Virtual Library of Microcredit, http://www.gdrc.org/icm/wind/wind.html; see also Mayoux (1997).3 R. Righter, “Bangladesh’s famous financier uses microcredit to bring wealth to the