Replicating Grameen Bank Miracle in Developing Economies
Like the popular quote from Winston Churchill “to improve is to change and to be perfect is to change often,” change and innovation are crucial factors that must continually take place for any country to remain relevant in the 21st century. With about 2.8 billion of the world’s population currently living on less than $2 a day; finding creative ways of providing solutions to the perennial challenges that bedevil people, particularly in developing countries, is crucial in lifting them out of poverty and raising their living conditions. According to research carried out by a think-tank in 2008, findings showed that microfinance is an innovative pathway towards poverty alleviation and improved living conditions of the world’s poorest people. This is because it provides opportunities for people to develop skills that will empower them to earn money through micro enterprises.
In 1976, Professor Muhammed Yunus, the head of Rural Economics program at Chittagong University, set up a microfinance bank, Grameen, as an experiment in Bangladesh for the rural poor. The pilot scheme was a huge success as collateral free loans were given to poor people in rural areas at full cost interest rates repayable in installments. The borrowers were put in peer groups which helped to minimize the risks of defaulting in the repayment of the loans.
The scheme was most successful among women who are the most vulnerable group of the population. This is because opportunities were given to them for self-employment which significantly improved their security, autonomy, self-confidence and household status. In the same vein, self-employment portfolios also rose by 125% with the combined impact of credit and non-credit intervention on self-employment profits rising by 175%. The beneficiaries were not just given loans, but were allowed to be the owners of the bank and also received dividends. The pro-poor stance of the scheme allowed it to grow, as there were about 2,500 branches reaching out to 85,000 villages, and impacting 40 million people through the provision of credit facilities to about 8 million people. Consequently, there was an unprecedented loan recovery rate of about 98% and 60% of the borrowers got out of extreme poverty and improved their living conditions.
Replicating this success story in other developing countries is very crucial in this challenging global economy. Using China, Colombia and Nigeria as case studies, despite their peculiar economic challenges, the Grameen Bank model can be the prototype. To scale down the model will require a careful study of the model, and looking at the case study countries’ peculiar economic challenges. Furthermore, the bank’s team should work closely with the economic planning teams of these countries to learn sets where they will exchange ideas, share best practices and generate action points. The economic teams will then pass on the blueprint to the states and then to the local governments which will implement the action points at the grassroots level.
For instance, unemployment rates as of the first quarter of 2015 in Nigeria, China and Colombia stood at 24.20%, 4.1%, and 9.50% respectively and in Nigeria 50% of the unemployed population are youths. Similarly, the poverty headcount ratio stood at an average of 46.0% between the three countries between 2010 and 2013. The rural areas were the most affected by extreme poverty and deprivation.
For instance, in rural China and Nigeria, over 250 million and 100 million people lived on less than $1.25 a day and $1 a day respectively in 2014. This shows that there is an urgent need to tackle poverty and unemployment among their populations which are predominantly farmers. Since the agricultural sector employs half of the labour force in developing countries, tackling the myriads of challenges that bedevil farmers, particularly low agricultural productivity and inadequate access to rural finance, is crucial. The challenge of rural finance is compounded by the unwillingness of financial institutions including credit cooperatives to lend to rural households which serve to channel farmers’ savings into urban areas thereby increasing rural-urban income gaps.
By introducing the Grameen Bank model to the rural population and unemployed youths in these case study countries, it will enable them to have access to collateral-free loans to start small scale businesses which will have a multiplier effect of generating more jobs and improve agricultural productivity. This will, in turn, improve the food security of their growing population, increase their earnings and raise living conditions.