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In Bangladesh, as in many other developing countries,

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In Bangladesh, as in many other developing countries, subsidized rural credits offered by government or state owned banks do not work well. Repayment rates are typically low and loans are often used for political reasons. Contrastingly, the Grameen Bank, started in the mid-1980s, achieved quite high average repayment rates over 97%, even though its borrowers are very poor households and the loan do not require collateral. The nominal rate of interest is around 20% (roughly 12% in real), which is higher than some formal credit, however, apparently much cheaper than typical informal credit. The notable feature of Grameen model, which has been adopted in other countries to form a big wave of microfinance by now, is to lend to groups of borrowers rather than individuals. A typical group consists of self-selected five borrowers, and lending to individuals within the group occurs in sequence. There is no form of joint liability, i.e. group members are not obliged to pay on behalf of a defaulting member, however, Grameen?s policy of not extending any further credit to a group in which a member defaults works as a de-facto joint liability. The Grameen bank also requires the borrowers to observe certain codes of conduct as followings (The 16 decisions of Grameen Bank);(1) We shall follow and advance the four principles of Grameen Bank ? Discipline, Unity, Courage and Hard work ? in all walks of our lives.;(2) Prosperity we shall bring to our families.;(3) We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest.;(4) We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus.;(5) During the plantation seasons, we shall plant as many seedlings as possible.;(6) We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health.;(7) We shall educate our children and ensure that they can earn to pay for their education.;(8) We shall always keep our children and the environment clean.;(9) We shall build and use pit-latrines.;(10) We shall drink water from tubewells. If it is not available, we shall boil water or use alum.;(11) We shall not take any dowry at our sons' weddings, neither shall we give any dowry at our daughters wedding. We shall keep our centre free from the curse of dowry. We shall not practice child marriage.;(12) We shall not inflict any injustice on anyone, neither shall we allow anyone to do so.;(13) We shall collectively undertake bigger investments for higher incomes.;(14) We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her.;(15) If we come to know of any breach of discipline in any centre, we shall all go there and help restore discipline.;(16) We shall take part in all social activities collectively.;(a) (15 points) Discuss the advantage of group lending as opposed to individual lending. Explain why group lending achieves low default rate in average, while other formal credits do not. Be sure to mention incentive mechanism. (150 words);(b) (15 points) The sequential lending strategy, which Grameen Bank adopted, is considered to have an advantage over the simultaneous lending strategy, in which all group members are given loans at the same time. Compare and contrast two strategies and explain the disadvantage of the simultaneous lending strategy. Be mindful of the group lending scheme which Grameen Bank adopts. (150 words);(c) (15 points) The social involvements (16 decisions) make the Grameen bank very different from an ordinary financial institution. Briefly discuss the benefits of those social involvements in terms of economic development. You do not need to discuss all 16. Choose three (groups of) decisions and explain how each of the decisions (or groups of decisions) alters the situation and increases economic growth. Explicitly state the numbers of the decisions (e.g. (1), or (1) and (2)) at the beginning of each discussion. (100 words each)

 

Paper#21595 | Written in 18-Jul-2015

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