Introduction
As part of the pro-poor agenda exemplified by the UN’s Millennium Development Goals, micro-credit strategies have become a popular tool for addressing poverty in both rural and urban situations and have now been adopted by the World Bank as a key strategy for relieving poverty. Almost unanimously the Grameen Bank in Bangladesh is praised as the hallowed example of the success of these micro-finance schemes, particularly through its assistance to women.
Critically examine how micro-credit works and why Grameen Bank has been able to be so successful: what are its strengths and weaknesses in terms of helping the poor? Discuss possible pitfalls in replicating the Grameen Bank’s success elsewhere.
Main body
This paper would seek to address certain important issues which would be in reference in to the Grameen Bank and its operational activities. The way the Grameen bank raised and the way it is currently operating is one of the biggest success stories to date of the micro-credit financial institute. It proved to be a par above the rest of the micro credit financial institutes and yet it too has certain weaknesses and flaws which would be addressed in this paper.
It would also be seen that what are some of the issues in replicating the success and an anlysis would also be carried out of the sort of structural activities in the other financial institutions as well as the other financial models.
This paper would in other words carry out a cost/benefit analysis in order the costs and benefits of implementing the Grameen success elsewhere.
If one was to define what was meant by Microfinance it could be defined as the efforts or the initiatives which are taken by certain organizations in order to ensure that a certain section of the society has greater access to loan and saving faculties and over time is recognized worldwide as one of the most successful tools to eliminate poverty.
The examples can be quoted of organizations such as those in Paxton (1996) which provided loans of an amount tantamount to 13 million loans which in worth seven billion USD. Grameen bank is one the biggest success stories of such initiatives ,began in 1976, it constituted around 260 million USD and its members list was quite vast as it entailed around 2. 3 million people. The fact that its success rate of collecting payments averages 90 percent and in certain cases even more speaks volume for the sort of success rate this organization has been able to achieve.
One of the factors which greatly goes in the favor of this organization is the fact that despite having to face some of the worst natural disasters along with cultural constraints targeting its major clientele; women, it was able to recover most of the its investments. In fact, this bank inspired many such initiatives in regions such as the Europe, US etc.
What has to be taken into notice is the fact that cans microfinance aid in all purposes and whether it in certain cases becomes the major source of development overshadowing other such developmental projects and initiatives. These developmental projects include the provision of water, food and basic infrastructural faculties. Some prior studies were carried out in order to analyze the effectiveness of the Grameen bank but these studies failed to provide a detailed cost/benefit analysis.
The flaws with some of the earlier research included the fact that if the presence of Grameen was not to be considered and in certain cases, the impact value was also quite hard to calculate. This paper would try to inculcate the necessary information in order to provide a detailed cost/benefit analysis. Though the Grameen bank can be considered to be one of the leading financial institutes, yet there are certain drawbacks to this institute which are in most cases overlooked by the people.
This paper would try to evaluate all the necessary facets of the Grameen bank while at the same time to have a comparison analysis of the subsidies provided by the bank with its outputs. The subsidies would allow a more accurate and easier comparison at the same time. if one was to quote an example of such an analysis, the subsidy which was for the members was around 20 USD during the 1990s which if compared to the subsidy on borrowed amounts was around 0. 22 USD hinting at the sort of excess levels which have been available to Grameen and the reasons behind their occurrence.
This paper would seek to address the sort of benefits which are provided by Grameen to its users and would evaluate them in terms of the costs to the users in order to determine whether the structural arrangement of Grameen would result in a resounding success for the other related financial institutions. If one was to weigh what the Grameen bank is actually worth to the users that would be certainly be difficult due to the qualitative element which is associated with this sort of research.
If one was to analyze the costing structure go Grameen, what would become apparent is the fact that Graeme’s current profit structure is one which presents the profit sheet of the bank to be within moderate limits and the interest rates are also presented as lower than other money lenders.
Another factor which strongly benefits Grameen bank is the fact that it has positive user surplus which allows this institution to create strong customer loyalty and make use of its understated profit statement. The fact that most of the clientele of this institute is poor highlights the success of this institute in garnering the support of the poor class and providing them with the necessary services.
The fact that Grameen bank has over 3 million users proves that this institute has been able to reach out to a number of people highlighting the sort of customer confidence that this organization has been able to initiate.
The fact that Grameen bank is being provided subsides has allowed it to secure necessary capital for its users but its current capital inputs are sufficient to survive the cut-puff of these subsides proving the success of this organization and its ability to raise the sort of capital required for this project. Grameen has been offering the savings option but at the same time, it restricts the user in terms of the forceful savings and the limits on withdrawal.
In order to have a cost/benefit analysis, this paper would compare the surplus per output to the subsidy per user output.
Hence, allowing an effective comparison between the benefits and the costs to the user. In one was to analyze the different factors which make up the subsidy and the surplus values in order to create a cost/benefit evaluation , what would come across are certain factors such as the cash flows from the private and the public bodies, lack of externalities, discount on public debts, ownership of shares, dividends and taxes.
While some of these allowed the inflows to rise, at the same time there were other factors which increased the outflows adding to the costs of Grameen.
In terms of the externalities, the surplus became positive which allowed Grameen to incuse positive returns while at the same time what has to be understood is the fact that the discount on expenses aided the purpose of Grameen to a great extent as well.
The discount on expenses allowed the provision of loan losses which allowed Grameen to decrease the overall reported profit. Also, the discount on public debt would result in the actual profit to be actually lower than the reported profit as well. The ownership of shares is another factor which if considered can be considered in the light of the liquidation of Grameen bank which would result in the share price rising in value as well.
The aspect of the dividends and taxes has allowed Grameen bank to decrees the figure of the reported value as well. If one was to evaluate the above costs and benefits, what would come across is the fact that this bank has been able to earn more surplus than the subsidies paid.
According to a study which was carried out by Latif (19940 and Schuler and Hashemi (1994), it was proven that Grameen has been successful in increasing the usage of contraceptives amongst women which is another factor going in the favor of Grameen Bank.
According to a study carried out by Khandker et al (1998), another important fact that came across was that Grameen bank increases the wage earnings on the villagers on average proving the sort of success that this institution has been able to achieve.
Nanda (1999) did a study correlating Grameen membership to the women and their demand for quality health care and it’s proven to be strongly positive again highlighting the successful rate of the policies of the Grameen bank.
Hence, what comes across is the costs-effectiveness of this organization in achieving its aims but whether this can be translated into the success of the other organizations is yet to be seen. In regard to the spillover effects that the micro financing sector has, it will be seen that in the long run it can have a strong effect on the effectiveness of such institutes and determining their success rate.
The two approaches ; subsidy and market target tow entirely different things and what has to be understood is the success with which Grameen was able to incorporate both but the same cannot be said for the rest. The other institutions either weigh towards one theory or lack the sort of strength in the different departments that Grameen bank had.
The fact that it has so many users, and its profitability system would be able to survive the loss of subsidies is something which would be certainly hard to implement in other institutions. Grameen bank made use of its profits to further increase the size of its operations while at the same time keeping its costs to the users low which is indeed a formidable task and hard to emulate as well.
Added to this is the fact that it made use of cheaper lending programmes through the use of a low cost workforce which in this case made effective use of the finds rather than absconding with them as is the case with many other micro financing agencies.
Therefore, though the initial prices offered were quite low but at the same time were sufficed in order to reach desired levels of profitability.
Hence, the Grameen model was a unique case for all the above reasons and in order to emulate it, it would be a tall order indeed and in the case of Grameen many external factors aided as well which would become an uncontrollable factor for others.
Thus, if any organization would hope to emulate the success of Grameen bank it would need to consider certain vital issues while at the same time considering the possibility of this happening.
References
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