• Corpus ID: 12741471

Grameen Bank: Impact, Costs, and Program Sustainability

@inproceedings{Khandker1996GrameenBI,
  title={Grameen Bank: Impact, Costs, and Program Sustainability},
  author={Shahidur R. Khandker},
  year={1996}
}

• S. Khandker
• Published 30 June 1996
• Economics

Grameen Bank of Bangladesh is known worldwide for its innovative credit delivery to the rural poor. By incorporating group-based lending, mandatory savings and insurance, repayment rescheduling in case of disasters, and similar other schemes, it has been able to minimize both behavioral and material risks of lending. By 1994, Grameen’s coverage had increased to include 50 percent of villages of Bangladesh with more than 2 million members (94 percent of whom are women), with a loan recovery rate steadily above 90 percent. It also has noticeable positive impacts on participants’ economic and social wellbeing, and on the overall income growth and poverty reduction in the village level. To become cost-effective, Grameen Bank should not only expand its outreach, but also diversify its loan portfolio with more growth-oriented activities. This also requires sound macroeconomic policies from the government. Replication of Grameen’s financial model is possible with necessary modifications as long as it is social-conscience-driven and its operations are transparent. ∗ Shahidur R. Khandker is an Economist with the Poverty and Social Policy Department of the World Bank. This paper is based on the findings of a study, .Credit Programs for the Poor: Household and Intrahousehold Impacts and Program Sustainability”, sponsored by the World Bank. The author would like to thank Mark Pitt, Abdul Latif, Baqui Khalily, Rushidan Rahman, Osman Chowdhury, and Zahed Khan for their contributions to this major collaborative study; Hussain Samad for research assistance; Carrie Palma for technical support; and IIyse Zable for editorial assistance. The author is also grateful to M.G. Quibria for suggestions, and three anonymous referees of this journal for valuable comments that helped improve the paper. Views expressed in this paper are entirely his, and should not be attributed to the World Bank, its Board of Directors, or the countries they represent. The author alone is responsible for the remaining errors or opinions expressed herein. Asian Development Review, vol. 14, no. 1, pp. 65-85 @ 1996 Asian Development Bank 66 Grameen Bank: Impact, Costs, and Program Sustainability Shahidur R. Khandker The Grameen Bank of Bangladesh is well-known for its innovative banking for the rural poor, who are otherwise excluded from formal banking because they lack physical collateral such as land or other immovable property. Grameen Bank practices physical collateral-free lending, relying instead on peer monitoring and peer pressure to enforce loan contracts. It also provides members social development inputs (e.g., consciousness raising, health and nutrition training) to make the poor both individually and socially accountable for their actions which include those toward loan repayment and other financial transactions and children’s welfare. Providing access to financial services to the poor, as Grameen Bank believes, would help the poor to be self-employed and would generate income, thus freeing themselves from poverty. Further, providing social intermediation inputs would help them to be financially and socially disciplined. Grameen Bank was established in 1983 as a specialized bank. By 1994 it had mobilized more than 2 million members, disbursed more than US$1 billion, and mobilized US$306 million from the poor. About 94 percent of Grameen Bank’s members are women. Its loan recovery rate has been consistently above 90 percent, an outstanding success for a rural-based financial institution compared with the dismal recovery rate of 25 percent or so for the country’s commercial and agricultural development banks. Its success has attracted worldwide attention and the Grameen model has been replicated both inside and outside Bangladesh. Because of Grameen’s innovative program design, outreach to women, and poverty reduction potential, development practitioners are increasingly interested in learning more about its potential, constraints, and replicability. Grameen Bank has been well-studied in terms of its program design and sources of its success as a rural financial intermediary (Fuglesang and Chandler 1988, Hossain 1988, Jain 1996, Stiglitz 1990, Varian 1990, Wahid 1993); its subsidy dependency (Yaron 1992); its replicability outside Bangladesh (Hume 1990); and its impact on the poor and women (Goetz and Gupta 1996, Hossain 1988, Schuler and Hashemi 1994). Yet, to date no study has been comprehensive enough to examine the benefits and costs of this program, nor been able to identify the causal impacts of Grameen Bank to determine whether the program is generating desirable impacts and if so, at what cost. Analysis shows that Grameen Bank is heavily subsidized by donors and the government, thus, with its performance conditional upon grants and subsidized funds, Grameen Bank possibly cannot survive without subsidy (Bouman and Hospes 1994).1 The question immediately arises whether a subsidy-free operation of Grameen Bank is at all possible and if not, whether the subsidized operation of Grameen Bank is worth supporting. Assessing whether a subsidy-free Grameen Bank is possible requires an analysis of Grameen Bank’s cost effectiveness in delivering financial services over time. However, no study so far has looked at these dynamic issues of self-sustainability. On the other hand, assessing whether a subsidized operation of Grameen Bank is worth supporting requires analysis of its cost effectiveness in generating benefits accrued to the poor and society. But the impact studies have not looked at these issues at all. Moreover, although program impact studies show that the program generates a number of benefits such as income, employment, and other socioeconomic outcomes such as lower fertility and higher contraceptive use, the findings are not conclusive as they suffer from estimation bias, and it is not clear whether program impacts are causal. In fact, without such a study, the long-run effectiveness of a Grameen Bank-type operation which finances microenterprises can always be questioned (see, for example, Adams and Yon Pischke 1992). That means, if the program benefits are not quantified and substantiated, it may be difficult to justify the subsidy that is involved in the operation of Grameen Bank. Similarly, some studies argue that although women are the major participants of Grameen Bank, they may not be the principal beneficiaries, as majority of them have no control over the loan (Goetz and Gupta 1996, Rahman 1986). Although it may be difficult to assess objectively who controls what in the household, one can objectively assess the resource allocation between men and women within a household in both production and consumption and the program’s impact on women’s welfare. 1 Grameen Bank, “an almost lone jewel in a series of mostly dismal failures, is, after two decades of experimenting, still dependent on outside funds to survive” (Bouman and Hospes 1994, 13). 67 Grameen Bank: Impact, Costs, and Program Sustainability Shahidur R. Khandker A common problem of the impact analysis is the sample selection bias. Because program participation is self-selective, program impact studies suffer from such bias and hence, have failed to establish the causal effect of program participation on a participant’s own and household welfare. Similarly, the exercise that shows Grameen Bank’s subsidy dependence does not go on to show whether a subsidy-free Grameen Bank is at all possible and, if so, how. If subsidy is inevitable, then the most relevant question is whether the program is cost-effective both in delivering financial services to the poor and generating benefits accrued to the poor. The paper’s objective is threefold. The first objective is to assess program effects on household outcomes (such as consumption, asset accumulation, and poverty reduction) and individual outcomes (such as employment and education). Identifying these causal effects would help understand whether a credit program such as Grameen Bank produces desirable impacts at the household level that help reduce poverty and increase the human capital of the poor, including women. The second objective is to identify whether a credit program designed for women raises the welfare of a woman and her family and, if so, how. In other words, the objective is whether the identified household or intrahousehold effects vary by the gender of the program participant. The third objective is to estimate the cost structures of Grameen Bank and examine whether it is self-sustainable. Overall, the objective is to find out whether the benefits accrued to program participants justify the economic subsidy enjoyed by Grameen Bank and whether the subsidy can be eliminated and, if so, how. The program sustainability analysis is based on Grameen Bank data, collected from its aggregatelevel records and from a selected sample of branches. The aggregate program-level data spans the 19851994 period, while the branch-level data were collected from 118 randomly drawn branches for 19851991 (for details, see Khandker, Khalily, and Khan 1995). Household and intrahousehold impacts of Grameen Bank and two other programs were carried out based on household survey data of 1,798 households randomly drawn from 87 villages of Bangladesh. The survey was carried out in 1991/1992. A quasi-experimental survey design was used to determine both the independent effect of program participation by gender on a number of household and individual outcomes (for details, see Pitt and Khandker 1996). A comparison of household-level and individual-level outcomes between program and nonprogram villages was carried out for a number of outcomes to see if Grameen Bank has been able to benefit beyond the program participating households. The paper is structured as follows. The second section presents a description of the Grameen Bank, its program design and targeting, and how it addresses the moral hazard problem of lending in a rural setting. The third sec