Microfinance experience vs. credit union -- Grameen I
I am reading a good book that gives details on the institutional history, structure, and experience of Grameen and Grameen II. The book is Asif Dowla and Dipal Barua's The Poor Always Pay Back: The Grameen II Story, Kumarian Press, 2006. A number of interesting thoughts came to my mind, especially in relation to my thought of using RoSCA-JAK hybrid structures to generate credit unions organically using the existing institutions in Egypt. The notes in this post relate to Chapter 2 of Dowla and Barua's book, which focused on the original Grameen model and its evolution. Quotations from the book will be in quotation marks, followed by my comments/thoughts:
- Interestingly, Grameen itself has a mutual structure, with all members forced to save with the bank, and part of those savings are shares in the bank itself (on which, at least as of 2005, the shareholders did not receive dividends; they received 8.5% interest on their deposits). This begs the question why Grameen was not set up at the outset as a non-profit credit union (more on that later).
- One potential answer is the following: "A major reason for the prior failure of credit cooperatives in Bangladesh was that the groups were too big and consisted of people with varied economic backgrounds... more affluent members captured the organization" (p.18). This suggests, perhaps, that those cooperatives were structured more like mutual savings banks (one share = one vote) rather than credit unions, which are much more democratic in nature (one shareholder = one vote).
- Grameen used presaving to qualify for loans, which I did not know from reading secondary and tertiary sources: "To receive a loan, borrowers were required to save ... [in the form of] deposit[ing] a fixed amount weekly... [in addition to] a 5% deduction from the loan... [as a] group tax. The compulsory weekly savings and loan deductions were used to create a group fund, and the borrowers were paid 8.5% on their deposits." (p.19) This is somewhat reminiscent of JAK structure, except that interest was paid on deposits and charged on loans (mostly at 20% for general loans).
- Branches borrowed from the main office at 12% and lent at 20%, eventually covering their costs and making a profit after three to four years of operation. (p.30) Why is sustainability always associated with profitability? A nonprofit credit union can be more sustainable than a profit-maximizing bank.
- The structure is standard banking practice: the poor had to save and deposit with the bank, earning 8.5% on deposits and 0% on shares; then the bank lends funds at 12%, and the branches lend them on to the poor at 20%. The miracle of Grameen is that it was very successful in growing, mainly by providing credit to those whom the banks did not consider creditworthy or sufficiently lucrative. However, that is not nearly sufficient to suggest Grameen over a credit-union structure, where all deposits were shares earning dividends, and where loans are made at the lowest possible interest rate to avoid losses (without necessarily resorting to the weak argument that at least the interest rate is lower than what loan sharks would charge).