Tuesday, August 18, 2009

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).


Blogger Muhammad Saeed Babar said...


Reading and thinking about debt / loan, I come to the conclusion so far, First, it is not possible to lend someone without any benefit whether pecuniary or else, Islamic or non-Islamic. So the discussion of usury / interest / mark-up / profit is irrelevant. It will be present in any transaction involving debt; pure loan transaction, credit based trading transaction, Islamic debt "Murabaha", "Ijara" etc. Second, in lending business there shall always be risk of default because future is an unknown entity, anything can go wrong beyond our most sophisticated analysis or our wildest dreams. The conventional institutions have legal recourse and illegal methods to recover the amount. In Islam there is only one way and that is what is prescribed by Allah (SWT) "If the debtor is in a difficulty grant him time till it is easy for him to repay. But if ye remit if by way of charity that is best for you if ye only knew." If this is not possible, then there is no business of lending in Islam or credit based transaction in Islam or Microfinance in Islam.

2:43 AM  
Blogger nhusain said...

Hassan Nemazee iranian has been arrested on flimsy fraud charges at the airport.
Someone needs to cover this story and expose the double standards of the US justice system. They leave all the big bankers who destroyed the economy but charge muslims on flimsy charges when they get the chance.

9:44 PM  
Blogger nhusain said...


Islamic banks continue to defy the odds!

11:54 AM  
Blogger nhusain said...

How can credit union be halal when they take interest from the mortgagor and pays interest on deposits.

11:42 AM  
Blogger Mahmoud El-Gamal said...

Credit unions do not pay interest on deposits: they pay dividends on shares (their "depositors" are actually shareholders, as the Islamic banking rhetoric - but not practice - suggests). As for charging interest on the mortgage, please see my argument on mutuality and nonprofit status (again a characteristic of credit unions). We can disagree on the nature of riba if you equate riba to interest. I think that making a profit on embedded interest in credit sales (murabaha finance) or leases (ijara finance) is much more ribawi than charging the zero-profit-mandated interest as compensation for cost of the loan (which jurists allow in qard Hassan, righteous loan: you can charge fees to cover your costs).

11:46 AM  
Blogger nhusain said...

Dear Mahmood,

I understand that taking interest from the mortgagor is used to cover costs, since the credit union is a non-for profit organization.

Since the shareholder is supposed to be supporting a non-profit organization on what basis is he getting a "dividend" i.e. from an islamic perspective?

11:39 AM  
Blogger nhusain said...

According to wikipedia

"Afghan credit unions are called "Islamic investment and finance cooperatives" (IIFCs) to comply with Islamic lending practices."[14]"

12:47 PM  
Blogger nhusain said...

I need a fatwa on credit unions.

10:41 AM  
Blogger nhusain said...


Muslim credit union has started in Houston.

12:05 PM  
Blogger Mahmoud El-Gamal said...

I believe that this is one of two Ismaili (Agha Khani)-community credit unions here in Houston, and they are only available for members of the various Ismaili-community's jamat khanas.

12:23 PM  
Blogger nhusain said...

Since the rates on the checking accounts and savings accounts at the credit union are subject to change periodically it may be acceptable Islamically. Since Islam allows a benefit on a loan as long as that benefit is not guaranteed. Its a stretch but something worth noting.

1:38 PM  
Blogger nhusain said...

Money talks Im sure that if they open up a 0% interest checking many sunni Muslims would deposit their money their. Sunnis love the 0% as you know. The further advantage is that it would reduce the cost of funds for the credit union. Also coming back to this point of taking interest on deposits. If someone has a loan with them and he is paying interest to them and at the same time receiving interest on a deposit. The interest he is receiving may be considered as a rebate from a shariah perspective. The only issue would be that the amount of interest on the loan typically would be much larger then the amount he is receiving.

5:27 AM  
Blogger nhusain said...


This is an interesting halal home financing program out of Ohio. They serve the whole USA.

10:34 AM  
Blogger Parvez said...

How can i get your paper titled "Islamic Finance, Petrodollar Recycling, and Economic Development"


8:58 AM  
Blogger nhusain said...


Im a big fan of Egyptian culture, scholars etc. do not get me wrong but I have several comments on this issue.
The biggest mistake done by the Egyptians is that they did not give proper protection to the Algerian delegation who were guests. They knew this was a high pressure match. After the hooligans attacked they said “ma7aslsh haaga” and everyone saw what happened in the media. They should have immediately accepted their responsibility and sought to arrest the trouble makers.

This is what inflamed the situation. The Algerians retaliated in a stupid way and that was to impose a .5 a billion dollar tax on Orascom and Egyptian cell phone company instead of seeking to arrest the perpetrators of violence against Egyptians in Algeria. But if our Egyptian brothers handled the issue properly all the trouble may have been avoided.

What was further upsetting is Gamal Mubarak acting like a crown prince watching the match in Cairo and his brother Alaa whose source of wealth is unknown. These brothers are acting like royalty in a country that is pretends to be a democracy.

1:06 PM  
Blogger nhusain said...

Islamic bonds in dubai are collapsing big time. I have another prediction. First we had a subprime problem, then it was said that only subprime was the problem. They said "A paper" and freddie/fannie are good. Then freddie/fannie "A paper" had problems. Now they are saying Islamic mortgages are good. I think there will be a lag and then the Islamic mortgage companies will follow the same path as mentioned above.

9:54 AM  

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