Session 12, Case study

The Grameen Bank, Bangladesh: Mizapur Branch (disguised branch name)

The Mizapur branch of Grameen bank was established in 1982, six years after the bank itself was started. It was the 32nd branch of Grameen Bank to be set up. Mizapur is a typical densely populated area in rural Bangladesh, about 100 km from Dhaka. Most of the villagers have very small landholdings, and many have no land at all; they subsist on the meagre daily wages they can earn by working on the land belonging to the few larger farmers. Nearly every household also earns extra money through non-farm activities, which are usually run by the women.

Nirjahan Begum is one of the 1,700 customers of the branch. She has no land, and her husband was an agricultural labourer. She used to earn a little extra money by weaving mats, but the trader who sold her the material on credit, and bought back the mats, allowed so small a margin that the business earned practically nothing. Her husband died in 1995, and a neighbour invited her to join a Grameen Bank group shortly after he died. Over the next two years, she took three loans to finance her mat-making business. She has made all the repayments when they are due, and in addition to taking care of her three children, she has also been able to repair the roof of her house and to buy a calf and some chickens.

By 1998, the branch served about 1,700 members in 384 ‘groups’, which were in turn organised into 70 ‘centres’. In addition, some 300 customers who were not members of groups used the bank for deposit account facilities. Over 95 per cent of the clients of the branch were women, and they took loans for a vast range of different purposes, such as petty trading, livestock, paddy processing, and many others.

The branch had 11 staff members, two of whom were women. They were all university graduates from urban areas. The staff members were paid at the same rates as government employees, and trained for six months, largely in the field. Many recruits resigned during this training because they decided that they would prefer to work in the city, but jobs were scarce, and those who stayed said they are proud to belong to the Bank, and that they gain a great deal of satisfaction from their work.

The Mizapur staff was proud of the results of its branch. It was one of the most profitable of the Bank’s over 1,000 branches; Prof. Mohamed Yunus, the founder of Grameen Bank, had visited the branch on several occasions to congratulate the staff on its work. Visitors from overseas also came to the branch from time to time, because it was reasonably accessible, and because it exemplified the success of the Bank.

Prof. Yunus established Grameen Bank in 1976. Teaching economics at a local rural university, he had observed how difficult it was for landless villagers to earn enough to live on. They could not even afford the tiny amounts of capital needed to undertake their non-farm activities, and the moneylenders’ loan interest rates were so high that they absorbed most of whatever the people could earn.

Prof. Yunus began by lending a small sum from his own money to a small group of women, and when they paid it back exactly as agreed, he eventually managed to persuade the local commercial bank to lend him money for more loans of this type. They said that they could not lend directly to illiterate village women, who had no collateral, could not possibly cope with the formalities of borrowing, and would certainly not be able to repay.

Prof. Yunus was convinced that the traditional bankers were wrong, and he extended his own experiments. In spite of his efforts to work with the existing commercial banks, it eventually became necessary to set up a completely new bank; hence, Grameen Bank was incorporated in 1983.

The Grameen Bank system, which has evolved over time and is still developing, is based on groups of five members, organised into centres of about seven groups. Only the very poorest people are eligible for

membership, and the bank workers visit every prospective member’s home to ensure that s/he does not have more than $ 50 or Rs 2,500 worth of assets or half-an-acre of land. Traditional bankers are astonished at a bank, which insists that its borrowers should not have collateral, but they are also astonished by the average on-time repayment rate of 98 per cent, which Grameen Bank achieves.

The group members have to learn the simple procedures of the bank, and to sign their names, but they do not receive any training in business or in the activities they wish to undertake. After they have demonstrated their solidarity by meeting promptly at a fixed time and saving a small sum regularly every week for a short period, they become eligible for loans. They also have to learn some simple physical exercises and a drill, which they go through at every meeting.

The members themselves decide what activities they will undertake, and how much money to borrow. The average loan is around $ 100 or about Rs 5,000, while the maximum is $ 750. Members are eligible for increasing loan sizes over time, depending on their repayment performance. The members know what activities are viable in their communities, and what their fellow villagers can do, and the bank has so far financed over 1,000 different types of micro-enterprises.

The bank worker, who bicycles out to attend their weekly meeting in the village to collect member’ savings and repayments and to receive new loan applications, merely checks that the application is in order and that the whole group, and the centre, are in favour of it. This is vital, since every member of a group, and eventually a centre, is responsible for every other member’s repayments in case of default, and no member of a group can apply for a new loan if any other member is in arrears.

Loan applications are approved and disbursed within 10 days at most, and the only time that the members have to visit their branch is when their loans are disbursed. All their other banking business is transacted at the weekly meetings, which usually take place early in the morning before farm work begins. Discipline and punctuality are strongly enforced, by the members themselves; if a member, or the bank worker, is late for a meeting by even a few minutes, s/he pays a fine into the centre’s fund.

Every loan has to be repaid in 50 weekly instalments, starting the week after it is disbursed. Interest is charged at the rate of 20 per cent per year, but when the total of the various savings and emergency insurance fund contributions that members have to pay is added to the interest, the total actually amounts to over 30 per cent of the loan amount. This is well over the rate charged by commercial banks but the members pay without difficulty and the high rate, as well as the small loans and regular repayment, ensure that only people who really need the money will try to join; richer people can get larger loans more cheaply elsewhere.

The bank has grown rapidly. By 1998, it had well over 1,000 branches and over 2 million members, 94 per cent of whom were women. There were about 12,000 staff members. Monthly financial accounts for the whole bank, and for each branch, are produced and circulated within three weeks of the end of each month, and the manager and staff of particularly successful branches receive substantial bonuses. Staff members who fail to perform are warned and may eventually be dismissed.

In the early years, the government contributed substantial capital and was the majority shareholder, but later on the Bank’s capital requirements exceeded the government’s ability to subscribe, and the members now own 88 per cent of the shares, through converting a part of their savings into share capital. Also, nine of the 12 directors are women members from villages, elected by their fellow members. In 1997, Grameen Bank as a whole had some $ 250 million of loans outstanding. About $ 115 million of this was financed by the members’ savings and equity, and the balance of the funds came from loans to the bank from overseas, which are generally made on concessional terms but have to be repaid; Grameen Bank is a bank, not a project.

The following simplified set of the accounts of the Mizapur branch for 1997 shows the sources and uses of money, and the operating income and expenses.

Grameen Bank Bangladesh, Mizapur Branch

Simplified balance sheet, as on 1 January 1997

Assets Liabilities

Cash negligibleLoans and interest outstanding $ 1,35,000 Members savings and funds $ 80,000Fixed assets $ 17,000 Owed to head office $ 72,000Total assets $ 1,52,000 Total liabilities $ 1,52,000

Simplified income statement, for the year ending 31 December 1990

Income Expenses

Interest on loans $ 16,000 Interest on deposits and loans $ 5,000Total income $ 16,000 Interest on funds from head office $ 3,000

Operation expenses $ 6,000Total expense $ 14,000Branch profit $ 2,000

The Bangladesh taka amounts have been converted at the approximate exchange rate of 50 taka = $ 1.

Session 12, Case study

Bank Rakyat Indonesia: Contoh Unit

Note: The US dollar amounts mentioned in this case study have been converted from the Indonesian rupiah at the rate of Rp 2500 = $1 or Rs 50, which was the approximate exchange rate in December 1996.

With a population of 30 million in less than 50,000 km2, the Indonesian province of East Java is a densely populated area with many bustling cities and towns. Nevertheless, the region remains primarily agricultural, with numerous small towns and villages dispersed among carefully cultivated rice fields. One such town is Contoh (not its real name), located about 120 km south of Surabaya, the provincial capital of East Java.

Surrounding the town of Contoh are 24 villages, which make up the sub-district of Contoh. Within the Contoh sub-district live about 30,000 families—more than 1,20,000 people. The vast majority of the population depends on agriculture for its livelihood: either by farming or by transporting and/or trading crops.

Although rice is by far the largest crop, corn, cassava, sweet potatoes, and other fruit and vegetables are also grown. There is also some small industry, much of it home-based, and trading in coffee, soap, shampoo, and other cosmetic goods. About 25 km from Contoh is the district capital of Malang, a hill town established in the late 18th century as a coffee-growing centre.

There are three commercial bank offices in Contoh, which serve the sub-district. Two of them primarily serve larger- and medium-sized borrowers, while the third, BRI, primarily serves smaller borrowers. In addition to the banks, there are also individual moneylenders who work in the market or offer door-to-door credit. However, the interest rates charged by the moneylenders are usually substantially higher than the rates offered by the banks. By one account, BRI has about 50–60 per cent of the market of small borrowers in the area.

BRI is a century-old, state-owned, commercial bank whose traditional mission was to provide financial services to rural areas of Indonesia. Headquartered in the capital city of Jakarta, BRI is Indonesia’s largest bank in terms of total employees and number of banking offices. BRI has 323 branches in Indonesia, located in large cities and district capitals. Under each BRI Branch is an extensive network of local banking offices, or Village Units.

The Contoh BRI office has been in Contoh since the early 1970s and is typical of the 3,595 BRI Units, which are usually located in sub-district towns or small commercial centres throughout Indonesia. There are also more than 400 BRI service posts, which operate under particular Units in areas where there is not enough volume to warrant opening a Unit. These posts are manned by two people, and are open for one or more days a week; the Contoh Unit does not have any of these posts attached to it.

The Contoh Unit is one of 18 Units under the Malang Martadinata Branch, which in turn is one of 35 branch offices under the Surabaya BRI Regional Office. There are $ 6 working in the Unit: a Unit Manager, two Credit Officers, two Deskmen/Book-keepers, and a Teller.

One of the Contoh Unit customers is Mr Wasis. He and his wife live with their three children about 5 km from the Unit. Mrs Wasis makes meatballs and soup at their home every day, which her husband sells door-to-door in the surrounding villages. In 1987, to help him buy raw materials, he borrowed $ 20 or about Rs 1,000 from an informal moneylender, who offered door-to-door credit in his village. He immediately had to

repay two dollars, followed by 30 daily instalments of 80 cents, making a total of $ 26, or $ 6 interest for

the use of $ 20 for just one month. When his uncle, a former BRI Unit customer, heard about this loan he recommended that Mr Wasis go to BRI to get a loan.

He went to the BRI Contoh Unit, and was told that the BRI Unit System had only one type of loan called ‘Kupedes’’ (an abbreviation for General Rural Credit). These loans, from as little as $ 10 up to a maximum of $ 10,000 (about Rs 500 to 5 lakh), were available to support any ongoing, credit-worthy, productive activity. Mr Wasis would have to provide collateral, for which he was prepared to hand over his title deed. His uncle had told him, however, that BRI was willing to accept less formal documents, such as tax bills or receipts, if borrowers did not have title deeds, and they would also accept other fixed or movable assets from borrowers who did not own their own land.

The term of most Kupedes loans was between a year and three years, depending on whether they were for working or fixed capital, and most loans had to be repaid with monthly instalments. Mr Wasis was told that the interest rate was a flat 2 per cent per month based on the original balance of the loan. However, if he repaid the loan on time within a six-month period, he received half of 1 per cent back, as a ‘prompt payment incentive’. This meant that the loan would actually cost 1.5 per cent per month, on a flat basis. This 1.5 per cent Kupedes interest rate works out to an effective annual interest rate of 32 per cent on a declining balance basis.

Mr Wasis filled out a loan application, giving the purpose of the loan, his borrowing history, the amount and terms requested, and a brief description of how the money would be used. Mr Wasis worked with the Unit Credit Officer to figure out what his loan repayment capacity was, based on his current income and expenses. The BRI Credit Officer visited Mr Wasis’ home to get more information about his business, and he also spoke to a village official who could vouch for Mr Wasis’ character. About a week later Mr Wasis received a $ 120 Kupedes loan, which he had to repay in 12 equal monthly instalments. As long as he could make his monthly payments on time, the Unit staff did not attempt to dictate, or closely monitor, how he used the loan.

His business progressed well, and in 1991 he took out another Kupedes loan in order to buy a market stand. He paid back this loan in 18 equal monthly instalments, after which he immediately received another loan.

Mr Wasis also opened a savings account at the Unit to safeguard his money. The Unit staff suggested that he open a Simpedes account, which allowed an unlimited number of withdrawals, and offered a competitive interest rate. As a Simpedes customer, he was automatically eligible for semi-annual lotteries in which motorcycles, television sets, radios, and other prizes were awarded. Mr Wasis used the account regularly—with the account balance fluctuating between $ 100 and $ 1,000—for his changing cash needs.

In the 10 years that Mr Wasis has been a customer of the BRI Contoh Unit, he has received six Kupedes loans. At the beginning of 1997, he borrowed $ 2,400, which he was repaying in 24 monthly instalments of about $ 140 each. During that same period, his sales grew at least seven-fold and at the time of his seventh loan, they averaged about $ 80 per day. While he still works in the market from about 6.00 a.m. till 3.00 p.m. every day, he now employs two relatives to assist him.

BRI Unit history, structure, and performance

Mr Wasis was just one of the 718 outstanding loans in the portfolio, valued at about $ 6,00,000, which the Contoh Unit staff managed as of December 1996. Of the Unit’s loan portfolio, about two-thirds were classified as trading loans and 20 per cent were for agriculture. In addition, the Unit had more than six times as many saving accounts, which totalled almost $ 8,00,000.

The Contoh Unit was among the first BRI Units established when the Unit Banking System was initially developed in order to provide subsidised government credit to rice farmers. In 1973, a network of almost 3,600 BRI Units was established in rural areas of Indonesia to carry out the credit component of a government fertiliser-intensive rice cultivation programme. Under this programme, the Units were a typical example of targeted subsidised rural finance with little savings mobilisation. They did not charge interest rates high enough to cover their costs, experienced high default rates, and consequently incurred losses in all but one year from 1970 until 1984.

By the early 1980s, it was clear to policy-makers that the credit component of the programme should be discontinued and that the Units would either have to be closed down or fundamentally restructured. Rice cultivation was also becoming proportionately less important to the rural population as they became more prosperous, and there were more opportunities in other areas. At about the same time, the Indonesian government announced financial reforms, which allowed banks to set their own interest rates. The Ministry of Finance encouraged BRI to commercialise the Unit Banking system by setting interest rates high enough to cover the cost of funds, overheads, and loan losses, and return a profit. This, followed by BRI’s successful efforts at savings mobilisation, led to the creation of one of the most wide-reaching sustainable and indeed profitable rural banking networks anywhere in the world.

Between 1984, when Kupedes loans were first introduced, and the close of 1996, BRI Units had lent out the equivalent of almost $ 10 billion, or about Rs 50,000 crore. Losses were small. The long-term loss ratio of Kupedes loans—the ratio of the cumulative amount due but unpaid, to the total amount due—for that period (1984–96) was only 2.2 per cent.

Each Unit is viewed as a separate profit centre, has separate financial statements, and is expected to cover its costs and earn a profit. In 1996, 95 per cent of the Units were profitable. At the end of 1996, there were 2.5 million Kupedes loans outstanding, totalling about $ 1.6 billion. BRI Units made an average of over 1,50,000 loans per month in 1996, with an average loan size of $ 900 or Rs 45,000.

About a quarter of all the borrowers are women, but it is estimated that a somewhat greater proportion of the total amount borrowed is actually used by women because many loans which are taken by husbands, because land is usually registered in their names, are actually used by their wives. When the Village Unit system was introduced, the management had considered using some form of group mechanism, but it realised that there was no local tradition of loan guarantees outside the family. They, therefore, decided to lend only on an individual basis, and they have maintained this policy since.

At about the same time Kupedes was introduced, BRI conducted extensive studies on rural savings potential; shortly after, it began pilot savings projects. In 1986, BRI introduced a new savings instrument at Units across the nation. This new savings instrument, Simpedes, was designed to meet customer preferences. With a combination of appropriate products differentiated to appeal to various market segments, and effective incentives and marketing efforts, the Unit Banking System has been remarkably successful in mobilising savings. At the close of 1996, there were more than 16 million savings accounts at the 3,595 Units, representing almost 30 per cent of the total number of savings accounts in Indonesia. These accounts had an average balance of $ 175, and at the end of 1996 totalled almost $ 3 billion.

Overall, the Village Unit network deposits are almost double the total outstanding loans. The BRI system allows Units with a surplus of savings to deposit excess funds with their supervising branches, while Units with more outstanding credit than deposits can borrow from their supervising branch to meet their loan demand. Fund transfers between the BRI Branches and Units receive interest equal to the ‘transfer price’, which is set on a monthly basis by BRI and is usually slightly above the top savings rate offered.

The organisation of BRI Units is purposely kept very simple and transparent. Each Unit has at least four staff members: a Unit Manager, a Credit Officer, a Deskman/Book-keeper, and a Teller. As the business of a Unit grows, upto 11 staff members (additional credit officers, book-keepers, and tellers) are added according to predefined, activity-based personnel standards. Units with more than 11 employees are split into two or more Units. The immediate supervisors of the Units are located at the branch level, with each branch supervising about 11 Units.

The BRI Unit staff is recruited from the areas where they work. They are only required to have completed secondary school, but an increasing number now have university degrees. All Unit staff members start as deskmen or tellers, and promotions are made from within. When they join, all staff members receive a one-month basic training course about the Unit products and procedures, at one of the five regional training centres operated by BRI. They receive further training when they are promoted; the centres train about 7,000 personnel every year. Unit staff members also receive on-the-job training from their Unit managers.

The staff receives a bonus of 6 per cent of their Unit’s annual profit as an incentive, up to a maximum of one to two-and-a-half months’ salary, depending on their position. Since 95 per cent of all Units are profitable, this bonus is received by the same proportion of the staff. In addition, staff members are eligible

for semi-annual cash prizes for particular Unit achievements, such as savings mobilisation or loan quality, depending on the needs of the Unit system and the BRI as a whole.

The financial position of the Contoh Unit was approximately as follows in 1996.

Bank Rakyat Indonesia: Contoh UnitsSimplified balance sheet, as of 31 December 1996

Assets Liabilities

Cash $ 8,000 Simpedes deposits $ 6,33,000Kupedes outstanding $ 6,12,000 Other deposits $ 2,77,000Surplus lent to branch office $ 3,50,000 Other liabilities and equity $ 84,000Other assets $ 24,000 Total liabilities $ 9,94,000Total assets $ 9,94,000

Simplified income statement, for the year ending 12 December 1996

Income Expenses

Interest on Kupedes loans $ 2,14,000 Interest expense $ 1,58,000Interest income from branch $ 51,000 Operation expense $ 40,000Other income $ 11,000 Bad debt reserve $ 21,000Total income $ 2,76,000 Total expense $ 2,19,000

Unit profit $ 57,000

The figure for operation expenses also includes the cost of branch supervision. The bad debt reserve was calculated on a standard formula of 3 per cent of the current loan portfolio plus 50 per cent of all balances, which were overdue up to three months past the final due date, plus 100 per cent of all balances, which were more than three months overdue past the final due date. Any loan balances, which were more than 12 months overdue, were automatically written off.

(This case study is adapted from: Harper, Malcolm, 1998, Profit for the Poor, London, IT Publications, Delhi, Oxford and IBH Publishers. This case study was contributed by Patricia Markovich of the Harvard Institute for International Development, who is a Project Adviser to the BRI International Visitor Programme.)