Why Grameen Microcredit Loans have such Low Default Rates

Grameen Bank has changed the lives of millions of poor rural Bangladeshis for the better.  Professor Muhammad Yunus, the founder and managing director of the bank, took a chance on a new program of tiny loans to the poor for community development, and his “microcredit” loans, given mainly to women, have proven a wonderful way to empower the poor in their own business ventures.

2006 Nobel Peace Prize

So successful has Grameen Bank’s loan program become that, in 2006, Professor Yunus and the bank shared the Nobel Peace Prize for their efforts “to create economic and social development from below.” (http://www.grameen-info.org, FAQ)

Discernment in Giving

Why does the bank give open preference to women in approvals of micro-loans?  This decision follows the rationale of international humanitarian organizations, whose efforts to deliver food and medicine to needy people were stymied by the actions of the governmental bodies and male chiefs who once received them.  They discovered that delivery of these essential materials to governments and head-men resulted in fighting, looting, and high levels of waste.  On the other hand, if organizations contrived methods of delivery to women in the affected locales (around governmental barriers and male chiefs), women were far more likely to distribute the materials in logical, equitable ways to ensure the survival of the whole community, including the men.

Grameen Bank and Professor Yunus took these principles to heart when they chose to prefer women as the primary borrowers for these microcredit loans.  They relied on studies that showed women who took these loans were more likely than men to use the funds for improvement of their lives and to educate their children.  Since both of these aims buttress the desired results of community development and empowerment of the poor, the decision was a win-win for all parties.

Loan Repayment by Poor People

One of many objections raised by others to Professor Yunus plan was that poor people simply cannot or will not repay the loans they receive.  Grameen Bank has put in place an organizational system to address the payment discipline of borrowers.  Individual borrowers, who are usually rural poor women, are chosen carefully, just as their proposed projects are.  Branch bankers hold considerable delegated authority to make these choices, based on their belief that each successful project not only helps the chosen group of women to repay the loan, but also that each project contributes measurably to the bank’s primary goal, the eradication of poverty in Bangladesh.

The group concept that is built into each project is a large part of the success of the micro-loan system.  The group, whether women or men, exerts peer pressure on the borrower to contribute to the success of the work, which, in turn, makes the community healthier and a bit richer in terms of commerce and savings.