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Skip to 0 minutes and 3 seconds Hello I want to talk about Grameen Bank and what we can learn from their experience. Grameen Bank has been a very very powerful institution in its own right. Today it serves over 8 million customers in Bangladesh, but more than that Grameen Bank has been the inspiration for the entire microfinance movement. There were other pioneers but no founders no pioneers were as public and as articulate as Muhammad Yunus. So today I want to go back to the nineteen eighties and then nineteen nineties to see what was so exciting about Grameen, and to see what we can learn looking back at their experience. Grameen Bank showed that microfinance could be very attractive for donors.

Skip to 0 minutes and 51 seconds Grameen Bank established that poor customers, poor women in remote villages even could be bankable but they only wanted small sized loans and hopefully that would increase their productive power and ultimately allow them to gain income that would reduce poverty and introduce a fundamentally new way of Banking.

Skip to 1 minute and 18 seconds Donors were attracted by this for a number of reasons: one, it’s always appealing to help people help themselves, but there’s also a more practical reason which is the donor saw that they could help to start a bank like Grameen and then eventually Grameen could become profitable and then the donors could remove themselves, and so subsidies and grants were just meant to be temporary as they planted seeds in different places to start new microfinance institutions or to build in new areas. So the idea of microfinance was always very commercial as an ultimate goal but there was always a place for subsidy to get things going.

Skip to 2 minutes and 4 seconds So it’s helpful to look back on the real experience of Grameen Bank, because one of the powerful claims that Muhammad Yunus and others made was that while Grameen was growing and expanding and serving millions of poor women in Bangladesh they were also making profits, not huge profits, but profits nonetheless. And in fact, if one looks at that crucial period from when they started as a real bank in the middle eighties, in the nineteen eighties, to a period in the middle nineteen nineties Grameen claimed that over that period in fact they had earned profits something to 1.5 million US dollars. That’s very impressive given the kinds of places they were working.

Skip to 2 minutes and 53 seconds I was curious about this claim because it’s so important as a part of the narrative in part of the appeal of microfinance so I want to go back to the data and really understand how Grameen had done that. Now, counting profits should be simple no profit is just simply revenues minus costs. But when we look at a microfinance institution it turns out not to be so simple. What are revenues? What are costs? Especially for an institution which is receiving subsidy. And so when we looked at this we went back to revenues.

Skip to 3 minutes and 32 seconds Now first revenues, the obvious source of revenues, is that as a lender you’re making loans and you’re receiving interest back from your borrowers, so that’s the most important source of revenue. But it turned out that Grameen Banks was also including grants from donors as part of their revenue now that certainly was part of their income, as part of what made them work, but it wasn’t part of their commercial enterprise, so if we want to really understand the profitability of Grameen Bank we need to remove those grants to see what they were really just earning from their lending business. So that step removes about 16 million dollars worth of what they counted as profit or what they counted is revenue.

Skip to 4 minutes and 21 seconds Now that’s the revenue side, but what about costs? So it’s also a little unclear. One step in calculating costs for a bank involves making provisions for loan losses. The banks make loans not all of the loans will be repaid. Almost all will be paid, but not all of them. So a bank has to account for that when they calculate the profits and losses. It turned out the Grameen Bank was not being very standard, was not using standard accounting methods to do that provisioning to make those accommodations.

Skip to 5 minutes and 5 seconds Grameen was setting aside money for assuming about a one-percent loan loss rate whereas in fact about five or six percent of the loans were not being repaid after two years, so by my calculations that was another 20 to 40 million dollars that was not being properly accounted for, and those also have to be added to costs. And then the last component has to do with the costs of capital. Now most banks that you know they probably take savings and they pay their depositors and interest rate and those are the cost of capital. They use that capital, those savings, to then lend to other people.

Skip to 5 minutes and 46 seconds Grameen Bank, like most other microfinance institutions, instead borrowed money from outside and lent that to poor people in villages in Bangladesh. A lot of the money came from donors. And when the money came from donors, they did charge interest on those outside loans, but the interest that was charged was very low, it was very low relative to the true commercial value of that money, so there’s an indirect subsidy also involved in the cost of capital. This turns out to be a big thing. Grameen on average was charging about two or three percent for its interest on the money they were borrowing from outside.

Skip to 6 minutes and 36 seconds My calculation and the calculation of other experts is that they should have been paying about ten to fifteen percent as interest on that money. What that means is there was an indirect subsidy about 81 million dollars coming through those outside loans and another 47 million coming through an equivalent calculation having to do with their assets or equity. So putting it all together Grameen reported profits about 1.5 million dollars but once we do all of these adjustments we see in fact there was a subsidy, not a profit, a subsidy of about a hundred and seventy five million dollars over this period 1985 to 1996.

Skip to 7 minutes and 22 seconds So that subsidy is about eleven cents for every dollar lent, about eleven percent of their loan portfolio was covered by subsidy. Now there’s nothing wrong with subsidy the purpose of this exercise is not to criticize Grameen Bank, not at all. Grameen Bank has done inspirational things in very difficult environments. The point of the exercise is to be transparent about the use of money. Much of the subsidy is hard to see. It’s indirect, is coming through these soft loans and soft equity. This subsidy i think in many ways a very good thing, it permitted the growth of a world-changing institution, it inspired a global movement, and Grameen is certainly not alone and using subsidy.

Skip to 8 minutes and 18 seconds So there’s nothing wrong with subsidy, but we need to have an open and transparent conversation about how to use subsidy and how important it has been in creating the microfinance movement.

Importance of subsidies in the emergence of the microfinance sector

We understand that funding is crucial to sustain for social enterprises. Most microfinance institutions started their operations with subsidized funding.

In this video, Jonathan Morduch will talk about the importance of subsidy in the emergence of the microfinance sector, including leading organisations such as the Grameen Bank. Jonathan is Professor at the New York University (NYU), in the US. He is probably the most well-known microfinance researcher in the world. For his contributions in the field of microfinance Jonathan Murdoch was awarded the ULB Honoris Causa distinction in 2009.

Let’s listen to him in the video to find out more about the emergence of subsidy in microfinance!

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This video is from the free online course:

Commercialization of Social Enterprises: Stemming the Tide of Mission Drift

Université Libre de Bruxelles