Banking Basics

Ways Grameen Banking Differs from Conventional Banking



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The Grameen Bank is a microfinance institution in Bangladesh that facilitates the distribution of micro loans to small and underprivileged debtors. The Grameen Bank is known for its efforts in alleviating the widespread poverty experienced in Bangladesh.  Moreover, Grameen Banks are noted for being "the bank of the poor."

Basically, the Grameen Bank specifically targets the poor and rural communities. More so, due to the bank's efforts in helping the people of Bangladesh, the bank and its founder Professor Muhammad Yunus were awarded a Nobel Peace Prize in 2006.

The system of the Grameen Bank differs from those of traditional banking institutions in many ways.

Solidarity lending

Solidarity lending refers to the borrowing practice wherein small groups borrow funds collectively. In return, the group members help one another in repaying the loan. Essentially, solidarity lending is the main foundation of microfinance institution. Unlike conventional banks which lend money to individuals, the Grameen Bank offers loans to poor communities and villages in Bangladesh.

Collateral-free system

The Grameen Bank's system is a collateral-free system. Individuals and communities can apply for a loan even without any sort of collateral or mortgage that will secure the loan. The Grameen Bank believes that each person, despite his social class, possesses a certain, underrated skill or quality.

Hence, such skill or quality already secures the loan based on the Grameen Bank's point of view. A person's distinct skill or quality is his capacity to pay. Grameen Banks see the hidden potential in every person.

Simple interest

Grameen Banks differ from conventional banks in a way that it does not charge interest beyond amount of the principal. Furthermore, Grameen Banks apply simple interest to all loans unlike conventional banks which normally charge compound interests.

Location

In order to reach the poor and underprivileged people of Bangladesh, Grameen Banks are located in rural areas. The Grameen Bank's main task is to help people fight poverty and by positioning in rural areas, they make themselves more accessible to the poor and underprivileged people.

Higher priority to women

Grameen Banks give high priority to poor women. The Grameen Bank claims that they are owned by poor women. Needless to say, around 97 percent of Grameen Bank's customers are women.

In addition to the differences mentioned above, Grameen Bank also strictly follows a code of conduct known as the "Sixteen Decisions." The Sixteen Decisions is a vow made not just by the bank employees and its officers but as well as their clients. In fact, before borrowing funds, clients are required to recite the Sixteen Decisions and they should promise to follow closely such sacred vows.

 

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