The structure of the Grameen Bank

Morning everyone, its Friday and it means we have something new for you today :)
We've received many questions from you regarding the "Grameen Bank" so, HNFC wrote whole new article on this topic. Enjoy!

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How does the “bank for the poor” work?
In my previous article about microcredit, I showed you that, according on how Grameen Bank and Muhammad Yunus created this concept, it is much more than just small loans, you can read more about microcredit here. Thus, we may wonder how Grameen Bank works and to what extend it is different from other commercial banks.
But could the answer be really easy: no… according to the structure of the institution. However, as the aim of the “bank for the poor” is to help the poorest people to get out of poverty. Hence it is different from normal banking institutions. It is very interesting to analyze how Grameen Bank uses the banking system to achieve its goal.
 
Grameen Bank is a pure business organization…
We repeated it: Grameen Bank works for the poorest in a social way. There are different types of organizations evolving with the same aim as Grameen Bank: Social Charity, NGO and Business which we can classify into two groups.
In a first group, there are “Social Charity” and “NGO”. A Social Charity is “an organization set up to provide help and raise money for those in need”[1] and a NGO (Non-Governmental Organization) is “a non-profit organization that operates independently of any government, typically one whose purpose is to address a social or political issues” [2]. To get financial resources, the social organizations require funds given by people who do not wait for a return of money. As a big NGO, we can mention Doctors without Borders (Médecins Sans Frontières) or Oxfam for instance.
The second group is composed by the classical commercial companies. The aim of these companies is to extend their business and to maximize their profits. Thus, they get money from shareholders who are expecting returns on their invested money. In the field of the banking industry, we can mention HSBC and roughly any banks as an example.
 
Grameen Bank looks like an NGO in way, as its main goal is to help people from poor regions to survive and to get out of poverty.
However, Grameen is surprisingly a pure business. Indeed, it pays dividends yearly as every company which makes profit. Its shareholders are composed of the State of Bangladesh (25%) and of the borrowers from Grameen (75%): every borrower receives a share at the same time of their first loan. Thus, it creates a financial relationship based on mutual confidence instead of a classic “creditor-borrower” scheme.
If we look in details, the profit of the Grameen Bank was Tk 43.6 Crore (around $ 5.2 million) were distributed for more than 50%.To be precise: Tk 5.83 Crore (almost $ 700,000) to the State of Bangladesh and Tk 17.49 Crore for the rest of the shareholders. As there are almost 9 million borrowers so almost 9 million shareholders, their respective gain is really low: less than Tk 20 which makes less than $ 0.25 only.
 
However, if we compare Grameen Bank with a company as HSBC, we can observe a huge difference. HSBC has only hundreds of shareholders who share more than $ 12 million after the financial year of 2015 (83% of the profit became dividends). It means every shareholder expects thousands or even hundreds thousand dollars dividends every year.
Annual Report and Accounts 2016 – HSBC (P.31))

…in which investors and users are the same players
The huge difference of the amount of dividend received by shareholders from Grameen Bank and HSBC, as we have seen it above, is because these two organizations have two different types of business.
 
On one hand, there is the “classical” business where investors and users are players with different objectives. The customer seeks for low cost and good quality while the shareholder pays attention on the forthcoming dividend and hence the profit made. In this case the price are kept high to enjoy a large profit in order to satisfy shareholders.
 
On the other hand, there is the “new” business where investors and users are the same players. In that case, there is no need to make high profit, so the prices are almost the same as the cost prices. Plus, every shareholder received the same amount of money so it does not change a lot for shareholders.
 
Grameen Bank: a normal organization with a different aim
As commercial banks, the “Bank for the poor” also uses savings to finance credit. To that end, Grameen Bank forces its borrowers to open a saving account at the same time they receive a loan. Moreover, during the pre-loan training, the bank explains to the future borrowers the importance of saving money in case of natural or financial issues.
 
To conclude, we can say that Grameen Bank works as a classical bank but has a different aim and therefore uses the system to reach its final goals.

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Summary:
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​​Written by Etienne Coltat│Independent Stock Analyst

​Edited ​and Corrected
​by Vee Venski

Disclaimer:
​This article is not a promotion of financial investment. ​Investing money in financial instruments is risk-reward process. Losses and gains are part of financial investment process. Only invest money you can afford to lose. ​​​​​​​​​​​