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Understanding the Grameen Miracle Information and Organisational Innovation Case Solution

Solution Id Length Case Author Case Publisher
1202 712 Words (4 Pages) Indrani Roy Chowdhury
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Grameen bank is known for providing microfinance loans to the poor, mainly focusing on the rural areas. The lender gives loans in the form of groups. The Grameen lending model is one of the most popular methods of micro-financing. Group lending, endogenous group formation, and joint liability alleviate the adverse selection problems as it encourages peer monitoring. If the peers start monitoring their group members, they can reduce the problem of choosing risky borrowers more. Furthermore, Joint liability and peer monitoring reduce moral hazards. It includes two different aspects, Ex ante moral hazard, and Ex post moral hazard. The first one involves when the lender is unsure as to how will the borrower make use of the amount lent to him, while, the latter involves the chances of the borrower running away once he earns returns on their investment. Once the group members are aware of the fact that any default on repayment by one member would have to be paid by them, they make sure that the incidence of running away with profits does not occur.

Case Analysis for Understanding the Grameen Miracle Information and Organisational Innovation

The main aim of the Grameen bank lending model is to provide loans to the poor in the rural areas who do not have any physical collateral. The selection of the people is merely based on the judgment of the lender and the social information provided by others about the borrowers. Furthermore, Grameen bank is focusing on lending to women from the same rural village. This is because it encourages intra household bargaining and women empowerment.

In the Grameen Bank lending model, each group has four to five members. This tends to reduce the risk as it would be difficult to monitor more than five members and, at the same time, two is very less as the group is divided between the safe borrowers and risky borrowers. In this case, the least creditworthy members are chosen first so that if they default risk it can be paid by the safe borrowers and at the same time it also followed the sequential lending and contingent renewal, that is if any of the group members default no group members receive any further loans.

The lending model involves an early repayment system, which is the most appropriate form. The early repayments force the borrowers to look for subsidiary loans from family and even moneylenders. Such bridge loans will be forthcoming provided the borrower is efficient and using the initial loan amount wisely. Also, sequential repayment allows one to tap into information that is available at the local level. Hence, it screens out undisciplined borrowers, gives an early signal to the loan officers and peer group members and the bank gets hold of the cash before they are totally misused.

Microfinance is an effective way of encouraging and giving hope to the poor to survive. Not only can it be effective in the rural areas but also the urban poor of the developing countries can be focused upon too. Grameen bank lending model can be applied here too. However, some changes need to be made. Peer monitoring should be highly focused upon. Also, safe borrowers and risky borrowers should be kept in a different group so as to charge them with different interest rates.

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