As Professor Muhammad Yunus refined a microcredit approach to breaking the cycle of poverty, he also developed a specific method that enhanced the efficacy of microcredit. This became known as the Grameen Method. After earning his Ph.D. from Vanderbilt University, Professor Yunus returned to Chittagong University in Bangladesh to teach economics. Frustrated by the inability of the economic theories he was teaching to reach people outside of the University, he sought to develop an idea that could reduce the suffering brought on by the 1974 famine. In recounting the experience that led him to pioneer microcredit, he wrote:
I met a woman, Sophia, who made bamboo stools. She was extremely poor, and no wonder. She made only two cents a day making bamboo stools. Why so little? Because she did not have the working capital to buy bamboo from the market for 20 cents. A trader lent her the money to buy the bamboo under the condition that she sell her stools to him at the price he decides. Now you can guess why she was extremely poor. (Yunus “Grameen Bank Story” 1997, 1)
Using his own money, Professor Yunus began making small loans that addressed the basic needs of the poor. Eventually, Professor Yunus located the root of the problem in lending practices and the commercial banks. Since impoverished individuals had no collateral, they could not borrow from the commercial banks. The poor were considered a risky investment and this perpetuated a cycle of poverty. Professor Yunus was determined to reach the poor, and he co-signed commercial loans for community members and began expanding his ideas.
Professor Yunus believed that small scale self-employment was an effective way to creates wages and meet the needs of Bangladesh’s poorest group – women. Professor Yunus began to develop an anti-poverty program that was tailored to women’s needs and was centered on readily available credit for entrepreneurial projects. Professor Yunus refined his ideas for many years. Finally, he saw social capital as a way to solve the lack of physical collateral among the poor and began operating the Grameen Bank in 1976 as a peer-lending institution.
The Grameen Bank (“Rural Bank” in Bangla) is a for-profit commercial bank, which is based on the idea of social capital. It exclusively serves borrowers who join in self-organized, non-family groups of five that combine “peer pressure and peer support” for the process. The borrowers must go through a brief training period. During the training, they learn about the Grameen Method and formally organize a group of five. Two members are then issued small loans. These groups must meet once a week to repay the loans. With each loan successfully repaid, this increases the number of members who may borrow and the amount of each loan. If one member of the group defaults, the entire group is ineligible for a new loan. This cultivates strong incentives among group members to ensure the others’ business success and repayment. The social capital model allows the poor to bind together on a community level, while also being self-regulating and self-sufficient. This reduces the need for borrower oversights and promotes shared knowledge that can lead to entrepreneurial success. The Grameen Method also places the onus of screening and monitoring onto the borrowers themselves, and thus decreases the cost of implementing a program.
The Grameen approach to the group-lending model fosters a powerful social network that produces social capital by engaging borrowers in weekly group meetings. These support networks empower women to expand their businesses, repay loans and prosper in ways that were not made possible by solely providing financial capital.