Grameen bank is known for providing microfinance loans to the poor, mainly focusing in the rural areas. The lender gives loans in form of groups. Grameen lending model is one of the most popular method of micro financing. Group lending, endogenous group formation and joint liability alleviates 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 reduces the 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.
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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 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 credit worthy 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 member defaults no group members receive any further loans.
The lending model involves 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.
This form of lending is only suitable in developing countries only. The social and economic factors in United States vary, when it comes to microfinance, from that of Bangladesh, who specializes in microfinance banking. In many ways, microfinance is more difficult in the United States than in the developing countries. The size of microenterprise sector and the potential market for microfinance is large in the Bangladesh but small, in the United States. There is huge competition from the commercial lenders. Also, there is huge competition from large firms. Furthermore, there has been a case where the first U.S. microfinance programs used the joint-liability model of the Grameen Bank of Bangladesh and failed .The main reason was that the potential for such groups in the United States was low, and there was a slow shift away from them. Lenders failed to manage groups properly, members lacked social capital, and the opportunity costs of group participation were high. Thus, micro financing is not suitable in developed nations like US
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