Professional Documents
Culture Documents
Inception of Grameen Bank
Inception of Grameen Bank
The word “Grameen” came from the word “gram” which means village in English. In 1976, the
Grameen Bank project was born in the village of Jobra; transformed into a formal bank in the year
1983.This bank works exclusively for women. Borrowers of Grameen Bank who are mostly women,
own 94% of this bank and the rest 6% is owned by the government.
In 1979, the bank has expanded to Tangail and that is where we went to experience the bank
an d the way of life of their members. In 1976 when Professor Muhammad Yunus and his
colleagues started giving out tiny loans under a system, which later become known as the
Grameen Bank, they never imagined that some day they would be reaching hundreds of
thousands, let alone three million, borrowers. But the capabilities and commitment of their
staff and borrowers gave them the courage to expand boldly.
In the late 1980s, they started to think of ways in which they could build on the network that
their borrowers represented, in order to accelerate their progress towards a poverty-free
world and also improve Bangladesh's overall economic performance. So, in the beginning,
they got involved in leasing unutilized and underutilized fishing ponds and irrigation pumps
such as deep tube wells. At about the same time, they also became involved in providing
training and other support to people from other third world countries that wanted to adapt the
Grameen methodology.
After some initial successes in the fisheries and irrigation projects, they became interested in
expanding their work by getting involved in other business in various new sectors. By this
time, carrying out all these initiatives under Grameen Bank became unwieldy, and from 1989
they began to establish new organizations.
As they moved forward, they gained confidence and became more and more bold in our non-
banking activities. Independently from Grameen Bank, they became involved in venture
capital, the textile industry, an Internet service provider and much more. Each new initiative
was incorporated in an extending organization or spun off into a new one. This became what
they call the Grameen Family of Organizations.
1
• Reverse the age-old vicious circle of "low income, low saving & low investment",
into virtuous circle of "low income, injection of credit, investment, more income,
more savings, more investment, more income".
2
of outstanding loans stands at US$ 425 million. From January to December, 2005 Grameen
Bank disbursed US$ 612 million.
Projected disbursement for 2006 is US$ 821 million; among this monthly disbursement of
US$ 68.40 million. End of the year outstanding loan is projected to be at US$ 600 million.
The loan recovery rate is 99.01%.
3
Liquidity Ratio:
The liquidity of a firm ability to satisfy its short-term obligations as they come due. Liquidity
refers to the solvency of the firm’s overall financial position- the ease with which it can pay
its bills. The three basic measures of liquidity are 1. The current ratio, 2. Net working capital
and 3. Operating cash flow.
Current ratio measures the firm’s ability to meet its short-term obligations. Current ratio is
expressed as: current Assets / Current Liability. From the table below, it is evident that GB is
maintaining a stable current ratio. GB has almost one and half time the current assets to meet
its every current liability over last five years. The blue line in the graph also showing a stable
line.
GB’s operating performance is also has a stable trend. It is generating over 20% cash of
current liability from its operating activities. Though it is not extra ordinary performance in
terms of financial institution, as a micro finance institute it is in acceptable level.
Working capital is also showing positive and increasing trend, which indicates that GB is
generating more liquid assets than liquid liability. From graph it is evident.
Current Ratio
Operating cash flow
Liquidity Ratio Cash ratio
Growth of NWC
2.00
1.50
1.00
0.50
0.00
2002 2003 2004 2005 2006
-0.50
Year
Profitability Ratio:
4
There are many measures of profitability. Each relates the returns of the firm to its sales,
assets, equity, or share value. as a group, these measures allow the management to evaluate
the firm’s earnings with respect to a given level of sales, a certain level of assets, the owners’
investment, or share value.
GB is retaining 65% - 70% of its earning as gross profit and incurring only 35% - 30% of its
earning as core expense to generate revenue. Operating profit margin is also a healthy figure.
It is about 30% of total revenue in recent years. Operating profit margin could be better if GB
can minimize its operating expense by moving to digital world.
GB’s net profit margin is poor. It is not expected comparing with gross and operating profit
margin. Poor net profit margin is due to more conservative approach. GB maintains high
provision for expected loan loss. The trend of changes of these three profit margins can be
examined from the graph below. Operating profit margin is showing an increasing trend.
Du-Pont Analysis:
5
Du-Pont analysis relates the firm’s net profit margin and total assets turnover to its return on
total assets (ROA). This analysis first brings together the net profit margin with its total asset
turnover, which indicates how efficiently the firm has used its assets to generate sales. The
product of these two ratios results in the return on total assets (ROA).
For Grameen Bank, asset turnover has a stable condition and net profit margin has
inconsistent fluctuation. In 2003, the company performed poorly which lead to a drastically
decrease in net profit margin at 9.99% from 24.11%. Asset turnover also decreased in that
year. The combined effect of this two is a decrease of ROA. Later on GB continues to
improve its performance and continuing a stable ROA.
In second step it employs the firm’s return on total assets (ROA) to the return on equity
(ROE). Here, ROE is measured by multiplying the ROA by the Financial Leverage
Multiplier (FLM), which is the ratio of total assets to stockholders’ equity. That is:
Use of the financial leverage multiplier (FLM) to convert the ROA to the ROE reflects the
impact of leverage on owners’ return. In 2002, GB has gained 36% ROE. It was an
extraordinary performance. The underling reason of this performance was the higher net
profit and higher level of uses of leverage. In 2003, the ROE decreased to 7.63% from
35.93%. the reason of this sharp decline which is evident from the graph is the less uses of
leverage in association of low net profit. In later years, ROE gradually increases and the
latest rate is almost 23% which is handsome for any microfinance institution. Less net profit
suggest that GB has repaid its debt from its operating income. For this reason, the level of
uses of leverage was also low.
6
DuPont ROA ROE
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2002 2003
Year 2004 2005 2006
Activity Ratio:
Activity ratios are used to measure the speed with which various accounts are converted into
sales or cash. A number of ratios are available for measuring the activity of the most
important current accounts like, accounts receivable, accounts payable, etc. The activity
(efficiency of utilization) of fixed and total assets can also be assessed.
Higher payable turnover and lower payment period is also indicates that Grameen Bank has
improved its liquidity position. GB took only 1 day to settle all payables in 2006 where as it
took more than 19 days to make payment in 2002.
Grameen Bank is also improving its efficiency in fixed assets management. In 2006, GB
generates income more than 9 times than its fixed assets. In 2002 it was only more than 3
times. It means, GB is capable to generate more than Tk. 9 by using fixed assets of Tk. 1.
increasing trend in total asset turnover is also supporting the previous statement.
7
Leverage Ratio:
Leverage position means the uses of debt financing. The debt position of a firm indicates the
amount of other people’s money being used in attempting to generate profits.
The debt ratio measures the proportion of total assets financed by the firm’s creditors. This
ratio is consistent over the last 5 years. In 2006, GB uses 90% of assets as debt. That is
higher uses of others money to generate profits.
Debt of equity, debt to capital and debt to assets all these three ratio indicates that Grameen
Bank is reducing its dependence on others fund by reducing debt portion. That is GB is
reinvesting its profit to reduce debt decency.
Financial leverage is concerned with the relationship between the firm’s earnings before
interest and taxes and its net income. Degree of Financial Leverage (DFL) measures the
sensitivity of net income to operating income. That is by the change of 1% in operating
income what is the change of net income. DFL is increasing in every year. It indicates that
net income is more depended on operating income. In 2006, it was 4.32 which indicate that
1% change in operating income will change the net income by more than 4 times. It is over
influence on net income.
Total leverage is the combined effect of this two leverage. That is with the change in both
total and operating income what the effect on net income is. DTL in 2006 is 1.44 which
indicates with the change of 1% the net income will change by 1.44 times. It is good sign for
Grameen Bank because the combined effect of more than 1 is desirable for any company.
8
Item 2002 2003 2004 2005 2006 2007
Change in Operating Income 30.09% 51.09% 89.48% 9.20% -18.02%
Change in Total Income 17.67% 31.26% 57.48% 27.53% 12.11%
Change in Net Income -51.22% 18.07% 137.00% 39.75% -92.35%
DOL 1.70 1.63 1.56 0.33 -1.49
DFL -1.70 0.35 1.53 4.32 5.13
Degree of Total leverage -2.90 0.58 2.38 1.44 -7.62
4.00
3.00
2.00
1.00
0.00
2003 2004 2005 2006
-1.00
-2.00
-3.00
-4.00 Year
The important point is operating expense ratio is decreasing over the years which contributes
in profitability and financial sustainability. The portfolio at risk ratio shows that only 1-2% of
total loan has the possibility to be default, but GB maintains 250-300% loan loss provision
which adversely affects it’s profit and under perform the efficiency of GB.
9
Net income growth -51.22% 18.07% 137.00% 39.75% -92.35%
Deposit Growth 56.15% 40.79% 52.81% 39.85% 17.27%
Loan portfolio growth 47.80% 23.91% 38.62% 18.16% 9.96%
No. Members growth 26.61% 29.13% 37.44% 23.83% 7.27%
Operating expense ratio 24.11% 42.48% 35.60% 32.18% 31.59% 34.90%
Yield on loan portfolio 14.81% 12.85% 13.60% 12.12% 12.61% 13.43%
Personnel expense / Loan portfolio 9.66% 7.00% 6.00% 4.40% 4.22% 5.10%
Portfolio at risk 0.74% 1.74% 1.44% 1.23% 1.20% 2.03%
Loan loss provision/ Portfolio at risk 0.00% 160.66% 276.79% 361.04% 266.18% 228.36%
Cost per borrower (In Taka) 714 614 509 544
Cost per borrower (In USD) 12 11 8 8
Return on Investment:
In calculating ROI we have followed weighted average ROI approach. First we calculate
total investment and the return from that respective investment. Then we have calculated the
average amount of investment in respective investment items. Average is calculated by
adding beginning and ending balance of respective investment class and divided the sum by
two. After that, the weight of each investment class in comparison to total investment amount
is calculated. Then weighted investment of each class is multiplied by the rate of return of
respective investment class. The product is considered as weighted average return on
investment.
Interest income:
Fixed Deposits with 2,904,090,130
409,166,597 489,526,787 655,432,120 851,952,678 1,693,658,097
other banks
Grameen Mutual Fund 0
0 0 0 0 0
- One
Share 0 0 0 0 0 0
On short term deposit 19,913,362
11,668,976 6,435,789 8,366,396 19,339,234 63,907,179
accounts
Total 420,835,573 495,962,576 663,798,516 871,291,912 1,757,565,276 2,924,003,492
Average investment:
10
Fixed deposits with 22,089,412,838
4,005,894,8944,662,609,8416,264,555,365 8,588,251,444 14,845,116,468
other banks
Grameen Mutual Fund 11,500,000
12,000,000 12,000,000 12,000,000 14,250,000 16,500,000
- One
Share 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
On short term deposit 863,539,365
422,969,406 473,541,440 645,715,764 842,958,692 887,350,719
accounts
Total 4,444,864,3005,152,151,2816,926,271,129 9,449,460,135 15,752,967,186 22,968,452,203
Investment Weight:
Fixed deposits with 96.17%
90.12% 90.50% 90.45% 90.89% 94.24%
other banks
Grameen Mutual Fund 0.05%
0.27% 0.23% 0.17% 0.15% 0.10%
- One
Share 0.09% 0.08% 0.06% 0.04% 0.03% 0.02%
On short term deposit 3.76%
9.52% 9.19% 9.32% 8.92% 5.63%
accounts
100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Return
Fixed deposits with 13.15%
10.21% 10.50% 10.46% 9.92% 11.41%
other banks
Grameen Mutual Fund 0.00%
0.00% 0.00% 0.00% 0.00% 0.00%
- One
Share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
On short term deposit 2.31%
2.76% 1.36% 1.30% 2.29% 7.20%
accounts
Weighted Return
Fixed deposits with 12.64%
9.21% 9.50% 9.46% 9.02% 10.75%
other banks
Grameen Mutual Fund 0.00%
0.00% 0.00% 0.00% 0.00% 0.00%
- One
Share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
On short term deposit 0.09%
0.26% 0.12% 0.12% 0.20% 0.41%
accounts
11
The repricing gap analysis is essentially a book value accounting cash flow analysis of the
repricing gap between the interest revenue earned on an FI’s assets and the interest paid on its
liabilities over a particular period of time.
Repricing gap means the difference between assets whose interest rates will be repriced or
changed over some future period and liabilities whose interest rates will be repriced or
changed over some future period.
Rate sensitive asset/Liability means an asset or liability is repriced at or near current market
interest rates within a maturity bucket.
In the table below, we have classified interest rate sensitive assets and liabilities according to
maturity duration.
In the table below, we have measured the changes in interest income. First we measured the
gap between assets and liabilities. Then we assume that with in the investment period the
market interest rate for assets and liabilities will increase by 1%. If interest rate changes then
what will be the impact on interest income of the company is measured in this table. From
the table below, we find the changes in interest income by multiplying the gap with the
change in interest rate. The result is change in net interest income is positive in total figure.
But the change is negative in the class of maturity duration is above 1 year. The negative
change in net interest income reduces the total net income. The negative change is the result
of higher liabilities than assets. Thus we need to match the maturity of assets and liabilities
otherwise we will face adverse change in interest income.
12
Interest Income
rate (6) ( 7=4*6)
Up to 1 month 5,743,998,638 1,987,034,292 3,756,964,346 3,756,964,346 1.00% 37,569,643
Up to 1 - 3
7,961,857,060 7,143,652,801 818,204,259 4,575,168,605 1.00% 8,182,043
month
up to 3 -12
32,482,435,24116,743,828,14715,738,607,09420,313,775,699 1.00% 157,386,071
month
up to 1- 5 years 8,194,775,309 12,897,530,097 -4,702,754,788 15,611,020,911 1.00% -47,027,548
More than 5
341,448,971 7,425,591,561 -7,084,142,590 8,526,878,321 1.00% -70,841,426
years
Total 54,724,515,21946,197,636,898 85,268,783
In the previous table, the change in interest rate was equal for both assets and liabilities. Now
what will happen if interest changes unequally for assets and liabilities? The effect of
unequal changes is calculated in the table below. Calculation procedure is as pervious. The
result is that if the change in interest rate for liabilities higher than assets and the change is
2% or more in favor of liabilities the net change is negative. That is interest rate for assets
changes less but interest for liabilities is higher the net change will be negative. This finding
again suggesting to match the volume of assets and liabilities.
If we want to avoid any uncertainty regarding the changes in interest rate, we have to match
our asset and liability in terms of maturity as well as volume.
13
Sustainability of micro finance institution refers to both financial and economic sustainability
of the programmes. Financial sustainability is necessary to reach significant numbers of poor
people. Most poor people are not able to access financial services because of the lack of
strong retail financial intermediaries. Building financially sustainable institutions is not an
end in itself. It is the only way to reach significant scale and impact far beyond what donor
agencies can fund. Sustainability is the ability of a micro finance provider to cover all of its
costs. It allows the continued operation of the micro finance provider and the ongoing
provision of financial services to the poor. Achieving financial sustainability means reducing
transaction costs, offering better products and services that meet client needs, and finding
new ways to reach the unbanked poor.
Financial sustainability: If the MFI has positive net margin or profit then it can be considered
as financially sustainable. Cost and financial efficiency determine the degree of financial
sustainability. Thus a cost and financial efficient MFI can only be financially sustainable.
The Subsidy Dependence Index (SDI) is the most common way to measure the importance of
public support for Development Finance Institutions (DFIs).
Subsidized DFIs are worthwhile in principle as long as their social benefits exceed their
social costs.
We define social cost as the opportunity cost to society of the public funds used by a DFI less
what the DFI could pay back to society and still break even in a given time frame.
A DFI with no social cost is subsidy independent.
Subsidies for DFIs are not bad unless they could improve social welfare more elsewhere.
Common measures such as accounting profit and ROE do not tell society whether a DFI
creates or destroys social welfare.
Subsidy
The Subsidy Dependence Index: SDI =
Re venueFromLending
14
It tells how much subsidy society gave the DFI for each dollar of revenue collected from
borrowers.
In several papers about the performance of DFIs in Bangladesh, Khandker proposes the
Subsidy Dependence Ratio (SDR) as an alternative to the SDI (Khandker and Khalily, 1996;
Khandker, Khalily, and Khan [KK&K], 1995; Khandker, Khan, and Khalily, 1995). Measures
similar to the SDR have been proposed by Holtmann and Mommartz (1996), SEEP (1995),
and the Inter-American Development Bank (1994).
The main concern of these authors is that the SDI compares subsidy only with revenue from
lending even though DFIs also get revenue from investments in non-loan assets such as
treasury bills. In principle, a DFI could decrease its subsidy dependence through increased
revenues either from loans or from investments.
Thus the SDR suggests that subsidy be compared with revenue both from loans and from
investments.
In case of measuring ESII both the cost side and revenue side are considered. It is the best
measure of determining subsidy dependency.
S 1 ( w * Emp ) + ( bi * B ) + ( di * MS ) + θL + OPE ( ri * I ) IG
+ − − −1
( rl * L ) rl L ( rl * L ) ( rl * L )
ESII =
ri * I
1+
rl * L
• Gross subsidy intensity in relation to income from loans as captured by the first part
of the numerator.
• Cost and financial efficiency as represented by the second part of the numerator.
• Portfolio mix in relation to output price ratio as captured by third part of the
numerator.
• Income grants intensity as captured by fourth part of the numerator.
Measurement of ESII
15
The degree of ESII is influenced by cost efficiency; portfolio mix, market interest rate and
gross subsidy and income grant intensity. Furthermore, it is inverse of cost and financial
efficiency and portfolio mix in relation to output price ratio. Higher the degree of cost and
financial efficiency and portfolio mix and output price ratio, lower is the degree of efficiency
and subsidy intensity index (ESII). A zero or negative value of ESII represents no subsidy
dependency.
Richness of ESII
• Causes and its effects on sustainability can be derived from the constituents of the
index.
• Financial and cost efficiency as an indicator of competitiveness and sustainability can
be examined.
• The degree of allocate efficiency in terms of indicator of portfolio shift can also be
deduced.
• The role of income grant and gross subsidy intensity in sustainability can be
evaluated as inverse relationship exists between income grant and gross subsidy
intensity and sustainability.
• Different policy options can be made from the index to eliminate or reduced subsidy
dependency.
Cost & Financial Efficiency Ratio 0.99 0.99 1.11 1.16 1.18
Portfolio Mix 0.18 0.15 0.17 0.16 0.25
Inverse of indicator shift 1.18 1.15 1.17 1.16 1.25
Gross Subsidy Index 0.36 0.22 0.18 0.13 0.12
ESII 0.15 0.05 0.10 0.12 0.04
As ESII is positive it indicates that Grameen Bank has dependency on subsidy. That is it is
financially sustainable but not sustainable in economically. Grameen Bank can reduce or
eliminate subsidy dependency by employing the following techniques:
1. Improving cost efficiency through increasing productivity and exploiting economics
of scale
16
2. Improving financial efficiency through increasing lending interest rate
3. Optimizing portfolio mix through shifting resources away from low return generating
investment to high return investment.
Findings:
As a micro finance institution Grameen Bank is operating in Bangladesh but its appearances
is larger than many other commercial bank in Bangladesh. its different financial indicators
are comparable with commercial banks. GB’s profitability condition is healthy enough
without any subsidy. It has efficiency in liquidity management like many other commercial
banks and efficiency is improving in every years. It is evident from our ratio analysis and
graphical presentation.
At this moment GB is maintaining its documentation system mostly in manual and partially
in digital system. Maintenance of both systems is taking longer time and higher cost also. If
GB can convert its documentation system in digital format it can reduces a large portion of
its operating cost that will improve GB’s profitability as well as speed up activities.
GB has recovery rate more than 98%. Even though, it maintains excess loan loss provision in
addition of IAS rules as reserve. This huge provision reduces the profitability of the company
but increases the reserve level.
Grameen Bank is not receiving any subsidy form donors since 1996. From our ESII
calculation we find that GB is still not achieved economical sustainability. But it is close to
achieving it. Thus we can say that GB will achieve in short time the ability to operate its
operation as any commercial bank. GB can achieve it by increasing its operating efficiency
and utilizing its fund in a manner to maximize the return.
17