Creating trust in the ability of the poor to repay loan is monumental in the context of the history of agricultural credit in Bangladesh. Historically, society as a whole had a condescending view of the poor and in particular their ability to repay loans. In addition government sponsored credit programs created a legacy that suggests that it is morally wrong to insist that the poor repay loans. Prior to Grameen Bank, there wasn't a single bank that would lend money without any collateral and especially to poor, illiterate, landless women. The poor always had to depend on friends and relatives to meet their credit needs. There were formal sector institutions that mainly catered to the needs of the small and medium farmers and required collateral. Grameen's other contribution was the creation of trust in institutions that deal with poor people's money. Rural Bangladesh is replete with failed attempts to provide credit to the poor. As is true in most government and donor sponsored credit schemes, the rich and powerful and their clients usurped the credit. Most of these attempts were biased towards small farmers. Since more than half of the rural population are landless, the focus on agriculture led to financial exclusion of the poorest of the poor.

Grameen Bank's trust in poor borrowers and the reciprocal trust of the borrower, were instrumental in changing the norm about credit relations in rural Bangladesh. Once these norms were established they became part of the preferences of the borrowers. This created a positive externality in that others benefited from these established norms. Other institutions that followed Grameen Bank did not have to invest much energy in impressing upon their members to repay on time. A further benefit of such norm is exhibited in the repayment statistics of credit-granting NGOs in Bangladesh and especially when one compares these with the repayment statistics of government owned banks and other financial institutions.

Grameen Bank also helped to create the norm of credit discipline. It believed that nothing should be given for free to the poor. In the face of tremendous pressure, Grameen never forgave any loan. This was extremely difficult given the low recovery rates and frequent write off of agricultural loans by the government. The biggest threat to Grameen's existence came in the year 1991. In that year the newly elected government decided to forgive all loans from government banks that were under 5,000 Taka (about $ 125). As Professor Yunus explained, "Though the policy may sound as though it would benefit the poor, in reality almost 100 percent of these loans were made by government banks to land-owning, wealthier members of the population. But because most of our loans were also under 5,000 Taka, many Grameen borrowers thought that their loans had been forgiven. It was extremely difficult to explain to our borrowers why the rich people in their village were getting their loans written off, but they were not." Grameen Bank had to get on with the arduous task of convincing the borrower to repay their loans. So strong is the norm against default especially among female members, that they will borrow from informal market at a higher interest rate to keep their credit record clean with group lending.

Grameen has created the norm of group lending. The groups consist of five people and initially the loan is extended to two members and based on their repayment performance, two more members get the loan and the chairperson of the group is the last one to receive the loan. The main motive behind organizing the borrowers into groups is to use peer pressure or "social collateral" to guarantee repayment since all members are jointly liable for the loan. In addition, the group is supposed to be a support mechanism for the members in need. Members view group formation and using the group for disbursement and collection as a reflection of accountability and permanence.

The norm of group liability, regular attendance, staggered and accelerated lending appears to be replicable in most cultures with the exception of atomistic society such as the United States. Researchers have attributed the lack of success in the United States due to weak social capital of the poor and poor enforcement of loan discipline compared to Bangladesh. When the Grameen model was replicated in other countries without adherence to the strict principle of Grameen model, it failed miserably. Rehabilitation entailed returning to the essential principles of Grameen. Seibel describes the case of a Grameen replicator, ASHI, in the Philippines. When the repayment rate dropped to 58%, rehabilitation entailed returning to the essentials of Grameen model. AIM, another replicator in Malaysia had to do the same thing to improve performance. However, work by Jain suggests that joint liability is rarely enforced in Bangladesh. Imran Matin reports that joint liability is enforced mainly via staff pressure and infrequently by completely reversing the contract-members with good repayment records are rewarded instead of being penalized to counter the demonstration effect of becoming irregular.

Grameen Bank also established the norm that credit is not charity. During the flood of 1987 that affected the northern part of the country, aid organizations asked the bank to help distribute relief to flood victims. To inculcate the norm that it is not charity, the bank started a revolving disaster fund. The fund was capitalized by selling the food supplied by the aid agencies at cost with the condition that the borrowers will replenish the fund when the situation improves.

By holding center meetings in public, the bank has created the norm of transparency in financial transactions. In these meetings, group chairperson collects repayment from members and hands it over to the bank worker who makes the entry in the ledger book. This precludes the possibility of misappropriation of funds by the staff and bestows a sense of ownership to the members. Given the amount of money handled by the staff, the incidence of embezzlement of fund by them is quite rare. In recent years many staff have beeb attacked and physically assaulted on their way to the branch office after holding center meetings to collect funds. In many cases the staff tried to safeguard the funds at the cost of serious physical injury to them.

Currently each Grameen member owns one share of the bank. By virtue of this ownership, the borrowers own 93 percent of the shares of the bank and the borrowers elect nine out of twelve members of the Board. These nine members of the Board are elected via direct election by all the borrowers of the bank. From its inceptions the bank insisted on borrower's ownership of the bank. This form of governance where the borrowers own the bank and has their representations in making all major decisions of the bank, is an absolutely new norm of corporate governance for Bangladesh.

Recent studies have questioned whether illiterate women in the Board of Directors really make any difference at all. It has been suggested that the presence of such women in the Board is another manifestation of dominant patriarchal norms; these women are persuaded to accept decisions made by dominant males. Not many banks in Bangladesh-- indeed even banks in the USA-- can claim to have 9 out of 12 women as board members. Granted these women may not understand the intricacies of modern finance, but they are smart and savvy enough to understand the ramifications of policy changes at the field level. Putting women on the board will not change the country's historical norm of male domination overnight, but it is a symbolic change and a very good beginning at that. In fact, one could argue that electing female borrowers to the Board is more than symbolic, since they led the way on changing how the group fund works, not to mention many other important policy changes.

Sixteen Decisions of the borrowers reflecting their social development needs have established an important set of norms. In a national workshop in 1980 the first four of these decisions were accepted. By 1984 the total number of decisions added up to sixteen. Some major decisions are the promises to keep the size of family small, sending children to school, growing and eating vegetables all year round, drinking water from the tube wells, building sanitary latrines and not accepting and payment a dowry. Research by the World Bank and others suggest that Grameen Bank's presence does influence contraceptive use. However, Pitt and Khandker using a different econometric methodology find mixed statistical evidence on current contraceptive use and recent fertility. They find that lending to women reduces use of contraceptives while increasing men's contraceptive use. Male and female credit from Grameen Bank has resulted in increased boys' schooling and female credit from the bank increased girls' schooling as well. Grameen Bank's credit to women led to improvements in the nutritional well-being of both male and female children.

One could question why the members didn't come up with these norms of behavior spontaneously? It is probably true that many members value these norms and accept and adopt these in their every day life. Why was there a need for this reaffirmation? Why was it necessary to have the tutelage of a third party to develop these codes of behavior? One could raise the same type of question about the formation of groups. Woolcock answers these questions succinctly by noting that "even if they wanted to form groups of their own accord, villagers struggle to engage in collective action of any sort because they do not have the organizational skills to do so, have a short radius of trust, and are so poor that they can afford to take few risks (i.e., they prefer strategies that defend what little they have over higher-risk ventures that might increase their income). An external agent is, therefore, needed to instil these skills, and to provide a credible selection and enforcement mechanism, in order that the costs of banking with the poor might be lowered".

Anthropological research suggests that members are not abiding by these norms. Despite their public pronouncement, very few of them abide by the pledge about not paying and receiving dowry. In the bank's defense one could argue that it is the borrowers who came up with sixteen decisions, and the bank requires only that new borrowers memorize them. Encouragement and support for implementing them is given, but ultimate choice is left to borrowers. However, Rahman and his respondents noted that the staff neglects social development initiatives in regular center meetings. So, an explanation for non-compliance of the norms may be that the members feel that since the bank is not keeping its part of the bargain and has become a bank for loan collection only, they do not have to abide by these norms either.   

Lisa Larance through her research has suggested that Grameen Bank has also created the center meeting norms. These norms were adopted by other credit and non-credit granting NGOs in Bangladesh and in many other countries. The norm includes "walking across the village to attend the center meeting; sitting with a group of women from different bongsho (kinship group), religions and social status at the center meeting; handling money; and first name address from the GB employees during the center meeting". She reports that the center meeting norm of personal address creates positive feeling among members. First, the female members liked hearing their first name; it gives them self-identity in contrast to using only possessive terms denoting their relationship to the family's male members: such as someone's daughter, or wife or mother. Second, it was important to them because it indicated an educated person, the male bank worker, was showing them respect. Third, public pronouncement leads to others knowing their first name as well. This was valued because the respondents argued that prior to membership in the bank "no one knew the names of poor women. Now they do."

Larance further argues that the social capital formed among center members has also benefited non-members thus making it "social" in the true sense of the word. Community members and the resident family planning worker in her study village suggested that establishment of the center and weekly meetings have reduced conflict among village members now that they know each other and their extended families. The village's NGO health worker vouched that the center has increased monitoring of children in the village also. Village elders noted that the center has increased exchange among people in the village and the members are included in better off social and economic circles.

Another aspect of center meeting norm, however, not discussed by Larance, was the norm of signing one's name to receive credit. Historically, the poor feared signing or putting fingerprints on any piece of paper as moneylenders, rich and powerful people swindled many poor illiterate people by tricking them to sign their name or putting fingerprints in paper. Grameen Bank members worked hard to learn how to sign their names. Rahman reported that some of his respondents even changed their names, as they were long and complicated. However, he notes, "Whether the names are given or arranged, the informants' ability to write their names is a source of pride and encouragement for literacy for the poor women in Bangladesh".

Grameen Bank created the norm of asset ownership by women. Women can indeed own property in Bangladesh and Islamic law ensures such rights. However, such rights are not operative in practice and access to property is limited by social tradition and customs. For example, a widow's inheritance is often claimed and used by her sons. By law, a daughter inherits half of her brother's shares when the father dies. However, very rarely would a woman actually put a claim to that right and the right is relinquished in practice. "By giving up the right of inheritance, the daughter keeps access to the parental home open in case of marital crisis, a time during which she might need her brother's help, specially following a divorce". To increase asset ownership by women, loans for housing and leasing of cellular phones have specified pre-condition that the assets have to be registered in the name of the women. This is to protect them in case of divorce and to improve their "fallback" position in the intra-household bargaining. A woman working for wage employment is against the social norm of labor. Grameen Bank's loan for asset ownership such as a cellular phone allows them to be self-employed and somewhat neutralize the ill effects of not being employed for wage. Owning land improves the social status of women also, since in an agrarian society social class is predominantly determined by land ownership.

Networks can be horizontal, connecting agents of same status and power as well as vertical, connecting unequal agents in uneven relations of hierarchy and dependence. Weak horizontal ties could be actually more useful as it connects a member to a wide variety of people, and thereby to a wider information base. Putnam noted a critical difference between horizontal and vertical networks: "A vertical network, no matter how dense and no matter how important to its participants, cannot sustain social trust and cooperation."

Lisa Larance's work provides the most interesting and exhaustive evidence of how membership in Grameen Bank expands borrowers network horizontally. Her work aptly illustrates how the center meetings are used to expand networks beyond immediate family and kinship groups' weak horizontal ties. Many of her respondents reported that center meetings enabled them to expand their social and information networks that were used to facilitate economic and non-economic transactions. Seventy-four percent of her respondents reported that the networks were used to make up for shortfalls on a loan. The members also used the networks to expand social exchanges. The networks eased mobility restrictions for women who were secluded within their neighborhood where they interacted almost exclusively with their husband's kin. Such mobility outside of their home to visit others and travel to "public" place in the village, is a challenge to the well-established norm of purdah. The network was especially beneficial to women who are married patrilocally. Now instead of going to their natal village for help, they could use the local network to seek assistance. The bank organizes annual meeting of group chairpersons in each branch. In these meeting the members share marketing information as well as best practices regarding cow fattening, livestock rearing, poultry farming, fish farming. Later the center chiefs share these experiences with members in their own centers. This is another means of expanding horizontal networks.

Membership in the bank is allowing borrowers to expand their networks vertically whereby they can now have goods and services provided by the different levels of government. The poor in general are excluded from essential services provided by the government. It is highly unlikely for the poor to get service from government offices in rural Bangladesh. Even if they get the service, the transaction costs in terms of filling the paper work, waiting period and cost of bribing the official, will be high. Publicly provided goods are distributed via the local elite and elected officials who usually allot it to their own clients and kinship groups. Center and the brand name of Grameen Bank is used as a leverage to get essential services from various branches of the government such as advice from agricultural extension workers, immunization of children and immunization of livestock.

Because of the enhanced self-confidence and an expanding network due to membership in the bank, members especially the women find it easier to participate in the political process. Even though none of Larance's respondents contested in the elections, many regretted not running for positions. In the 1997 local level elections, the government encouraged women to run for office in the local union council elections by reserving seats for women. However, many women participated in the open seats as well. Out of a total of 4298 unions, the lowest tier of government in Bangladesh, 7 Grameen Bank members and 39 members of the family ware elected to the post of Chairman. However, no woman was elected as Chairman. In the election for membership in the union councils, out of 51,396 seats, 261 male and 1,343 female Grameen members were elected by contest and 34 members were elected uncontested. In addition, 1,073 family members were elected as members of the union council.

Moore and Putzel suggested that empowerment should involve increasing the political capabilities of the poor. "It is the political capabilities of the poor that will determine whether they can employ social capital (the shared networks, norms and values created through social interaction) constructively or create social capital where it is lacking." By creating an enabling environment, Grameen Bank has enhanced the political participation of the poor. Even though the bank discourages discussion of political issues in center meetings, it encourages the members to vote and to go to the voting centers as one unit.

The provision of credit by Grameen Bank accentuates an existing source of social capital-the family. The use of the credit becomes a joint family enterprise. Grameen Bank is aware of this and is devising a new product that can take advantage of pooling of resources in the family enterprise such as a larger leasing loan, and a medium term loan for family members. One of the preconditions for these loans is that the family must have an additional source of income. Grameen's female members are unable to use larger loans because of societal restriction on women's mobility. In such cases the borrowers are taking the help of the male members of the family to expand their businesses. The male members can bank on the network of the members to upscale their operation. Critics argue that men utilizing women's loans thwart the effort to empower women. Critics, however, are failing to recognize that credit given to women is used as an input in the household enterprise. Recent advances in bargaining theory suggest that women who bring financial resource to the households can improve their bargaining position.

In rural Bangladesh the poor trust each other within a "narrow radius of trust"- friend, family and gusti (kinship group). This is because trust in this case is enforceable by the threat of retaliation. Membership in Grameen bank enhanced the "radius of trust" as it allowed people who are not related to one another to co-operate to achieve a common goal-access to credit in the current period and the future.

It is true that creation of social capital was not the prime goal of Grameen Bank. However, in the process of providing credit to mostly poor women, the bank realized that such transaction has to be embedded in the social context. In other words, to ensure that credit delivery ultimately leads to qualitative changes in the lives of the members, the bank had to create and cultivate social capital. Deliberate effort by Grameen Bank to create trust, norms and networks, has fundamentally changed the lives of the members. However, the bank is showing sign of "growing pains." Because of the pressure to attain sustainability, the workload of the staff has increased enormously. The staff can barely keep up with collecting the loan instalment and negotiating problems that arise from missed payments by a few borrowers. They have less time to explain the policies and procedures and to provide social intermediation, i.e. giving advice on loan use, etc.

Traditional measures of the benefits of microfinance have looked at mostly economic and some non-economic aspects. Very few studies have discussed or tried to measure the extent of social capital created by a MFI. Since social capital is a public good--non-excludable and non-rivalrous--the market will underprovide such good. Micro-finance is a means to correct market failure in the credit market. This paper shows that micro-finance corrects another type of market failure-under provision of a public good. In case of Grameen Bank, the public good provided is a "global public good", since the model is being used all over the world. The social capital building aspects of a MFI need to be taken into account in the whole debate about the need for subsidy.

The author is an Associate Professor of Economics, St. Mary,s College, Maryland, USA. Full verson of this paper along with detailed references is available from the author at e-mail address: audowla@smcm.edu