MGT602 Entrepreneurship GDB 3 Solution Fall 2012

The banks, before extending loan to the entrepreneur, make sure five Cs of lending which are character (credit ratings, loan history, etc.), capacity (cash flows, sales, etc.), capital (owner’s share), collateral (assets of the business i.e. land, building, plant, stocks, etc.), and conditions (industry and market conditions). Grameen Bank (GB) of Bangladesh was started by Dr. M. Yunus to provide credit to the poor people in rural Bangladesh, without any collateral. Its main purpose was to eradicate poverty by encouraging small businesses. The GB gives a unique lending model in which loan is provided to a group of people and one person from each group is responsible to collect the loan amount from other group members after the loan period ends. Only those people are eligible to re-apply for loansthat have paid their previous amount. Recovery rate of the bank is more than 90%. The bank has helped millions of depraved people and has turned baggers into small businessmen. The bank and Professor Yunus were awarded noble peace prize in 2006 for their invaluable services for the poor. But, unfortunately in Pakistan SMEs are not facilitated by the banks. Here banks are least interested in financing small entrepreneurs. Loan process itself is very complicated. As a result, the entrepreneurs prefer to get finance from other sources (family, friends, etc.) and avoid contacting commercial banks.


 
Point of ponder

Keeping in view the remarkable success of Grameen Bank lending model, in your opinion what are the hurdles in the way of Pakistani banks to adopt that model? Produce sufficient number of arguments.

Solution:

Grameen Bank lending model cannot work in Pakistan because the political and cultural conditions are totally different in Pakistan and Bangladesh. There is lack of management and Pakistan economy is controlled by such person those who don’t have any info about it. They do not want that poor people grow up and being the owner of banks they make such difficult conditions which are not fulfilled by little entrepreneur. So they can’t get help from banks. Another major reason is energy crises.  Current situation of Pakistan is not suitable for any business due to lack of Electricity and Gas. Corruption is a major problem which has infected the whole lending mechanism as result small entrepreneurs are deprived from taking loans. Banks are afraid of lending money to small entrepreneurs as recovery rate is very low in the country. There are numerous cases in which people were declared defaulter as they unable to return the loan amount. Due to poor law and order situation prevailing in the country people are confident that they will break the law and nothing will happen. Also interest rates are high on the loan amount for SMEs according to the policy of State Bank which stops people from taking loans.

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