GRAMEEN BANK and GRAMEEN TELECOM
Profiting from 'Unprofitable' Customers

In October of 2006, Mohammad Yunus, a former economics professor from Chitagong University, was awarded the Nobel Peace Prize for conceiving the idea of a bank (the Grameen Bank) that focused on offering ‘microcredit’ (very small loans) to the world’s poorest people. His business concept was based on the direct personal interactions he had with poor people in rural villages and shantytowns. Up to then, most bankers assumed that laziness or lack of skills were the reason why so many people lived in abject poverty. As a result, banks have traditionally focused their attention on more affluent customers.

But Yunus was personally motivated to understand exactly what the poor needed to change their lives for the better. Much to his surprise, he discovered by travelling around villages and through extended personal interaction, that poor people were, for the most part, energetic and motivated and knew exactly what they needed to move forward. In almost every case, this involved gaining access to small amounts of credit to launch or expand a small enterprise (e.g. to buy a tool, or a goat, or raw materials…).

By 2004, Grameen Bank was lending in excess of $445 million each year to more than 3.8 million poor customers. Even more amazing, it achieved a 98.9 percent repayment rate, the highest payback rate of any bank in India and much higher than those enjoyed by North American and European banks.

Grameen Bank has since spawned Grameen Telecom, launched in the late 1990’s, which focuses on bringing information and communication technology to rural Bangladesh. New York computer worker Iqbal Quadir originally conceived the idea for this concept after his firm’s computer network crashed. While the problem was being fixed, Quadir was reminded of his childhood days in Bangladesh when he used to waste entire days walking long distances because there was no phone service available.

Today more than half of humanity (3 billion people) is without reliable telecommunications service. Grameen Telecom’s mission has therefore been to bring telecommunication service to the rural poor in Bangladesh – where the average per capita income is $286 per year. At this income level, the existing business model for telephone service is not feasible. Something radical was needed.

Accordingly, at the initiation of Mohammad Yunus, two independent companies were formed in 1997, one for profit (Grameen Phone) and the other not-for-profit (Grameen Telecom). Grameen Phone, which is the recipient of the telecommunications licence, is a consortium of four partners (Telenor of Norway, Grameen Telecom, Marubeni of Japan, and Gonophone). At the onset, Grameen Phone focused on serving all urban areas in Bangladesh by building a nation-wide cellular network. In turn, Grameen Telecom buys bulk airtime from Grameen Phone and retails it through borrowers in rural villages.

Initially, few people gave the venture much hope because only the richest city dwellers in Bangladesh could afford mobile phones. But by changing its business model, Grameen Telecom was able to pilot-test and launch a venture that proved to be highly profitable.
To begin with, Grameen Bank loaned money to women in rural villages to establish them as independent entrepreneurs to sell mobile phone services. The women received loans of up to $175 to purchase both a mobile phone and a small solar recharge unit. The loan also included the necessary training needed to use and service this equipment.
The pilot project was launched in 1997 with 950 villages, but in Bangladesh alone the potential exists for tens of thousand of ‘village phones’.

By year’s end, the results of the pilot test were impressive. Village phone operators increased their income on average by about $300 per year, raising their status in the villages considerably. Most of these women spent their additional income on education and health care for their children, providing an additional development bonus.

For users of the phone service there was considerable surplus. Rather than making a time-consuming and expensive trip to secure information about crop prices or to place orders with distributors through a slow, unreliable postal system, users could now simply place a phone call. Each call saved the user between $2.70 and $20 – a whopping 2.5 to 10 percent of household monthly income.

Significant reduction in travel, combined with the avoidance of a wireline infrastructure, provided significant environmental advantages as well. Rural phones in the pilot project booked three times more revenue as their urban counterparts. Indeed, if extended to all of rural Bangladesh, it is estimated that revenues can be generated in excess of $100 million per year. And if a similar business model were applied to rural India and China, tens of billions of dollars in revenue seem possible.

In reality, the performance of Grameen Phone over the past six years has exceeded even the wildest dreams of those involved in the pilot project. By August 2004, the company had a subscriber base of more than two million people and provided telephone access to more than fifty million people. In 2003 the company produced net profits of $74 million on revenues approaching $300 million.

In addition, annual revenues from each village phone grew to nearly $4,000 per year – and village phone ladies earned, on average, $1,000 per year, moving their families squarely into the region’s middle class.

By 2004, there were nearly 75,000 village phone ladies and that number was expected to grow to 100,000 by the end of the year. This means that Grameen Phone is expected to make around a half-billion dollars in revenue - in a country where the average annual income is $286!
Recently, Grameen Phone has begun expanding its services to include rural Internet access.

From: Capitalism at the Crossroads, by Stuart L. Hart, Wharton School Publishing (Pearson Education), Saddle River, New Jersey, 2005.