Bank's Steps towards Poorest Bangladeshis - Literature review Example

Grameen Bank’s Steps Towards Customer Satisfaction In 1976, Dr. Muhammad Yunus, an economics professor in Bangladesh, started a research project that sought to give out credit to the rural poor. Dr. Yunus believed that lack of credit access was the biggest limitation of the rural poor. He thought that farmers could efficiently use small loans without collateral and would repay it on time, and that giving credit with reasonable terms can allow borrowers to think for themselves how to best enhance their incomes. With the growing poverty in Bangladesh, the project’s vision was to offer banking services to the poor and to alleviate poverty. To achieve these goals, exploitation of money leaders must be eliminated, small entrepreneurship activities must be created, disadvantaged people must be organized into formats they can understand and operate and where they can find some strength, support and power, and the financial systems of the poor must be expanded so that with their low income, they can gain more credit and investments, and thus more income. This research project became a formal banking institution in 1983, and is known today as Grameen Bank. From 75 Bangladeshi branches in 1983, the bank was able to reach 28,879 Bangladeshi villages and establish 974 branches within just nine years. The bank was able to garner 1,271,461 members, majority of which are women accounting more than 75% of its customers (Khandker, et al., 1997; Satgar, 2003; Wahid, 1994; Yunus, 2007). Despite the bank’s success, Rutherford et al. (2006) saw underlying limitations to the early model of Grameen. He observed that clients usually paid their weekly dues by combining their incomes from their normal works, remittances, self-employment, and from other loans instead from the incomes they garner from their new enterprises. Also, client’s debts usually heighten since other loans are given to them again to avoid defaulting. In 1998, severe floods have also caused agricultural loans to flop. These factors caused repayment problems to heighten in 1998, and in 2000, analysts revealed that Grameen Bank was bankrupt. In spite of the financial crisis Grameen Bank was facing, Grameen Bank was able to handle it successfully by improving their system via their three-point. First, the entire local portfolio was studied, and the bank recognized their significant losses. Outstanding loans were assessed or rescheduled to raise repayment rates, and unrecoverable loans were written off. To reduce the attacks on the company, the second point was mobilizing grants from aid donors to balance their losses. Last point was redesigning the bank’s products into more profitable and competitive ones. These strategies paved way for the creation of Grameen II. The new model was designed so that it meets the demands of their clients, and that it is profitable for the bank. The new system focuses more on savings, and it has become more flexible having repayments done from three to 36 months instead of the one year period. Grameen II has also gone away with social collateral. For the highly impoverished people, the struggling members program was initiated to subsidize beggars’ loans (Hulme, 2008). The implementation of Grameen II is more successful than the original model even though it first faced a financial crisis (Rutherford, et al., 2006). By 2008, Grameen bank served 7.4 million clients and has given out USD 545 million. Through out the years, Grameen Bank consistently garners a 98% loan recovery rate. Its success has encouraged governmental and non-governmental organizations in less developed nations and in the United States and Canada to replicate the Grameen model. As of today, more than 40 countries have adopted the model. (Khandker, et al., 1997; Satgar, 2003; Wahid, 1994; Yunus, 2007). It is evident that micro lending is the main service of Grameen Bank. In this paper, Grameen Bank’s micro lending services would be introduced. Prior to this, literature on customer loyalty would be discussed. Since micro lending has attracted a lot of customers to the bank, the key factors to the bank’s customer satisfaction would be identified. And since Hill and Alexander states that most organizations lose at least 10% of their customer base annually, some suggestions for improving customer loyalty would be given. Literature on Customer Loyalty Rob Smith (1998) defines loyalty as the situation wherein a customer strongly feels that a certain company can best meet his or her needs to the point that competitors are excluded and the customer buys almost entirely from the company. Literatures on service management propose that customer satisfaction affects customer loyalty, and then profitability. Customer satisfaction measures how well a transaction meets customers’ expectations, while customer loyalty measures the likelihood of a customer to repurchase and engage in partnership with the company. Proponents equate customer satisfaction with the result of customers’ perceptions of transactions’ or relationships’ values. In this case, value is equal to the perceived service quality relative to the price. Customer loyalty is achieved when the customer believes that the value he or she receives from one supplier is greater than from other suppliers. This loyalty can be manifested via continuing relationships, increased scope of relationship, and recommendations to other people. Because of customer loyalty, a company’s profit increases since revenues enhance, costs for acquiring customers are lowered, customer-price sensitivity decreases, and costs to serve familiar customers lowers (Hallowell, 1996; Shoemaker & Lewis, 1999). Marketing scholars concur to the proposal of service managers. They argue that customer satisfaction does play a role in purchase intentions and post-purchase attitude. Marketers characterize customer loyalty in two ways. First, loyalty is an attitude. Various feeling influences a person’s attachment to a product, service, or institution. Depending upon the level of feelings a person has, the degree of loyalty differs. Second characteristic is behavioral, which is how loyalty was defined earlier (Hallowell, 1996). Despite this proposal, other literatures state that a lot of customers who say they are satisfied with a service provider usually switch to a competing provider. In the United States (US), the Office of Consumer Affairs noted that 54% of customers usually maintain loyal to a service provider if the company resolved their problems satisfactorily. Meanwhile, 65%-85% of customers who switched to another service provider before noticing any defects in the products stated that they were satisfied or very satisfied with the previous company. A lot of authors assume that less than 25% of customers buy again from the same organization. Given this, Chandrashekaran, Rotte, Tax, and Grewal (2007) tried to identify the type of customers that are vulnerable to defecting from a company even though they have stated their satisfaction. They found that satisfaction strength mainly affects the leading of customer satisfaction to loyalty in both business-to-business context and in a business-to-customer context. They observed that even if high satisfaction leads to loyalty, having such effect decreases by 60% when such satisfaction is weakly held, like when there is a high uncertainty. Former relationship aspects like length of relationship, volume of business, and favor to prior experience affect vulnerability greatly. Applying Chandrashekaran et al.’s observation to failed service recovery, Mattila (2001) concurred with them. Her study showed that building and maintaining close relationships with customers are important, especially during failed service recovery. Mattila categorized customer-service provider relationships into three groups. First is the true relationship, wherein the customer has an intimate bond with the service provider because of past interactions. Second are pseudorelationships. The customer identifies with the service provider, but he or she associate front line employees with the business, and thus they must treat each customer the same. In this case, Mattila argues that the two parties do not share a mutual interdependence. Last is transactional service encounters. True relationships are vital for service organizations since customers in this level are more willing to forgive service providers for their poor handling than customers in the other levels. In a true relationship, customers are able to get social benefits like a personal recognition with the service provider. Matilla believes that this personalization allows customers to feel special, thus making them take care of the company from negative consequences of a failed recovery effort. Companies that can create an emotional bond with their customers are the ones winning customer loyalty. Andreassen (1999) has the same belief as Matilla in that a good relationship with customers is vital when dealing with dissatisfied and complaining customers. He proposed a theoretical model for customer loyalty with negative affect, satisfaction with complaint resolution, and corporate image as its key components. Negative affect is the negative precursor to satisfaction. A customer who is dissatisfied with a particular service experiences negative affect such as anger or disappointment. This may influence negatively customer loyalty and the customer’s satisfaction judgment when the complaint is resolved. Given this reasoning, cognitive and affective element may influence customer loyalty. Turning to the second factor, satisfaction is associated with subjective assessment of emotions. This assessment may result to a positive or negative feeling of fulfillment. Increasing the customer’s return, such as through proper complaint resolution, may change a negative fulfillment. Hence, satisfaction with complaint resolution affects customer loyalty positively. Lastly, corporate image is vital during dissatisfaction of services since a good corporate image serves as a moderator to future consumer behavior. And so, it can reduce incentives of people to exit because of dissatisfaction with services provided. These three factors play an important role to ensure and continue customer loyalty despite customer dissatisfaction. These literatures place a strong favor on the relationship of customer satisfaction and customer loyalty. However, Shoemaker and Lewis (1999) believe that customer satisfaction is not the only condition for customer loyalty, a conclusion that could likely explain the figures above. Reasons for poor translation of satisfaction to loyalty include the absence of a chance to purchase the same product again, desire to try new products, price sensitivity, and the lack of encouragement to be loyal by companies. In the end, customer satisfaction is an important factor to achieve customer loyalty, but it is not the only indicator for loyalty. Customer loyalty is important for businesses since it is profitable and it ensures continued support of customers even when service failures occur. Grameen Bank’s Micro Lending Business Poverty characterizes rural Bangladesh; therefore, alternative sources of income are a necessity for poor households. To do this, they need small capitals, which they do not have since their current incomes do not generate any surpluses. And so, they need a credit with reasonable interest rates. But since banks require collateral that the poor cannot afford, the poor cannot understand the procedures in setting up loans, and banks prefer large loans instead of small ones that the poor needs, poor households cannot attain credits. Dr. Yunus was able to respond to the credit needs of the poor by applying the Baker-Hopkin credit model, which states that credits are helpful to the poor if return on assets is larger than the loan’s interest rate. By using this model as a background, Grameen Bank made a different credit system with collateral free lending, payable in 50 weekly installments. To ensure payments, a group monitoring system was added (Hossain, 1988; Wahid, 1994). The Grameen microfinance system can be summarized in their 10 methods of action. First, their credit system responds to the social background of the poor instead to the contemporary banking techniques. Second, they have a progressive attitude. Third, their credit system serves the poor, and thus fourth is to make credit programs and actions that fit to the poor’s needs and lifestyle. Fifth, they have credit restrictions for income-generating activities that are selected by the customer. Sixth, solidarity and homogeneous groups are created to ensure payment of loans. Seventh, the bank encourages savings. Eight, close monitoring of borrowers is done via simple and standardized procedures. Ninth, financial systems are balanced. And last, human resources are invested through training (Srinivas, 2009). These modes of action pave way for the success of Grameen Bank’s microfinance system in terms of customer satisfaction and achieving their goals. The key factors that seem to contribute to the customer satisfaction on Grameen’s micro lending services are their unmovable bias for the poor, their peer group lending structure, and their business methods that the poor can understand and relate to. Grameen defines their target, the poor, as families with farmlands less than half an acre (Jansen & Pippar, 1998). Satgar (2003) observed that the bank’s strict and clear criteria for selection and practical screening methods allow them to exclude unqualified participants. Strict selection for the poor is required since higher income groups tend to overthrow low-income groups. Because of the gender biased banking systems in Bangladesh, Grameen Bank has a higher preference for women (Yunus 1994). Women’s empowerment brings greater positive impact on their families. Also, woman are more active, careful, and successful in running small businesses than men (Wahid, 1993). As compared to men too, women are less likely to squander money. The selection and delivery process of Grameen ensure that the diverse socio-economic development needs of the poor are met (Satgar, 2003). Because of their strict selection of customers, the bank is able to manage customer satisfaction. Grameen is able to package their services in a way that benefits their desired customers since the bank clearly defines who their target market is. Also, the service itself is made in a manner that is attractive and can be availed by their market. Aside from their clearly defined market, Graneem Bank’s peer group lending structure is another key factor in customer satisfaction. This system was introduced to overcome problems defaulting. Since the poor cannot provide collateral to pay for their loans, having a group encourages members to pay their loans on time. Under this procedure, each group member is banned from receiving additional loans if any of the other members fail to pay their loans. And so, peer pressure is exerted upon members to pay their loans on time. A group may fine or expel members who do not participate well, and they may support a member in trouble. A member can only leave a group if the loan has been paid. If not, the payment is passed on to the group (Hossain, 1998). For each group, a chairperson and secretary is selected, and this changes every year to let borrowers acquire leadership skills. For new groups, the bank requires training on Grameen philosophy, banking rules and procedures, business skills, responsibilities of group members, and group saving program. Social development and empowerment programs are also administered (Jansen & Pippard, 1998). To foster a spirit of group solidarity, Grameen considered various factors such as group size, homogeneity, and individual and community projects (Tinker, 1990). At the start, Grameen required ten or more members per group, but unsatisfactory results were garnered since a larger group posed increased diversity in economic conditions and lengthier decision-making process. Less incentive was also given for members to monitor their group mates since a larger group would mean that charger for member defaults would lower. Free riders were also associated with large groups. Today, Grameen Bank requires five members per group. It is more efficient since each member can closely monitor the actions of other group mates, and incentives increased. A homogeneous mix of members in terms of socioeconomic status and sex is also considered. Varian’s study (1990) observed that borrowers were more attracted to join groups where all members have equal or lower credit risks as them. Lastly, individual and community improvement projects such as reducing family size, banning of dowry payment, and improving water supplies are also encouraged (Tinker, 1990). The peer group lending system contributes highly to customer satisfaction since it is the main factor why they can attain loans. Since most of the customers come from very poor-income generating families, social collateral allows them to gain loans without having to give up anything. Also, this type of system ensures them that loans are being paid on time and that the bank is doing well. Moreover, since Grameen’s market are the unrecognized members of society and thus do not get much social skills, the customers feel comfortable with the bank. The peer group lending system allows customers to have a more personal kind of banking. Last factor is the business methods used by Grameen. The bank uses simple and culturally appropriate business methods to manage groups and operate loans successfully. First is their door-to-door banking, which allows the bank to adapt to local demand. For the Grameen, it is the bank that goes to the poor and not vice versa by letting bank workers or highly trained community development workers live in the village and recruit women to organize groups, conduct training, and hold seminars and meetings (Jansen & Pippard, 1998). Second, the bank issues no collateral loans. Third, an easy payment scheme is implemented wherein 50 weekly installments are spread over a year. Fourth, borrowers are encouraged to use their loans as capital for income-generating activities that they already have skills and knowledge on. Lastly, compulsory and voluntary saving schemes are initiated to minimize risks (McDonnell, 1999). The business methods implemented by Grameen plays a factor in customer satisfaction. Since the methods they provide adapt to the needs of their customers, Grameen is able to capture the interest of the people. The success of their business methods in capturing their customers plays hand in hand with the bank’s clear recognition of whom they want as customers. Because of this, they transform their methods into appropriate ones for their customers. All these factors are major aspects as to why Grameen Bank’s clients keep on growing yearly. But Alexander and Hill (2006) states that majority of organizations lose at least 10% of their customers each year. This might not hold true for Grameen, or it might not be evident since as they lose customers, many more still applies for loans in the bank. But if Alexander and Hills observation is true or not, there are still factors in the bank that needs improvement so that customer loyalty can be maintained or even increase. First of all, there needs to be more empowerment among their customers. Grameen Bank’s customers are the unheard and the neglected in society. They have the thinking that whatever they do, they will never succeed since that is what is always happening in their lives. And so, it is possible that whatever Grameen does, they can never satisfy some of their customers. What their market needs is a boost of self-esteem so that they can feel that what they are getting from the bank is truly a privilege for them. Empowerment can be achieved through personal training and seminars. Aside from empowerment, customers need extra training on the income-generating business they chose to spend with their loans. The customers need to be ensured that their small enterprise would be successful, so that they can repay their loans and they can loan again for business improvements and expansion. And to do this, they need to have the proper training and background for their enterprise. Grameen Bank has effectively boost customer satisfaction. By knowing whom their target market is, they were able to provide the proper services and business methods. This ensures that the customers are able to identify themselves with the bank’s micro lending service, and thus customers are highly satisfied with the bank’s services. Their satisfaction has allowed them to continuously transact with the bank. And based on the results of studies, customer loyalty of Grameen Bank is continuing to strengthen. However, the bank’s system is not perfect, so defection is still experienced by the bank, as explained by Hill and Alexander (2006). Hence, there are still aspects in the micro lending system that needs to be improved. References Andreassen, T.W. 1999. What drives customer loyalty with complaint resolution? Journal of Service Research, 1 (4), pp. 324-332. Chandrashekaran, M. Rotte, K. Tax, S.S. Grewal, J. 2007. Satisfaction strength and customer loyalty. Journal of Marketing Research, 64, pp. 153-163. Hallowell, R. 1996. The relationships of customer satisfaction, customer loyalty, and profitability: An empirical study. International Journal of Service Industry Management, 7 (4), pp. 27-42. Hill, N. Alexander, J. 2006. Handbook of customer satisfaction and loyalty measurement. 3rd edition. USA: Gower. Hossain, M, 1988. Credit for the alleviation of rural poverty: The Grameen Bank in Bangladesh. Washington D.C., USA: International Food Policy Research Institute. Hulme, D, 2008. 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