Micro Credit

Microcredit in bangladesh

Abstract This paper has discussed about the Micro credit which was introduced in Bangladesh after seventies. It has a great impact to the rural community since it is the means of the social and economic development in Bangladesh. This paper also discusses about the several numbers of credit suppliers which play an important rule for the economic development. Does the micro credit always brings welfare it is also one of the main concern of this paper which suggests that micro level study is required before introduce the micro credit. Mohammad Sharif Hossain Choudhury. Email: [email protected] Economics of Innovation and growth programme KTH, Stockholm. Sweden..

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Introduction Bangladesh is a developing country having a very poor financial market. In such type of market the introduction of the micro credit was a financial innovation. In Bangladesh micro credit was introduced late seventies. Micro credit is the provision of small loans for the income generating self employment activities. It can be define as” Micro credit, or microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of. millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without." (Gert van Maanen, Micro credit: Sound Business or Development Instrument, Oikocredit , 2004) Grameen bank was the first organization which introduced such type of loan. The main objective of the micro credit is to reduce the poverty and make stable the income of the poor people. Since most of the people in Bangladesh live below the poverty line, the micro credit plays an important role. The initiative taken by the Grameen bank was supported by all the people and organizations in Bangladesh. Micro credit programmes target those without landless and the poor ladies. 90 percent of the micro credit recipients are women. The loans provided by the organizations is collateral free and usually have a maturity of 50 weeks with weekly repayment. There is no special sector for the micro credit. It can be given as the agriculture credit or rural credit or cooperative credit or consumer credit from the saving and loan associations or from the credit unions or from the money lenders. After the great success of the Grameen bank in the field of micro credit different kind of organizations come forward to provide micro credit to the poor people of Bangladesh. The mentionable organizations are Bangladesh rural advancement committee ( BRAC), Association for social advancement (ASA), PROSIKA etc. These organizations introduced micro credit for eradicate poverty from the society, empower the women , give free education to the children, family planning, women health care. These organizations support the government`s poverty reduction efforts through the above mentioned policy. In every case women have been able to gain some access to land, they have also taken loans for firming activities, including beef fattening, vegetable growing, fish culturing and betel leaf cultivation.

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The organizations which provide micro credit: In Bangladesh there are several types of organizations provide micro credit. All of the organizations are non governmental organizations (NGO). These organizations play an important role for the economic development of Bangladesh. Grameen bank ,Bangladesh rural advancement committee ( BRAC), Association for social advancement (ASA), PROSIKA are the important micro credit providing organizations in Bangladesh.

1. Grameen bank: Grameen bank is one of the largest non governmental organization in Bangladesh. The founder of this bank was the famous economist Dr. Mohammad Yunus. Grameen bank was first introduced the micro credit to the rural people. This bank always prefer women rather then men to provide micro credit. Because it is found that women are more conscious then men about the savings children’s diet, family health and nuitrition. However the most important objective of the bank is to provide loan to the poorest first. Women represent the group which is the poorest of the poor. Grameen bank has some social commitment. The bank encourages all of its borrowers to save 5 percent of the loan amount plus one taka per week. As soon as a borrower accumulates sufficient saving, she buys one (and only one) share in the Bank, which costs $3.Only the borrowers of the bank can buy the share. One of the important strategy of the bank is that after taking the interest from the borrowers it make a modest profit and then it gives the profit to the share holder as dividend. The current rate of interest on workink capita is 20 percent and on home loan is 8 percent. Last year the bank has made a profit of US$ 680,000. In a developing country such type of organization plays an important role. Source: All the data has been taken from the HOME PAGE of the Grameen bank.

2. Bangladesh rural advancement committee ( BRAC ) : . BRAC was introduced after the liberation war in Bangladesh. It was started its work to provide relief to the war effected people. After some years this organization has taken some important

3. commitment. It provided support to the people who were deprived from the social opportunity such as rural women fisher men and the landless. BRAC's initial experience with credit dates back to the early 1970s. In 1974, BRAC provided credit to the villagers in its Sulla Project in Sylhetdistrict through the Sulla Thana Central Co-operative Association. In the following year, credit was advanced without interest to several landless groups; in 1976, BRAC started providing credit to landless through its Manikganj project. BRAC had taken some of the rural Development programme(RDP) which was started in 1979. The Rural Development Programme (RDP) is one of the major programmes of BRAC. Started in 1979, RDP had grown by December 1989 into a large programme providing credit to target groups from 81 branches in 45 sub-districts of 22 districts. The major objective of the RDP was to change the socio economic and political circumstances through the micro credit. BRAC has introduced the micro credit to the borrowers to use the loan according to the purpose for which it was given. This organization does not provide any loan for the consumption purpose. All the loans are given on the basis of the recommendation from the village organizations. The amount of the loan varies depending on the nature of the scheme. The smallest was for Tk. 500 and the largest for Tk. 4 million. Large loans are given for collective enterprises, such as deep tubewells, power tillers and so on, organized by several village organizations, whereas individual loans vary from Tk. 500 to Tk. 8,000. There are three lengths of duration for which credit is advanced to group members • • •

short-term for a period of 12 months or less medium-term credit for a period greater than 1 year but less than 3 years Long-term credit for 3 years or more.

In every cases BRAC has charged 16 percent interest for all loans. The main target group of the BRAC is those people who want to be self dependent through their manual labour. Source: All of the data has been taken from the HOME PAGE of the BRAC.

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3. Association for the social advancement (ASA):

ASA is one of the biggest international micro finance organization in the world. It started work in 1978 and introduced its micro finance programme in 1991. This organization has a special feature that it is an innovative firm. So the feature of this organization is not same to the others. ASA uses a micro finance model ‘cost effective sustainable microfinance model.’. This model is followed by the many countries like Asia, Africa, South America and the Middle East.Applying this model all the countries are trying to eradicate the curse of the poverty. ASA works for those people who are poor but enable to reduce their poverty. In the June 2005 ASA has launched credit programme which reached 5.47 million people. ASA has introduced voluntary savings along with mandatory weekly savings of taka10 per week. After introducing the Income generation activities the poor women get loans from ASA. The poor women in the rural area are taken the main benefit of the credit programme. Initially it provides 4000tk. to 6000 tk. Loans. The duration is one year and 15% service charge should be paid. ASA mobilized 1.78 million taka from its member in 2005. In the past year saving returned and withdrawn were tk. 1.941 million. In the 2004 the borrower of the ASA was 2.77 million but at the end of the year it increased by 3.55 million. The total amount of the disbursed loan was 16.365 million in 2005 and the loan out standing increased to 3.717 million tk . ASA also provides the small business loan. The minimum amount of the small loan is 20000 TK. The total amount of loans disbursed during January to June 2005 was Tk 1,232 million and loans out standing at the end of June 2005 were Tk 1,179 million. .

Source: All of the data has been collected from the HOME PAGE of the ASA.

4. Proshika Proshika was established in 1976. Which is also one of the important micro credit provider organization in Bangladesh. It provides the technical and the marketing assistance where needed. At the end of 2003 Prishika had over 1.2 million active borrowers , of whom over 0.8 million were poor women (Micro credit Summit 2004)

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From the above discussion of the main micro credit provider organization we can show the big four micro finance institute’s micro credit profile.

Organization Number Number Savings of of memb borrowers ers

Cumulative Out disbursement standing loan amount

Grameen Bank BRAC ASA Prosika

3.6

3.5

194.1

3372.5

295

4.5 2.7 2.8

3.8 4 1.5

114.4 47.3 24.3

2014.2 1900 464.4

219.9 234 61.3

Source: The table has been taken from the World Bank Policy Research Working Paper 3398, September 2004

Evaluation of the Micro credit for the Economic development: From the different point view micro credit plays a vital role in the socio economic development in Bangladesh .Since micro credit is related with the root level of an economy, so it is so important for the financial market of any country. •

Micro credit helps to remove the poverty. It always helps the poor and increase their income level. When the poor people get micro credit they can create the business opportunity which results the economic solvency of the poor.2

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They can pay for their all basic needs. Which is the first step to break the poverty cycle. Microfinance helps to take initiative for the parents to send their children to school. When they get money as credit they can spend money behind their basic needs.

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In order to work skillfully workers should be fit physically. The micro credit clients are more solvent than the non- micro credit client. The micro credit client

6. can take nutritious foods and can go to doctor if they feel sick. Overall they can take proper health care. Some of the micro finance institute also provide health education .The institutes give advice to the rural people to drink safe water , pre natal and post natal care, sanitation and housing. “In Bangladesh, a study of BRAC clients found that fewer members suffered from severe malnutrition than non-clients and that the extent of severe malnutrition declined the longer clients stayed with BRAC.” •

Some of the micro credit institutes have partnership with the insurance to the clients. By this way the clients may get the insurance facility.

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In Bangladesh most of the organizations are giving emphasis on the rural poor women. All of the organizations think that women are more responsible than the men to repay their loans. It is also found that women are more interested to increase the house hold income and family well being. Such type of thinking make the micro finance institutes interested to provide loan to the women rather than men. By this way women become more confident more assertive more likely to participate in family decision. Eventually financial support makes the women powerful. But we should not think this as gender discrimination. Positive programme designed for the women owing more assets having a more active role for the family decision and increasing investment in the family welfare.

Does Micro credit programme success in Bangladesh? The Millennium Development Goals includes that more than 1.2 billion people live behind the poverty line in Bangladesh. After then some of the micro credit programmes are successful in the sense that poor clients take smaller loans. For that reason the credit size becomes smaller. Then costs seem to be harder to achieve .Then some of the institutes design programme to reduce the cost pressure. By the cost effective banking system some of the organizations reach to the root level and still try to eradicate the costs. In Bangladesh ASA is one of the organizations which provides such types of opportunity. By the dint of micro credit policy all most the poverty problem in Bangladesh has been solved. Before the availability of the micro credit the people in Bangladesh should depend for their capital on the rich people. In every system they must pay a high interest

7 against their loan. After the introduction of the micro credit such type of problem has been solved . The micro credit system was supported by all class of the people. The poor people can do business with the money. After earning profit they can return their loan to the micro finance providing organizations.

Some problems of the micro credit: Though micro credit is a wellbeing for our hole society but it has some problems.We can organize the problem as follow: 1. The important problem of the micro credit is to turn the profit in to the loans. In this case the borrowers should bear the cost of the loan as well as the interest .Some time investment does not bear the profit then the borrower should reduced consumption and loan money from other source to pay the installment. 2. Another problem is that all most all the micro credit providing organizations give lone to the women with a less interest rate. For that reason the male relatives use the female borrowers in front to get the low interest bearing loan. These types of loan may or may not be useful to the family. Most often the women should bear the responsibilities. 3. Some of the micro finance providing organizations impose high interest for the short term loan. Since the poor people have no alternative they have to dependent on that organizations. Consequently they are not able to pay the high interest and supposed to be a loan defaulter. Unless increase their income they are permanently dependent on the micro credit.

Source :An Examination of the Micro credit Movement By Jason Meade, MA in IPE 15 January 2001

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Conclusion Before seventies Bangladesh was suffering from the curse of poverty. People were not conscious for the education and health. After the liberation war when the micro credit was introduced by some non government organizations then the poverty level was reduced successfully. The Grameen bank was in the leading role. Following the path of Grameen bank some of the NGO started to provide micro credit. As a developing country micro credit plays an important role. Micro credit still fighting against poverty. Though there is no single intervention against poverty. By the help of the micro credit people become more solvent. The unemployment problem in Bangladesh has been decreased. It has multiple effects. As the micro credit program approach financial sustainability, they can reach far beyond the limits of the scarce donor resources.