Micro Credit: An Experience Of Islami Bank Bangladesh Limited

MICRO CREDIT: AN EXPERIENCE OF ISLAMI BANK BANGLADESH LIMITED M. A. Habib, M. Sayeedul Haque, M. R. Uddin Mian and M.A. Bashar Department of Agricultural Finance Bangladesh Agricultural University Mymensingh-2202 Bangladesh

Abstract: The study was undertaken to examine the effectiveness of RDS credit provided by the Islami Bank Bangladesh Limited through interviewing a few randomly selected programme beneficiaries located in Sadar and Fulbaria Upazila of Mymensingh district. Most of the beneficiaries were observed to have required loan money within reasonable time limit during the study period. Loan was found to have been productively used irrespective of loan holder categories. Loan repayment performance of the beneficiaries was observed to be satisfactory. Selfconsciousness and hope of receiving future loan were observed to be the major contributing factors for good loan repayment behaviour of the beneficiaries. Small borrowers were good repayers followed by the medium and large borrowers. Key words: Micro credit, Adequacy, Utilization, Repayment INTRODUCTION In rural areas of Bangladesh, the major source of credit is informal credit market (Hossain, 1996), where professional moneylender is considered to be the principal source despite its charging exorbitant interest rate. At present, however, with the expansion of bank branches as well as the non-government organizations (NGOs) working in the rural areas of Bangladesh, the role of moneylenders has been gradually declining. Micro credit creates a virtuous effort to break the vicious circle of poverty. Women in the country have been benefited to a great extent from such micro-credit programmes, demonstrated by their increased income and assets accumulation. The major objective of development strategy of the government of Bangladesh has been to reduce poverty through providing institutional credit among people. This objective deserves urgent attention at the moment because, about half and one-fourth of the population in Bangladesh is considered respectively as poor and hard core poor (Planning Commission, 1998). Islami Bank Bangladesh Limited (IBBL) is one of the leading commercial banks in the country having 120 branches over important areas of Bangladesh. Considering rural economic condition, the bank has recently introduced a project in the name of Rural Development Scheme (RDS). The Objective of the scheme is to create income generating activities (IGAs), self-employment opportunities for rural people and thereby contributing towards poverty reducing agenda of the government of Bangladesh. The present study aims to see whether the RDS credit could have positive impacts on income generation of the rural poor under RDS and explore its mode of operation and improvement. The specific objectives of the present study were

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to assess the socio-economic characteristics of the respondents in the study area, to assess the loan receipt and adequacy of the RDS credit programme in the study area, to investigate the utilization pattern of loan provided by the RDS programme in the study area and to examine the loan repayment behaviour of the respondents in the study area. METHODOLOGY A total of 79 borrower respondents under the RDS programme of IBBL was randomly selected from whom desired information have been sought through administering carefully designed and prepared survey schedules. To supplement the collected information, informal talk with group members of the RDS also provided additional data. Respondents were both females and males. After collecting information, the filled in schedules were scrutinized and checked to avoid inconsistency in data. The collected data were then edited, coded and finally tabulated according to the objectives set for the study. Tabular analysis was mainly done by using techniques of the average, percentages, etc. RESULTS AND DISCUSSION Socio-economic Profile of the Respondents: Evidence shows that average family size consisted of 5.48 members in the study villages. Average family size relates positively to credit holders (Table 1). Average earning member was found relatively lower (1.56) although it is important to generate income in the family. The dependency ratio is relatively higher in the study villages during the study year. Situation may attribute to dominance of female members in the family or more dependent members therein during the study period. It appears that irrespective of loan size categories, petty business was observed to be the main occupation of majority of the earning members (34 per cent for small, 58 per cent for medium and 57 per cent for large ones during the study year). Next to petty business, rickshaw pulling for small, agriculture for medium and large loan holders were the main occupation during the same period. Insignificant proportion of earning members was found to have service as their main occupation. Daily labour sale was the potential occupation for small loan holders in the study villages during the same period. Average owned land per household was estimated at 0.74 acres while average cultivated land was 0.72 acres during the study year. It is however, evident from the table that the medium and small credit holders cultivated more land than they possessed on legal status (1.16 acre and 0.49 acre respectively) indicating their urge to cultivate more land even than they have of their own with a view to earning sufficient income while the larger ones were observed to cultivate less than they have of own during the same period. It also appears that the size of own land of the large credit holders was about three times higher than the small and about two times higher than the medium ones during the year of study. Table 1 also shows a clear-cut positive relationship between credit holders and average value of assets they possessed during the study year.

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Table 1. Socio-economic profile of the Respondent and Their Household Information Items Family Size Average earning members Dependency Ratio Occupational Agriculture status of the Petty business earning members Rickshaw pulling (%) Day labourer Service Land holding Average own land (acres) Average cultivated land Value of different assets (Tk) Average annual income (Tk) Average annual expenditure (Tk) Average annual Average saving savings (Tk) Compulsory savings in RDS Total

Small 5.35 1.35 3.96 12 34 25 24 5 0.45 0.49 43444 44690 44232 459 851 1310

Medium Large 5.53 5.81 1.71 2 3.23 2.91 27 22 58 57 Not available Not available 3 15 18 0.85 1.46 1.16 0.92 73527 135595 62082 74464 59291 69291 2791 5245 1888 2444 4679 7689

All 5.48 1.56 3.51 17 44 15 15 10 0.74 0.72 68581 54463 52533 1930 1397 3327

Source: Field survey, 2003. Overall income of the respondent households constitutes both farm and non-farm income earned by all the active members of the family. It is apparent that total average income relates positively with the loan receiver category. Average amount of annual income from all sources together was estimated at Tk 54463 for all loan receivers taken together during the study year. Small loan receiver earned more from non-farm sources because of their weak land resource base while the larger credit holders received relatively more from same sources during the study period. Above all, the respondents studied, have earned their major income from non-farm sources showing their weak agricultural production base and urged them to find out alternative sources of income for survival. The overall average annual savings have been estimated at Tk 3327. It can therefore, be said that IBBL could reach the target group and help to some extent the poverty alleviation program of the government of Bangladesh. Amount of Loan Received and Adequacy of RDS Credit: Amount of credit extended by RDS during the investigating year was categorized into the following: below Tk 8000 (A), Tk 8000 to Tk 11000 (B) and above Tk 11000 (C). From this study, it is found that 58 per cent, 22 per cent and 20 per cent of the sample respondents borrowed within the range of below Tk 8000, Tk 8000 to Tk 11000 and above Tk 11000 respectively. Average amount of loan obtained was estimated at Tk 8175 during the study year. Individual estimate of loan as received by different categories on an average were Tk 5430, Tk 9294 and Tk 14875 respectively for A, B and C during the year of study (Table 2). The table also reveals that the average amount of loan received was positively related with categories of credit holders where the large loan category was found to have had loan almost three times more than those of small category credit holders during the year.

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Table 2. Amount of Loan Received and Adequacy of RDS Credit According to Size of Loan Holders. Small

Items Average amount of loan received (Tk)

Medium

Large 14875

All

5430

9294

8175

5717

10706

19188

9519

5430 95 7

9294 87 7

14875 78 7

8175 86 7

Adequacy of RDS Credit and time taken to obtain loan Average amount of credit applied for (Tk) Average amount of credit received (Tk) Amount of credit received as percent of amount applied for Average required days

Source: Field survey, 2003. Again, 86 per cent of loan applied for was satisfied by the RDS programme in the study villages. Loan holder category shows that small category have got 95 per cent of their required amount while the medium and large categories received 87 and 78 per cent respectively, of their requirement. It can therefore, be inferred that the RDS of IBBL generally give importance to the poor class living in the study villages. On an average, 7 days were expectedly required to get loan from the RDS during the study year. Least time required to have loan from the RDS reflects their urge and sincerity to help the disadvantaged group of the society. Table 3. Purpose-wise Credit Distribution under RDS Head of purposes

Loan distribution by loan size Number

A Average amount (Tk)

Petty business Agriculture Livestock Rickshaw pulling Land purchasing Driving Tailoring Total

29 5227 4 6250 8 5277 4 6250 1 6000 Not available Not available 46 5430 Source: Field survey, 2003.

Number

6 5 2 2 1 1 17

B Average amount (Tk)

Number

C Average amount (Tk)

9667 11 15636 8800 3 12000 9000 1 18000 Not available 9000 1 12000 10000 Not available 10000 Not available 9294 16 14875

Number

All Average amount (Tk)

46 12 11 4 4 1 1 79

8295 8750 7111 6250 9000 10000 10000 8175

Purpose-wise distribution of the RDS loan among the selected borrowers is shown in table 3. The borrowers were found to have received loan for petty business (vegetables, wooden proudcts, selling rice, grocessary, cloth business, etc) agriculture, livestock, rickshaw pulling, purchasing land, driving, tailoring, etc. The average amount of credit obtained by the rural people for petty business was Tk 8295. Near about 36 per cent of all respondents were found to have got credit for this purpose followed by agriculture (Tk 8750) and livestock (Tk 7111) during the year. Loan was also distributed for rickshaw pulling, land purchase, driving and tailoring although the number of respondents was less. Among small category, majority of the respondents received loan for petty business while large and medium categories were found to have loan for petty business followed by agriculture and livestock respectively during the study period.

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Cost of Getting Credit from the RDS: Receiving credit from any source, particularly the institutional ones, involves some cost for negotiating the credit case. So attempt was taken to see the items of cost by the respondents incurred in processing RDS credit and analyzed accordingly during the study. Table 4 shows that the respondents had to spend some amount of money in obtaining credit. Five major items of cost were identified during the present investigation. These were i) cost for application form, ii) revenue stamp, iii) photograph, iv) transportation cost and v) wage for days forgone to travel to and from RDS branch. The study reveals that overall cost incurred for having RDS credit was estimated at Tk 205 and cost per Tk 100 was Tk 2.51 during the study period. Transportation cost was the highest for the large category of credit holders. People of better earning normally use machanical transport facilities costing more while the small credit holders spent minimum for transportation because they often travlled even on foot. Average total cost incurred by the small, medium and large ones were Tk 189, Tk 204 and Tk 254 respectively during the year. Cost per Tk 100 was estimated at Tk 3.47, Tk 2.20 and Tk 1.71 respectively for small, medium and large loan holders. It is quite clear that the respondents having large loan money have incurred the lowest cost followed by the medium and small loan holders. Table 4: Average Amount of Cost Incurred by the Borrower to Receive RDS Loan Items of cost

Loan category (in Tk) B C

A Fee for application form Revenue stamp Photograph Transportation cost Wages for man days required to take loan Total cost Cost per Tk 100

All

Not available 20 20 45 104 189 3.47

20 20 50 114 204 2.2

20 20 60 154 254 1.71

20 20 49 116 205 2.51

Source: Field survey, 2003. Utilization of Loan According to Loan size Category: Almost equal proportion of loan (44 per cent) has been spent on non-agricultural and agricultural (43 per cent) purposes followed by family expenditure (about 14 per cent). It is evident that family expenditure shared least because of proper supervision by the RDS staff on the one hand and borrowers’ self-consciousness towards proper loan use on the other. Among three categories, small ones were observed to have spent expectedly more than 23 per cent on family expenditure while the larger categories did least on the same during the period (Table 5). Table 5. Utilization of Credit according to Loan Size Category Head of expenditure

Loan size (In per cent) B C

A Expenditure on agricultural sector Expenditure on non agricultural sector Family expenditure Total

41.12 35.69 23.19 100

69.23 20.5 10.27 100

26.46 65.97 7.56 100

All 42.52 43.7 13.78 100

Source: Field survey, 2003 Attempt was also made to examine the detailed itemwise utilization of credit by the respondents and shown in table 6. In broad sense, the respondents utilized credit money on current expenditure and capital expenditure on

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farming. Among current expenditure, land preparation, purchase of seed/seedlings, purchase of manure and fartilizer, charge for irrigation water, hire charge for labour and purchase of insecticidies, etc. were important while purchasing land, mortgage in land and purchase of livestock were worthmentioning in capital expenditure on farming during the study. The respondents belonging to small (A) and medium (B) category were observed to have spent more or less equal proportion of loan money on current expenditure while the large ones behaved other way sharing less during the year. Non-farm business expenditure included investment in petty business, grocery, rickshaw pulling, driving, sewing. etc. Both capital and current expenditure on non-farm business was recognised as business investment. Near about 44 per cent of total loan has been invested in business activities. Table 6: Utilization of Credit According to Loan Categories under the RDS. Head of purpose Purchase of land Mortgage in land Purchase of livestock Total capital expenditure on farming Cost incurred for land preparation Purchase of seed & seedling Purchase of manure & fertilizer Charge for irrigation water Hire charge for labour Purchase of insecticides Total current expenditure on farming Total business expenditure Purchase of food Purchase of clothes Educational expenses Medical treatment Repayment of old debt Repairing or constructing of house Total family expenditure Grand total

Percentages amount of loan utilized according to loan categories.

A 12.1 7.24 7.06 26.4 3.03 1.41 2.42 2.72 2.72 2.42 14.72 35.69 1.21 2.82 0.81 12.1 1.21 5.04 23.19 100

B 21.15 28.21 5.13 54.49 1.92 0.28 3.56 3.21 5.13 0.64 14.74 20.50

C 6.71 Not available

14.29 21.00 1.68 0.42 1.26 1.26 0.84 Not available

5.46 65.97 Not available

1.28 1.94 0.64 Not available

6.41 10.27 100

Not available

1.68 0.84 3.78 1.26 7.56 100

All 11.84 9.66 9.73 31.23 1.95 0.7 2.64 2.3 2.61 1.09 11.29 43.70 0.47 1.40 0.93 5.14 1.87 3.97 13.78 100

Source: Field survey, 2003. Family expenditure has covered major sub-heads of food and clothing, educational expenses, house repairing, medical treatment and repayment of old debt in the present study. It is clear that the small credit holders expectedly have spent more of loan money (23.19 per cent) than other two categories (medium 10.27 per cent and large one 7.56 per cent) for family expenditure. Repayment of Loan by the Respondents: Repayment capacity is one of the crucial aspects of credit analysis and proper utilization of credit is supposed to have a great influence upon the repayment capicity of the respondents. Taking all the respondents together average amount of loan due for recovery was found to be Tk 4380 and average

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amount repaid was Tk 4764 ( 53 per cent). Average amount due was found to be Tk 2453, Tk 5105 and Tk 9152 respectively, for the small, medium and large credit holders while actual average amount repaid respectively were found to be Tk 3610, Tk 5304 and Tk 7508 respectively constituting 60, 51 and 45 per cent showing an inverse relationship between loan holders and the amount of loan repaid. Large credit holders were found to be relatively worse repayers of loan money. The percentage of total repayment seems to be low because there was a tendency among the respondents that they wanted to repay the loan money at the last moment of schedule time. They wanted to utilize their loan money to a greater extent, that is why they repaid a few instalments of loan money in aggregate at the last moment. In some cases loan repayment period was not matured while data collection was in progress So, percentage of loan money seems to be lower (Table 7). Table 7. Loan Repayment by the Respondents according to Loan Size Category

Loan size A B C All

Average amount due (Tk) Principal 2159 4492 8054 3855

Profit 294 613 1098 526

Average amount repaid (Tk) Total 2453 5105 9152 4380

Principal 3177 4668 6607 4192

Profit 433 637 901 572

Total 3610 5304 7508 4764

Percentage of total repayment 60 51 45 53

Repayment of Installments Repaid

Loan Size

Number of installments

A B C All

26 21 20 24

Due Average amount per installment (Tk) 137 249 373 198

Number of installments 19 24 26 21

Average amount per installment (Tk) 189 218 359 238

Source: Field survey, 2003. Table 7 shows the instalments repaid, the instalments due and average amount of every instalment. Rural Development Scheme collects loan on instalment basis. One credit holder has to repay his/her loan in 45 instalments. In every instalment, one has to repay Tk 25 for one thousand. Generally, during the week, a field supervisor visits the area to realise the due loan money. It is clear from the table that 24 instalments were repaid and average amount of repaid instalment was Tk 198 and average amount due was Tk 238. It is also found that small credit holders repaid more instalments (repaid 26 instalments and 19 instalments due) possibly because of their fear of harassment by officials or having more loan in future. Factors Affecting Loan Repayment: Respondents repaid regular installments timely were asked to express their opinions regarding repayment of loan instalments on time and the results have been presented in table 8. Fifty three per cent of the borrowers were observed to have repaid instalments timely to avoid additional penalties while 85 per cent of the borrowers timely repaid loan for getting more credit in future. Self-consciousness (90 per cent) and financial help by the other members (37 per cent) were also found to have encouraged the borrowers to repay loan. It is therefore, evedient from the table that hope to have credit in future, self con-sciousness towards loan repayment

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and proper supervision by the RDS staff were found to be the major factors affecting timely credit repayment by the credit holders in the study villages. Table 8: Factors Affecting Timely Loan Repayment Provided by the RDS Factors To avoid additional interest and penalties Pressure by the official staff For getting more credit in future Reminder by the bank Proper supervision by the bank stuff Self consciousness Financial help by the members Pressure by the group member Pressure by the relatives

Per cent respondents according to loan category A B C 47.83 19.57 95.65

64.71 47.06 70.59

71.74 82.61 13.04 34.78 23.91

64.71 100 52.94 29.41 17.65

56.25 56.25 68.75

All 53.16 32.91 84.81

Not available 87.5 100 87.5 37.5 12.5

73.42 89.87 36.71 34.18 20.25

Source: Field survey, 2003. Note: Summation of percentage figures would not be equal to 100 because of multiple answers given by the same respondent. CONCLUSION On the basis of the findings, the following conclusions may be drawn: 1. The RDS loan programme of the IBBL could reach the target groups in the study villages. 2. The beneficiaries could receive RDS loan for quite diverse income generating activities even beyond agricultural activities. 3. Petty business was expectedly dominant in receiving major share of RDS loan in the study area. 4. Credit received was found more or less adequate (86 per cent) and respondents got it within time (only 7 days) during this study. 5. Most of the loan received has been productively used by the beneficiaries in the study villages. 6. Loan repayment performance was fairly satisfactory. 7. Self-consciousness and hope of receiving future loan from RDS contributed most to the timely loan repayment. REFERENCES Hossain, M. 1996. “ Agricultural Policies in Bangladesh: Evaluation and Impact on Crop Production,” in State-Market and Development: Essay in Honour of Rehman Sobhan, Edited by Abu Abdullah and A.R. Khan, UPL, Dhaka. Planning Commission. 1998. The Draft on Participatory Perspective Plan, Ministry of Planning, Government of the Peoples Republic of Bangladesh, Dhaka

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Quasem, M. A. 2002. “ Credit Market in Rural Bangladesh: Issues and Evidence,” paper Presented at the Asia Regional Conference on Public-Private Sector Partnership for Promoting Rural Development, held in Dhaka on 2-4 October 2002.

MICRO CREDIT: AN EXPERIENCE OF ISLAMI BANK BANGLADESH LIMITED

By:

M. A. Habib M. Sayeedul Haque M. R. Uddin Mian and M.A. Bashar

Department of Agricultural Finance Bangladesh Agricultural University Mymensingh-2202 Bangladesh

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