Microcredit: Mix Of Hype And Hope

Microcredit The concept of micro finance was first developed in Bangladesh in the late seventies with a view to help the people living below the poverty line. This financial innovation is generally considered to have originated with the Grameen Bank. Micro credit is the name given to extremely small loans made to poor borrowers. A typical microcredit scheme involves the extension of an unsecured, commercial-type loan at interest to a poor borrower. The definition for poor varies with the situation, but in Bangladesh the typical definition is a borrower who owns less than 0.5 acres of land and relies on wages for all income. Loans are normally disbursed in a group of poor borrowers, with some amount of non-credit assistance also being made available. The non-credit assistance typically ranges from skills training to marketing assistance to lessons in social empowerment. Borrowers are normally placed into groups of 10-20 people who meet regularly with the loan officer of the micro credit program. These groups of borrowers substitute for collateral and take over the role of securing the loans dispersed. Each borrower in a group agrees to be held liable for all debts incurred by any member of the group. In the event that a borrower defaults, the other members of the group are required to make up the amount in default. Borrowers are encouraged or even required to monitor the behavior of one another to make sure that no one is danger of default.

Microcredit Regulatory Authority Microcredit Regulatory Authority is the central body to monitor and supervise micro finance operation in Bangladesh. Microcredit program in Bangladesh is implemented by NGOs, Grameen Bank, different types of government-owned banks, private commercial banks, and specialized programs of some ministries etc. Despite the fact that more than thousands operating micro credit program, only 10 large microcredit institutions (MFIs) and Grameen Bank represent 87% of total savings of the sector (around BD taka 93 billion) and 81% of total outstanding loan of the sector (around BD taka 157.82 billion). No MFI can operate micro credit program without obtaining license from MRA. Micro credit activities of Grameen Bank and 10 large non-government Microcredit Institutions are shown below: SL Name of the Institutions No.

Districts Covered No. No of Members No of Borrowers Outstanding Loan Savings of Branches (in million) (in million)

1

Grameen Bank

64

2,517

7,527,700

7,527,700

39,920

54,260

2

BRAC

64

3,005

8,448,107

7,053,798

43,240

14,850

3

ASA

64

3,324

7,132,427

5,675,784

29,180

5,240

4

Proshika Manobik Unnayan Kendro

58

213

2,724,101

1,761,638

3,940

2,160

5

TMSS

44

684

698,741

563,630

2,930

1,090

6

Buro Bangladesh

43

294

472,984

371,285

2,270

920

7

Jagorani Chakra Foundation

20

233

348,150

265,535

1,440

500

8

Shakti Foundation

45

195

181,990

158,763

1,170

570

9

Padakhep Manabik Unnayan Kendra

43

207

170,754

166,950

1,140

330

10

Caritas Bangladesh

40

243

376,922

302,196

1,030

600

11

RDRS Bangladesh

11

144

348,324

280,351

890

390

11,059

28,430,200

24,127,630

127,150

80,910

Total

(as of 30/06/2008)

Developed World Microcredit is not only provided in poor countries, but also in one of the world's richest countries. In USA 37 million people (12.6%) live below the poverty line and microcredit program has also been initiated there. Developed countries in which the microcredit model is fast gaining pace include Israel, Russia, Ukraine etc.

Advocates of Microcredit The advocates of microcredit focus on the following points: A. Reduction of Vulnerability One of the most important benefits of micro credit program is its ability to reduce vulnerability among the poor. Microcredit programs help borrowers to insure themselves against crises by building up household assets. Such assets can be sold if needed. They can also be used as security or proof of credit worthiness when dealing with businessmen or more traditional lending agencies. Such diversification of assets can reduce the risks of catastrophic loss. For example, a family which relies on share-cropping could easily be bankrupted by a single crop loss, whereas a family with a diversified base of crops and livestock or handicraft income could survive until the next harvest. Other aspects of micro credit programs such as skills training and female empowerment also contribute to a family’s ability to cope with crises. These reductions in vulnerability are important because they allow poor people to begin to hold their own in society. B. Increased Consumption Another benefit of microcredit programs is the increase in household consumption. Research shows that in Bangladesh for every 100 taka lent to a female borrower, household consumption rises by 18 taka. These are both important effects for people who typically live on the edge of disaster. Even small increases in consumption and increased regularity in consumption can lead to better health and nutrition, and enhance the ability to make long range plans for the family. C. Reduced Income Poverty Microcredit programs also reduce income poverty and borrowers actually tend to make more money over time. Once the cycle of poverty has been arrested & some stability is provided, many borrowers go on to make profitable investments & even lift themselves out of poverty all together. Members of the Bangladesh Rural Advancement Committee (BRAC) expect to see their poverty fall by an average of 15% after three years of participation. Grameen Bank (GB) microcredit program lift borrowers from poverty within four years of joining the program. About 5% of the GB’s members rise from poverty each year.

D. Women Empowerment Over the last two to three decades rural Bangladesh has experienced a complex range of developments thanks to microcredit. Micro credit has played an integral role in changing the lives women in the villages. Women's access to independent sources of finance, through micro-credit has increased their status and also has enhanced women's empowerment. Women in many families are no longer considered a burden rather they are a now contributing member of the family. E. Microclusters The main selling point for clustering is the “collective efficiency” that it produces. Microcredit funded business ventures are frequently plagued by the problems of small size and isolation. It is not worth the time for traders who are on the move. Consequently, the ventures can only rely on local patronage, which may or may not be enough to support long term growth. With microcredit clusters however, these problems are partly overcome. Traders are attracted by the possibility of making cheap & bulk purchases, whilst vendors of raw materials are attracted by the possibility of making bulk sales. The close proximity of a number of businesses in the same line of work also allows for sharing of labor and subcontract is also promoted within a cluster. Successful clustered enterprises may also go on to specialize, with the resulting benefits that come from division of labor. One of the major advantages about clusters is that they share information and technological innovations among themselves. Finally, rural microenterprise clusters have been found to have certain competitive advantages over more centrally located industries that do not have the benefit of clustering. Rural clusters usually have flexible to nonexistent rules for land use and environmental impact. Labor is also cheap, flexible, and unregulated. Finally, certain raw materials such as wood or bamboo are also frequently available either for extremely low price or free. To sum up, both straight microcredit programs and clustered microenterprise programs offer a number of benefits to participants. They have been successful in lifting people out of poverty. F. Misconception of High Interest Rate There is a misconception that circulate around micro credit. People always point to the high interest rates of microfinance. Actually borrowers benefit significantly despite the high interest rates, because returns on investment for micro enterprises are extremely high. Studies have estimated that returns from micro enterprises fall in the range of 50% to 100%. When a borrower is earning such high returns, paying interest rates in the range of 26% or even higher is perfectly acceptable to a borrower. Microenterprises enjoy high return of investment because:  They primarily use family labor, which is more cost effective than hiring labors from outside.

 Enjoys low infrastructure costs (e.g., village groceries are often home-front stores).  No taxes and legal costs  Businesses are mainly labor intensive and financial capital is a small percentage of the overall input, so micro enterprises enjoy high returns. Reasons why MFI’s need to charge such high interest rates:  They have to cover the transactions cost of lending to the poor. It is much more expensive to make a large number of tiny loans than to make a small number of larger loans.  Microfinance institutions often have to provide doorstep service—with loan officers traveling to remote villages to give loans and collect payments. That’s much costlier than setting up a branch office.

Criticism “One day our grandchildren will go to museums to see what poverty was like.” - Muhammad Yunus, Founder of Grameen bank, The Independent 5 May 1996. Mr.Yunus’s dream is a far-cry from reality in Bangladesh, his “Instrument for Poverty” is surrounded by many criticism. Despite the many claims by the advocates of microcredit it has the following allegations to its name  Some microfinance institutions take advantage of near-monopoly situations and charge interest rate as high as 50% to 100%.  Enthusiasm for micro credit among government officials as an anti-poverty program can motivate cuts in public health, welfare & education spending that are important for the rural society.  So far the success of the microcredit model in our country has been judged from the lender's perspective (repayment rates, financial viability) and not from that of the borrowers. For example, the Grameen Bank's high repayment rate does not reflect the number of women who are repeat borrowers that have become dependent on loans for household expenditures rather than capital investments.  Studies of microcredit programs have found that women often act merely as collection agents for their husbands and sons, such that the men spend the money themselves while women are saddled with the credit risk. As a result, borrowers are kept out of waged work and pushed into the informal economy.

 A big puzzle remains unsolved regarding empowerment of women. If the positive changes have really taken place, then why can’t we see solid improvements in women's position in the society. There has not been any convincing reduction in dowry payments or domestic violence. Indeed dowry amounts continues to rise, so as the associated violence against women. Microcredit has contributed to the escalation of dowry. While microcredit has benefited large sections of the rural population, it has also worked against women's solidarity and contributed heavily to the inflation of dowry. Grooms are aware that money is available to brides' families more easily now via MFI’s. Women are being sent home to persuade their parents to borrow money from NGO’s for their husbands to invest in business, including buying items such as rickshaws, vans, grocery shops or irrigation pumps. Although in theory micro-finance institutions do not lend money for the purposes of dowry payment, in practice it is common knowledge among the barefoot bankers (micro-finance institution employees distributing and collecting loans among village people) that most village families depend on microcredit to meet dowry demands.  The success of microcredit schemes has so far been measured largely by repayment rates. The largest microcredit lenders in Bangladesh regularly show repayment rates in excess of 90 percent. It doesn’t mean that repayment was made from profits or by selling personal belongings.  Advocates talk about microenterprise clusters. But reality is they only tend to be successful when they are located near roads or crossroads. Taking the infrastructure of the rural Bangladesh, we are yet to see the full benefit of clusters in real life.  From 2000 to 2007, Bangladesh has made progress towards poverty reduction at a rate of about 1 percent a year, and most of this progress is considered to have come from remittance. Why can we not see the benefit of all these borrowers coming out of poverty at a national level?

Recommendations Micro credit undoubtedly has built a positive image for Bangladesh. It has earned the most coveted Nobel Prize. Microfinance can play a role in development but it is not a panacea for poverty. If it is going to be successful it has to help people move away from borrowing and stop promoting collectivist notions and a zero sum mentality that only hinders development. Microfinance can be the first step on the ladder but macro-finance is needed too. For widespread and sustainable eradication of poverty, an attractive investment climate with secure property rights and rule of law are much more important in the long run.

Capping interest rates is not the best way to solve the problem of high rate. Instead the government should stimulate competition so that the existing microfinance providers must lower rates in order to survive. There has to be a win-win—long-term scenario for both the parties. The government has a key role to play on this issue. The government has to ensure that MFI’s activities are closely monitored so that they can’t exploit the poor people for their own benefit. Consistent development can only be ensured when the government will assess the policies of such institutions. In the past the biggest reductions in poverty has come from employment through capitalism. Industrial Revolution in the 19th century probably resulted in the single biggest poverty alleviation of all time. China is a good example of how mass population can be converted to a positive force. Bangladesh has also a high population and there is no reason we can’t train our population to make them self dependent. Here the private sector has not only a role but also an integral place in poverty alleviation. The challenge we face in Bangladesh is in engaging the private sector in rural employment creation. The government should give sufficient incentives to the private sector, so that the benefits outweigh the risk. There are many benefits of industrialization in the rural areas if the government can ensure infrastructure to the private sectors. The investors will get cheap labor whist the local people will not be dependent solely on Dhaka city for employment. Finally, accepting the limitations of micro credit and the boundaries within which it works effectively will enable other methods of poverty alleviation to flourish. The search for a solution to poverty alleviation did not end when micro credit began and indeed, if we are to compare an economy of poverty with a developed economy it is clear that there is no single solution. Rather, a whole range of measures are necessary to create a sustainable and robust economy.