Credit
Credit a term that originated from the Latin word ‘credo’ (Sanskrit Latin ‘crad’) meaning one’s confidence in another. Credit is the sale of money or goods on trust and it increases the purchasing power of the debtor. Most credit arises out of money lending transactions in which creditors surrender money at one point of time in exchange for promises from debtors to pay back later with interest. The term credit is also used to mean the acceptability of one’s promise to pay his debt, ie creditworthiness.
Credit has a long history. At first in farming and barter exchange, surplus farmers, upon request by deficit farmers, used to give them food stuff and seeds, subject to the condition that they would return the goods with some extra after the next harvest. The system of buying and selling of goods on credit spread with monetisation of the economy and replacement of the barter system by exchange in cowrie, metallic coins etc. Later, the cash credit system started to evolve abreast of consumer and trade credit in different forms in line with changing needs and demand of individuals, professionals, traders, industrial producers, etc, and involvement of various types of banks and other financial and non-bank financial institutions in trading in credit. But the evolution process of the credit system was accelerated primarily because of the increased participation of moneylenders, goldsmiths, and the merchant class.
There are various ways and bases of classifying credit among which the nature of the debtor and creditor, purpose of credit, and time length are very common. Depending upon the nature of the debtor, various types of credits, such as individual credit, business or trade credit, and government credit. Types of credit include consumer credit, production or productive credit and speculative credit; short-, medium- or long-term credit; monetised and non-monetised credit; trade credit, mercantile credit, and financial credit; commercial credit, investment credit, foreign trade credit; or, industrial credit, and agricultural credit. Credit is also classified as urban and rural, depending upon the area or regions in which they are sanctioned and utilised irrespective of purposes. Rural informal credit is in effect part of society and cannot be seen as a purely economic phenomenon. Major institutional suppliers of rural credit are rural branches of commercial banks, co-operative banks and societies, non-government organisations and other micro-finance institutions. informal credit providers in rural areas are friends and relatives, local professional moneylenders (mahajans), local rich people and farm families, surplus shop-keepers and households, business agents, bargamaliks and neighbours. Informal borrowings nowadays carry higher rates of interest. However, parts of the informal credit do not carry any interest. Interest free loans in the form of raw materials are supplied to artisans, or provided by landowners to tenants, but of course may involve obligations instead of interest. Some small informal credits, provided for subsistence, may be given as karja or haolat loans in the Islamic tradition. Rural informal credit is used in financing consumption costs, accumulation of retail capital, repaying old debts and financing costs of socioeconomic needs such as marriage ceremonies, medical treatment, buying clothes, and building dwelling houses.
Credit system in Bangladesh Although there is no formal evidence of organised credit transactions in ancient Bengal, people of that period had experience in credit and extra payment (interest) thereon. Koutilya’s Artha Shastra stated that banking on a limited scale was practiced in the Vedic era in the form of borrowing and lending on and for interest. These activities were centred mainly in temples and other religious places. But borrowing and lending activity took shape as banking during the period of Manu, a famous saint of ancient India, who advised people to deposit their money with a person bearing good moral character, well conversant with law, and surrounded by respectable and rich relatives. The mangalkavya of ancient Bengali literature also indicates the existence of moneylending and indebtedness in both cash and kind side by side with usury in ancient Bengal.
The credit system in the sub-continent was further consolidated during the Mughal period, when different types of gold coins were in circulation motivating people of different classes to engage in monetary transactions and profit-motivated credit-giving activities. Local moneylenders, capitalists, bankers, banians (commercial class) and other professionals participated in trading in finance during the Mughal era and contributed substantially to the growth process of the credit system. One of the old systems of credit is the dadni system under which tantis (weavers), local farmers, and industrial producers took advance money from foreign merchants and companies to supply a particular amount of goods within a particular period. The credit system gained momentum in 1700 through the establishment of the Hindustan Bank in calcutta, the first modern bank in this sub-continent. Famous among the moneylenders and other traders in credit in Mughal Bengal was the jagat sheth family, whose establishment had branches at important business centres such as Hughli, dhaka, and murshidabad. Manikchand, the founder of the great jagat sheths, came to Dhaka from Patna in the early eighteenth century, and established a firm here. In the early eighteenth century, mahajans advanced money to cultivators before the season for marketing grains. They accepted repayment in kind and stored the grain for the market. The interest rate charged by Jagat Sheths at dinajpur, Purnia, and other districts varied from two to four percent per month. But private moneylenders charged interest at an exorbitant rate.
Mughal rulers patronised the banking business of Jagat Sheth and other mercantile communities and traders, including moneylenders, moneychangers, village merchants and shopkeepers. During the eighteenth century, money and credit transactions in Bengal were concentrated in the hands of Seths, sarrafs, mahajans, and poddars. The credit voucher issued by lenders/bankers were known as hundis, which enabled the drawee to transfer money from one place to another and also facilitated payments between merchants of different places. Bankers normally charged commissions for these financial transactions. Hundi was widely used as the main credit instrument and issued by indigenous bankers. A hundi is a written order made by one person on another for the payment, on demand or after a specified time, of a certain sum of money to a person named therein. It served as an instrument to raise short-term credit to be drawn by a merchant and repayable at another place.
During the eighteenth century, merchants requiring money in various towns to buy goods for Surat could obtain it from local bankers by giving them a two months bill on Surat and paying a high rate of interest. Interest rates on these bills were fixed according to the risks involved and time and condition in Dhaka, Patna, and Murshidabad. Banking houses in the early eighteenth century used to give loans to the governments in the form of either ways-and-means accommodation or long-term financing of military expeditions or other ventures. According to English records, the Jagat Sheths lent more than 5 million rupees to Mir Jafar to meet his expenses as well as to keep the promises he made to the English after the battle of palashi. The interest rates charged by bankers and moneylenders on government loans were comparatively lower than the rates charged for zamindars. In the late eighteenth and early nineteenth century, the average interest rate they charged zamindars varied from 10 to 12 percent per year.
The English and Dutch East India Companies and Asian merchants engaged in exporting goods from Bengal to various other markets in Europe and Asia provided local producers with short-term advances to increase the production of exportable goods. Such dealings increased the flow of funds to the Bengal economy. The farmers and artisans were also dependent on local and foreign moneylenders for credit support to finance their costs of production. In 1720-21, English companies owed Rs 2.4 million to moneylenders, merchants and banker in Bengal. The Dutch East India Company’s debt to Kashimbazaar merchants with interest in September 1724 was Rs 1.5 million. In March 1754, total Dutch borrowing in Bengal was Rs 2.83 million. In the three years between 1755 and 1757, the Dutch debt to the House of Jagat Sheth was Rs 2.386 million while the French owed Rs 1.5 million. Loans were given on mutual trust, sometimes without a document, or even a witness.
Moneylenders, mercantile communities, and other traders in money and credit, including the famous Jagat Sheth family, suffered heavy losses after the occupancy of Bengal, Bihar and Orissa by the east india company. The decline in informal banking in Mughal Bengal caused serious instability in different sectors of the economy. To protect the economy and to stimulate trade and commerce, the British established several English Agency Houses in Bengal.
Credit system in the Bangladesh region started taking formal shape during the late eighteenth century and improved to a remarkable extent during the British period. Such institutions in the region during the British regime included at least 14 banks or bank offices and 17 loan offices.
Following the Partition of Bengal in 1947, Pakistan inherited a banking and credit structure from the British regime consisting of 631 branches and offices of both local and foreign banks. The State Bank of Pakistan established in 1948 undertook many initiatives to strengthen the country’s credit system through setting up of commercial banks and other types of credit institutions. In addition to the progress made in commercial banking, other credit institutions were established to satisfy the need for medium and long-term credit for trade, agriculture, Industry and housing in the 24 years between 1947 and 1971. Among them, the Agricultural Development Bank of Pakistan, Industrial Development Bank, Pakistan Industrial Credit and Investment Corporation, and the House Building Finance Corporation set up branches in East Pakistan.
Bangladesh inherited a formal credit system in 1971 that had only 1,130 branches of 12 commercial banks. The non-formal segment comprised local moneylenders and merchants, shopkeepers, and other types of lenders whose role remained insignificant during the early years of independence due to the limited loanable funds in their hand.
In 1972, the bangladesh bank was established as the central bank of the country and six nationalised commercial banks (NCBs) by merging 12 commercial banks. bangladesh shilpa bank (Industrial Development Bank), and bangladesh shilpa rin sangstha (Industrial Credit Agency) came into being in 1972 and bangladesh krishi bank (Agricultural Credit Bank) in 1973. These institutions serve as sources of long-term credits at concessional and directed interest rates and are known as development finance institutions (DFIs). rajshahi krishi unnayan bank and basic bank also operate in this way. Up to 31 March 2000, these banks together advanced Tk 69.51 billion. The Bangladesh Small and Cottage Industries Corporation (BSIC) is another institution that provides medium and long-term credit to small industries. The co-operative banks in the country provide medium and long-term credit to purchase land and agricultural equipment.
The investment corporation of bangladesh was established in 1976 and entrusted with the responsibility of accelerating the pace of industrialisation in the country along with other capital market development activities. Two private credit and investment companies, namely National Credit Ltd and Bangladesh Commerce and Investment Ltd, have been active in the country’s credit market since the mid-1980s. In between 1976 and 2000, twenty five new local private commercial banks, four specialised banks, 27 merchant bankers and leasing companies, and 22 non-bank financial institutions were established. Moreover, 13 foreign commercial banks have been working in the country’s banking market.
Total bank credit in Bangladesh has grown consistently over the years and the volume rose from Tk 11.53 billion on 30 June 1977 to Tk 558.25 billion on 30 June 2000. Bangladesh Samabya Bank (co-operative bank) provided a total of Tk 2.74 billion loans to the agriculture, industry, real estate, retail and whole sale trading, insurance, transport and communication sectors, and provided special credit for poverty alleviation programmes. grameen bank, a specialised microcredit institution, engaged mainly in poverty alleviation and women empowerment, granted Tk 15.70 billion up to 30 June 2000. Similarly, the Employment Bank , established on 22 September 1998, distributed Tk 85 million for promotion of self-employment in small and cottage industries till this date. Housing credit distributed by the bangladesh house building finance corporation up to 30 June 2000 totaled Tk 27.66 billion. Total long-term credit of various forms disbursed by the country’s 27 leasing companies up to the same date is estimated at Tk 13.32 billion.
A recently developed segment of the credit system in Bangladesh is the microcredit offered by NGO community, Grameen Bank, government microcredit agencies and other micro-finance institutions (MFIs). At present, more than 1000 MFIs are working in Bangladesh. Most of them are local and foreign NGOs. They work with the rural poor who are largely bypassed by the banking system and other credit-giving agencies. A few NGOs are also working with the urban poor. One statistical report on 369 NGOs, the Grameen Bank, Palli Karmasahayak Foundation (PKSF), and the Ministry of Youth and Sports reveals that these institutions distributed Tk 53.59 billion to their 4,926,427 borrower-members in 1998.
Bank credit The commercial banking sector is the main provider of bank credit in Bangladesh. This sector comprises 4 nationalised commercial banks, 27 domestic private and 13 foreign commercial banks. Together, they hold Tk 634.145 billion in deposits and Tk 464.476 billion in credit. The credit-deposit ratio of the commercial banking sector is 79%. About 83% of the credit from the banking sector was given to projects in urban areas.
The three institutional pillars of banking - a strong regulatory system, well-managed banks and an efficient court system - have proved to be inadequate to such a point that banking institutions cannot be relied on to ensure the safety of deposits and to allocate credit. Over 93% of the commercial banking system is insolvent and badly managed. As per generally accepted international norms for loan classification and provisions, around 52% of the total portfolio of NCBs and private commercial banks is nonperforming. The quality of portfolio is much better in foreign banks, but their share in the country’s banking system is only 6%.
The operating environment and work culture in NCBs is disorganised largely because of non-commercial union activities and unions’ interference in credit sanctioning. Government interference is also excessive in the governance of NCBs. The operations of most private domestic commercial banks are severely undermined by insider lending, fraud and negligence. Weak supervision and inadequate enforcement led to their present predicament. The legal system is slow and cumbersome. A weak and flawed legal system is an impediment to both debt recovery and enforcement of prudential laws by the Bangladesh Bank. The amount of classified bank credit of the commercial banks as on 31 December 1999 stood at Tk 240 billion, which is 39.34% of loans disbursed by all banks and specialised financial institutions.
Total credit provided by the banking system to different economic sectors up to 30 June 2000 is (a) agriculture, fishing and forestry - Tk 76.36 billion, (b) industry (other than working capital financing) - Tk 99.53 billion, (c) working capital financing - Tk 154.34 billion, (d) export - Tk 34.71 billion, and (e) commercial loans - Tk 188.80 billion.
Agricultural credit In Mughal Bengal, mahajans or mahajani enterprises were the main sources of agricultural credit. Mahajani is an ancient practice and existed even in Vedic India. It is stated in the Risala-i-Zirat, a Persian work written immediately before British rule in Bengal, that peasants fell into debt mostly because of the need to pay land-revenue or to meet additional tax-levies, and ‘occasionally’, to recover from losses due to drought or replace cattle losses, to observe the rite of marriage and bereavement, or to meet the expenses incurred in prosecuting disputes among themselves. Besides moneylenders, local merchants, and richer neighbours were also important sources of agricultural credit during the pre-British period. Local and foreign, especially, European merchants engaged in exporting agricultural produces from Bengal, also advanced money to peasants to ensure that they were productive.
Traditional moneylenders advanced loans to peasants in cash or kind to get them back on a high rate of interest without seeking any control on the production process. But the new credit agencies connected with trade and commerce advanced money to peasants with a view to securing a portion of the peasant’s produce. In the middle of the nineteenth century, peasants’ grain production for the market was largely financed by loans from the grain merchants and the landlords. sugarcane was dependent on loans from the sugar merchants. The East India Company advanced money for the cultivation of mulberry, and the indigo factories for indigo cultivation. Peasants also took credit against the hypothecation of their crop. But these credits were not sufficient to finance the costs of the transformation of agriculture from the old system to the modern one. Local money markets were too limited to provide funds for massive investment in agriculture. Capital for agricultural development from Britain was also not available in sufficient quantities. During the late nineteenth century, the agrarian economy of Bengal lost its economic equilibrium and peasants suffered chronic indebtedness due to high and compound interest rates, low level of production and income, and the defective structure of the economy.
The rates of compound interest charged on rural and agricultural credit by the village moneylenders, kabulis, jotdars, shahas, banians, telis and other informal lenders varied from 25 to 40 per cent per annum. The debtor agriculturists were often obliged to sell the whole or part of the their produce at unprofitable rates to creditors to repay their debts. On the other hand, the decline in the prices of agricultural commodities in the years of the Great Depression that lasted from 1928 to 1937 badly increased the extent of peasant indebtedness. The decline in prices of agricultural commodities in many Bengal districts by up to 70% between 1929 and 1935 worsened the economic health of peasants.
Exaction of interest by local informal creditors has been a problem in India for a long time. Such exaction lead to several peasant movements during the early nineteenth century. The British government formed the Indian Central Banking Enquiry Committee to investigate into the matter. On the basis of the Committee’s report, the finance department of the government made certain suggestions to check exactions throughout India, including Bengal. The British rulers of India formed and appointed several other enquiry committees and commissions. Many of these committees and commissions went into the subject of rural indebtedness and its impact on agricultural conditions. Their work resulted in the Land Improvement Loan Act 1883, Agriculturists Loan Act 1884, the Nicholson’s Report 1895, Maclagan Committee Report 1914, Report of the Royal Commission on Agriculture 1929, the Bengal Provincial Banking Enquiry 1930, Bengal Board of Economic Enquiry 1934, Rehabilitation Enquiry 1943 and 1944, Bengal Crop Survey 1944-45, Bengal Debt Survey 1946, Rural Debt Enquiry, debt settlement board and Debt Conciliation Board of Chandpur. All these made significant contributions to the settlement of the indebtedness of the Bengal peasants. According to the recommendation of the Bengal Relief of Indebtedness Bill, the Bengal Agricultural Debtors Act (BAD) 1935 was enacted. In 1938, the bengal tenancy act was amended declaring all mortgages given before or after 1928 as void.
To regulate the activities of the moneylenders, major provisions were made in the Bengal Moneylenders Act 1940. Prior to the above laws, the Usurious Loans Act 1918 was enacted by the central legislature of India. Under the Bengal Moneylenders Act 1933, interest in excess of 15% on secured loans and in excess of 20% on unsecured loans was made illegal.
Abreast of rural informal sources, formal credit sources were established in Bengal during the British period. The Co-operative Society Act was passed and enacted in 1912 and the provincial co-operative banks were established in the same year. Co-operative rules were amended and the Bengal Co-operative Societies Act 1940 was enacted.
After the partition of bengal in 1947, the problem of agricultural credit in Pakistan acquired a new dimension. Emphasis was now given on the production aspect of agriculture. A number of committees and commissions dealing with agriculture and agricultural credit were formed. Important among them were the Pakistan Agricultural Enquiry Committee 1951, the Expert Committee, West Pakistan Co-operative Enquiry Committee, Credit Enquiry Commission, and Food and Agricultural Commission. All these committees/commissions stressed the need for stregtnening the institutional set-up for agricultural financing. As the demand for agricultural credit in the country was intense and growing constantly, the central government set up a specialised agricultural credit institution. The government initially endeavoured to concentrate on providing credit to those areas of the country where more intensive effort for agricultural development were needed. Model development areas, popularly known as Crash Programme Areas, were selected for higher agricultural production. Special arrangements were thus made for organising adequate institutional credit to needy farmers. In the beginning, 7 districts in West Pakistan and 7 sub-divisions in East Pakistan were chosen. The programme was later extended to more areas.
Although in actual operation, the divisions of loan were short-term, medium-term, and long-term, agricultural credit in Pakistan was of mainly two formal types - seasonal and developmental. Seasonal credit was for expenses of a recurring nature, while development credits covered capital needs. Short-term credit was normally given for growing a particular crop or for a particular season. Cultivators usually required money at the time of preparing land and were in a position to repay loans after the harvest. They could borrow for one particular season or for both the summer and winter seasons at a time, and made repayments in two installments. Short-term credit with maturity of not more than 12 months would finance the costs of preparation of land, purchase seeds, fertilisers and other recurring expenses.
Credit worthiness was largely determined in the country through the landholding of the borrower both by private lenders as well as institutional agencies. Over large parts of the country, loans were generally available against land mortgage by the borrower or against surety of other persons, preferably those holding land.
The Bengal Agricultural Debtors Act 1935 (amended in 1940), Bengal Moneylenders Act 1939, and the [[East Bengal State Acquisition and Tenancy Act|east bengal state acquisition and tenancy act 1950 were in operation in the Bangladesh region. The East Pakistan provincial government’s loan for agriculture in East Pakistan was Rs 28 million in 1956 and Rs 25 million in 1961-62 takavi loan for West Pakistan and agricultural loan for East Pakistan constituted the operations of the government as a direct lender. Co-operative societies and organisations played significant role in providing agricultural credit.
In East Pakistan, there were 8 land mortgage banks in 1960 with a membership of 7,567 and share capital of Rs 0.27 million and working capital of Rs 2.48 million. In 1959-60, these banks advanced Rs 0.63 million to agriculture for redemption of old debts and permanent improvement of land. There were 83 central co-operative banks in East Pakistan in 1948-49. But the number was reduced to 56 in 1960. Together, they provided Rs 17.94 million in 1948-49 and Rs 28.80 million in 1959-60 to the agricultural sector. Although central multipurpose societies existed in East Pakistan, many of them had taken to credit business in order to fulfill the requirements of areas not served by the central co-operative banks. There were 62 societies in operation in 1959-60 and their total outstanding credit was Rs 6.024 million.
In 1972, Bangladesh inherited a weak banking system with only 1,130 branches of 12 banks. Between 1972 and 1976, Bangladesh Krishi Bank and the co-operatives were the two major institutions meeting the need of agricultural credit. To increase the flow of credit for agriculture, the government inducted the NCBs into the field of agricultural credit in 1976 under a new programme called Special Agricultural Credit Programme (SACP) which was designed to cater to all seasonal crop loans. Rural branches of NCBs started providing agricultural credit. As against a total disbursement of Tk 860 million by the banking system in 1976-77, the agricultural loan rose to Tk 3.75 billion in 1980-81, Tk 11.50 billion in 1984-85, and Tk 76.30 billion in 1999-2000.
Bangladesh Krishi Bank (BKB) with 844 branches and rajshahi krishi unnayan bank (RKUB) with 301 branches provide agricultural credit. BKB intended to distribute a total credit of Tk 14.5 million for agriculture in 1999-2000. The RKUB distributed a total of Tk 26.36 million in 1999-2000. Another major organisation providing agricultural credit is Bangladesh Samabaya Bank Ltd (BSBL), the apex institution of all central co-operative societies, co-operative land mortgage banks, central sugarcane growers associations, thana co-operative societies, and similar other societies. Any of the above societies can be a member of BSBL, which, on 30 June 1999, had 511 members. Total loans and advances of BSBL up to 30 June 2000 accounted for Tk 2.74 billion, of which Tk 2.59 billion was distributed to the agricultural sector. The rate of interest charged by institutions of the country’s banking systems for agricultural credit on 30 April 2000 varied from 9.75 to 15.50 per cent. The eight non-scheduled banks working in the country have participated substantially in agricultural credit giving activities. However, data on their performance are not available, as they are not required to submit returns to the country’s central bank.
Despite the significant increase in the amount of total agricultural credit in the country during the last two and a half decade, the NCBs, BKB, and RKUB together cater to around 50% of the total agricultural credit. The rest was provided by the informal money market, i.e., the moneylenders in different forms. All scheduled banks including private and foreign concerns in Bangladesh are taking part in the agriculture credit programme, initiated to intensify the food security in the country. A special agriculture loan scheme has been introduced to promote the marketing of special farm products, produced in specific zones. A policy for the operation of agriculture loan scheme based on Public-Private Partnership (PPP) has been formed under which farmers are allowed to open a bank account with only Tk. 10 at grass root level. The step was taken to speed up agriculture loan disbursement process. Under the scheme in 2008-09, Tk. 92,844.6 million was disbursed as agri-loan against the target of Tk. 93,792 million.
Internal Credit plays an important role in the country’s overall financial management. Generally the credit flow within the banking system is regarded as internal credit. Beside scheduled banks, the credit provided by Bangladesh Bank and Co-operative Bank also comes under internal credit. However, credit provides in foreign currency is not internal credit. Such credit is divided into three categories - (1) Public (Government), (2) Nationalised and (3) Private sector. By the end of June 2009, the total amount of country’s internal credit was Tk. 24,90,400 million of which the shares of public, nationalised an private sectors were 20%, 4% and 76% respectively whereas these were 30%, 8% and 62% in 1999 respectively. Internal credit in private sector has risen significantly due to strengthening the privatisation programe of the government and for widening the privatisation policy in the national economy. [Abul Kalam Azad]
See also microcredit.
