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Microcredit


Microcredit a term now broadly used to mean very small-sized supervised loans without any collateral. Amounts of microcredit in Bangladesh vary from Tk 1000 to Tk 10,000 per beneficiary and are provided mainly by micro-finance institutions/programmes and also banks and conventional financial institutions to poor people with less than half an acre of land to undertake employment and income generating activities. Micro-finance institutions (MFIs) develop various tools to provide the poor with access to financial services so that they can increase their income and productivity. Microcredit programmes aimed at poverty alleviation cover a large number of borrowers with the objective of substantially removing socio-economic imbalances, especially in rural areas.

Because the rural poor have long been excessively dependent on informal sources of finance, the microcredit programme was pioneered in Bangladesh through a grameen bank project as an alternative. Microcredit-financing started as a programme of group-based and intensively supervised loans to poor people, especially poor women. Grameen Bank initiated it in 1976 as a pilot project. At present, more than 800 non-government organisations, four nationalised commercial banks and specialised financial institutions such as bangladesh krishi bank (BKB), rajshahi krishi unnayan bank (RAKUB) and UNemployment bank operate microcredit programmes in the country.

The success of the group-based microcredit financing scheme of Grameen Bank and a host of other MFIs operating on the Grameen model has been greatly appreciated worldwide and replicated in more than 45 countries, including the United States. Later, a government agency of Bangladesh, the Department of Youth Development (DYD) of the Ministry of Youth and Sports, adopted a microcredit project to provide small loans to landless family-based youth groups to alleviate poverty through employment and income generation. The number of borrowers of such credit throughout the world stood around 9 million in 2000. Of them, more than 5 million are from Bangladesh.

Microcredit, however, is not something new in finance. Informal local sources such as moneylenders and mahajans, well-to-do neighbours, and relatives and friends used to provide small loans from time immemorial. Available records suggest that such transactions took place in India during the Vedic period. This age-old practice of moneylending expanded throughout the Mughal and the early British periods due mainly to the absence of formal/institutional providers of rural credit. The dominance of informal credit suppliers continued until institutional sources like loan offices and banks started to evolve in the mid-seventeenth century. These institutional sources, however, could not eliminate the informal ones since the demand for finance always exceeded its supply by institutional sources. More importantly, most poor borrowers, both from rural and urban areas, do not have easy access to formal credit sources.

Before the independence of Bangladesh, all but one commercial bank in Pakistan were privately owned. The common people especially, low-income groups were hardly allowed to receive bank loans. Indeed, 22 families in the country controlled all businesses including banking. Apprehending major popular discontent, the government initiated a few microcredit programmes in the late 1960s. Prominent among them were the Faria-Bepari Jute Financing Scheme and the Small Loan Scheme. Under the first scheme, retailers in jute trading, farias (factors) as well as beparis (petty merchants), were financed by scheduled banks and maximum loan limit for farias was Rs 1000 and for beparis, Rs 2000. These loans were collateral free, but trading licenses were to be deposited with banks as security. Under the second scheme, the State Bank of Pakistan advised scheduled banks to develop their own small loan schemes to cater to the needs of small economic activities. Some of the new schemes were the 'Peoples Credit' of the National Bank of Pakistan (loan ceiling Rs 2000), 'Shopkeepers Loan Scheme' of Habib Bank Ltd. (ceiling Rs 1000), and 'Small Loan Scheme' of United Bank Ltd. (ceiling Rs 1000). These programmes failed because dishonest bank officials extended lending to big traders under fake names and against the licenses of farias, beparis and small traders. Dishonesty of dealers and the absence of regulatory law thus accelerated the failure of these microcredit ventures.

Following independence of Bangladesh, the government nationalised all inherited scheduled banks and with a view to introducing people-oriented mass banking, opened bank branches in rural areas to offer savings and micro-lending services for the village poor. The government established Bangladesh Krishi Bank and later, Rajshahi Krishi Unnayan Bank to supply small size agricultural credit. Although nationalised commercial banks (NCBs), BKB and Rakub had institutional obesity and the rigidity in their rules and regulations made their microcredit operations inefficient, together they managed to disburse Tk 1,798.45 million as microcredit up to 30 June 2000.

During the war of liberation, many spontaneously formed volunteer groups helped freedom fighters as well as refugees through providing food, clothes and moral support. Some of these groups continued their rehabilitation and humanitarian activities in the country after the war was over and soon turned into organisations for social welfare and development. They became known as non-government organisations (NGOs) and gradually expanded their areas of activities to create social awareness, expand literacy, increase health consciousness, generate self-employment and income through microcredit schemes for the poor. Grameen Bank started its operations as a small project in 1976 in Jobra village of hathazari Thana under chittagong district. It was gradually transformed into a microcredit pilot project with the financial support of bangladesh bank and was converted into a full-fledged specialised bank in microcredit in 1983 under the Grameen Bank Act 1983.

Grameen Bank provides credit without collateral for a broad group of income generation and asset creation activities. It also provides housing loans to its members. During the FY of 2009-10, its cumulative disbursement of microcredit stood at Tk 91.9 billion which was in excess 28% than the previous years. The number of its borrower members rose to 90,000 and 95% of them were women. It operates in more than 45,000 villages. Other large microcredit programmes in Bangladesh that follow Grameen's group-based approach include brac, an NGO with more than 1 million members, and the Bangladesh Rural Development Board (BRDB), a government agency providing microcredit to about 500,000 members. The DYD of the Ministry of Youth and Sports is implementing the Thana Resource Development and Employment Project (TRDEP) which provides microcredit following a family-based approach in organising target beneficiaries. NGO sponsored poverty alleviation programmes organise their target groups based on among other things, gender (eg Grameen Bank), occupation (eg BRAC) or size (eg BRDB).

Under group-based microcredit programmes, borrowers have to form themselves into groups of five and accumulate savings before becoming eligible to borrow. The savings collected from the members by the MFIs on weekly basis vary between one and five taka per member per week. Both group-based and family-based approaches provide the poor with not merely microcredit but also other support services such as training on identification of feasible income-earning activities, organisation of production and marketing activities, and development of basic skills. Other support services include those related to social awareness, family planning, education, nutrition, hygiene, and environment.

BRDB is the largest public sector agency in the field of microcredit and social mobilisation in Bangladesh. It organises the rural poor through co-operatives and informal groups to provide an institutional framework for their development through credit, skill development training, and services in family planning, health, education and other social development components. Target groups include small farmers who own land up to 0.5 acre, and assetless women and men. BRDB distributed almost Tk 837.5 million in the FY of 2009-10 and loan recovery rate was about 94%. bangladesh academy for rural development (BARD) and rural development academy (RDA), primarily set for training and action research, also implement microcredit programmes. Cumulative disbursements made by these two organisations up to 1998 were Tk 920 million and Tk 35 million respectively and their recovery rate was 98%. Other government agencies that operate with microcredit programmes are a number of ministries, departments, and some specially created agencies for alleviating poverty. In 1999/00, they disbursed Tk 20.35 billion as microcredit. palli karma sahayak foundation (PKSF) alone extended microcredit to about 700,000 borrowers through 150 NGOs affiliated as partner organisations. According to some estimates, the number of all beneficiaries receiving microcredit from 363 NGO-MFIs in the country during 1976-2000 crossed 5 million. Upto June 2010, the number of microcredit borrowers rose to about 15 million. Activities for which microcredit is sanctioned or used are livestock and fisheries, rural transport, small entrepreneurship and trading, manufacturing, housing, rural forestry, poultry, service, and other non-farm self-employment and income generating/livelihood trades.

The acts under which NGOs operating with microcredit programmes can be registered are the Societies Registration Act 1860, companies act 1994, Co-operative Societies Act 1984, Charitable and Religious Trust Act 1920, and Trust Act 1882. NGOs willing to receive donations from different foreign sources have to be registered with the NGO Affairs Bureau under the Foreign Donations (Voluntary Activities) Regulation Ordinance 1978.

MFIs have been observed to have transaction costs. Identification and selection of target borrowers and the activity of maintaining a high loan recovery rate are costly as well. Group lending, for example, involves social intermediation, including group formation, training, and other noncredit activities. These activities are necessary to create a sense of responsibility in individual borrowers of microcredit. Because of such high transaction costs, microcredit programmes are heavily dependent on subsidised resources. Interest rate charged by MFIs on their lending are generally at or above market levels.

The experience of microcredit programmes in Bangladesh suggests that the poor can save and are creditworthy and that women borrowers bear lower credit risk than men. Such programmes on an aggregate have reduced the volume of borrowing from informal sources that charge exorbitant interest rates. Micro-finance loans are well targeted in the sense that their ultimate objective is to gradually alleviate the poverty from the society. Of the total microcredit disbursed in Bangladesh upto 2009, landless and marginal farmers received 74%, small and medium size farmers 22%, and large farmers only 4%. While in loans disbursed by formal banks the share of large farmers (owning more than 2.5% acres land) was about 85%, small and medium size farmers (owning more than 0.5 acres land but less than 2.5 acres of land) 13%, and poor and marginal farmers only 2%. [Abul Kalam Azad]