Closer look at micro-credit as poverty reduction tool
Friday, 31 October 2008
Md. Dilwar Hossain Bhuiyan
"Neither a borrower nor a lender be
For loan oft loses itself and friend
And borrowing dulls the edge of husbandry"
FOUR hundred years ago, what Shakespeare had advised in Hamlet through Lord Polonius, might have been appropriate for his time. But time has changed. Today credit is the lifeblood of an economy. Credit is now catalytic power in effective and efficient conversion of input into output. Now lending and borrowing are like the diastolic and systolic pressures of the blood stream of an economy.
But in spite of colossal influence of credit on the economy, problems still remain. Most of the people in the world are still poor. Poverty is not an isolated issue but a global one. Despite changes in development paradigms in the last half of the 20th century, the promise to bring welfare to all human beings remains unfulfilled. As it stands, more than 100 million children of primary school age have never stepped inside a class room, about 29,000 children die each day from largely preventable malnutrition and disease and more than 1.2 billion people in the world are struggling to survive -- at the margins of human existence -- on less than a dollar a day. Poverty is still a problem for all countries irrespective of their level of development.
Although intensity of poverty has lessened in Bangladesh due to the efforts made over the last three decades, its depth and severity still persists. The United Nations Development Programme (UNDP) provides two measures of poverty in Bangladesh: absolute poverty and hard core poverty. Both types are defined in terms of calorie intake. Absolute poverty prevails when a person consumes less than 2122 calories per day, while hardcore poverty prevails when a person consumes less than 1805 calories a day. The absolute poverty line is a proxy for poverty line used by the government.
Addressing the poverty problem is a great challenge mainly due to resource constrains. Bangladesh has so far implemented five-year plan and one two-year plan and a three-year PRSP rolling plan. The searching goals of these plans were to accelerate economic growth and poverty reduction. As an outcome of these development activities, Bangladesh has made commendable progress in terms of reduction of income and human poverty. Bangladesh has received universal appreciation for attaining success in reduction of human poverty in education, health, and nutrition. A recent survey shows downward trend in income poverty. According to the Basic Needs (CBN) method, the incidence of poverty at the national level declined from 48.9 per cent in 2000 to 40.0 per cent in 2005. According to Lower Poverty Line, poverty declined to 25.1 per cent in 2005 from 34.3 per cent in 2000. Direct Calorie Intake Method (DCI) shows, poverty declined from 44.3 per cent in 2000 to 40.4 per cent in 2005. The incidence of hard-core poverty line also showed a declining trend in the same period. Between 2000 and 2005, the depth (measured by poverty gap) and severity (measured by squared poverty gap) of poverty declined simultaneously both in urban and rural areas.
In the light of Millennium Development Goals (MDGs) set by the United Nations in 2000, the government is implementing the Poverty Reduction Strategy Paper (PRSP) titled, "Unlocking the Potential for Accelerated Poverty Reduction. The government has been implementing the three year rolling plan as outlined in the PRSP. The second PRSP is underway. Both the government and non-government organisations have been implementing a number of programmes for employment and income generation and improvement in the condition of the poor. These programs continue to enhance the entitlement of the poor and at the same time their empowerment and awareness building.
Micro credit has special contribution to the achievement of poverty reduction in the country. The aforesaid poverty alleviation in Bangladesh has been largely possible due to involvement and deep attention of Micro Finance Institutions (MFIs). Due to intervention of micro credit, a significant change has been attained in the lives of the poor. It has created immense scope for employment, income has been increased, women's status has been upgraded, rate of literacy has enhanced and a lot of successes have been achieved in the field of health, nutrition and sanitation. In fact at present poverty alleviation through micro credit has occupied the most important positions among topics of discussion throughout the world. Demands for poverty reduction have risen all over the world. The world leaders have come to a consensus on the issue and designed Millennium Development Goals (MDGs) that target to reduce poverty by half within 2015.
Micro credit programmes are poverty focused ones that can be defined as a system of finance that provide credit and savings services to the poor for generating self-employment and income. It is the system of credit delivery and savings mobilising scheme, especially designed to meet the unique financial requirement of the poor. The financing scheme allows the recipients to improve their standard of living through access to additional capital without collateral. The micro financing approach has evolved as an economic development tool intended to benefit low income women and men. It is not simple banking. It is a development tool having financial as well as social intermediation. Social intermediation includes services such as group formation, development of self-confidence and training in financial literacy and management capabilities among members of a group. Micro credit programs aim at involving bottom line people in productive activities through easy and quick credit delivery, generating additional income, reducing poverty, increasing standard of living, and empowering them which means they have better access to food/nutrition, housing, health, sanitation, education, plantation, family planning, family role, social status, etc., after utilizing the credit. Credit, savings and credit plus services are the components of micro credit.
Collateral-free micro credit dates back to 1905 when Rabindranath Tagore founded Kaligram Krishi Bank in Patishar in the district of Naogaon for group-based small loans to rural farmers. Between 1905 and 1974, there was no financial institution for providing non-collateralised loans to farmers. In 1972, a Non Government Organization named Bangladesh Rural Advancement Committee popularly known as BRAC was established. In 1974, BRAC started a programme of providing collateral-free loans to the poor people. It was the first model of "micro credit" offered to the poor borrowers after the demise of Kaligram Krishi Bank. Thereafter the Grameen Bank project went into operation in 1976 with the cooperation of Bangladesh Krishi Bank. Dr. Muhammad Yunus started the GB project as an experiment in collateral banking for the poor in 1976. The GB project was transformed into a bank and Grameen Bank started its full-fledged operation in 1983. Since mid 1970's the nationalised banks of Bangladesh were involved in rural and agricultural credit delivery. Because of inappropriate financial technology and hostile internal and external environment, the achievements of the banks have been very frustrating, especially in terms of their outreach and repayment. When Grameen Bank and some non-government organisations (NGOs) came up with their successful and viable models of alleviating poverty through providing credit to the poor people, the public sector banks, encouraged by the success of Grameen Bank and NGOs, emerged as partners in the alleviation of poverty programs of the government and introduced a number of micro credit scheme/projects. Micro credit activities got momentum when a large number of NGOs opened up micro finance section and started operation of collateral-free micro credit in 1983.
Micro credit and Dr. Muhammad Yunus are now synonymous words. It is Dr. Muhammad Yunus, founder of Grameen Bank, who propagated and popularized micro credit concept throughout the world. Grameen Bank Approach (GBA), because of its path-breaking efforts has become a model for many who are committed to use micro credit as a tool for poverty reduction and brought Nobel Prize for Dr. Muhammad Yunus and Grameen Bank.
The micro credit market in Bangladesh provides an interesting dichotomy: The Grameen Bank is not an NGO and stands alone on its own. On the other hand, the Micro Finance Institutions (MFIs), mainly characterized as NGOs and get their resources from donors, commercial banks and government. From this point of view, micro finance industry of the country is mainly characterized by three types of markets: a regulated monopoly (Grameen Bank), an oligopoly or cartel of three big MFIs (BRAC, Proshikha and ASA) and a monopolistic competition of nearly 600 MFIs. The public sector banks, some private banks and some government departments/agencies have come up recently as partners in the alleviation of poverty programs of the government and introduced a number of miicro credit schemes/projects.
The writer is general manager, Karmasangsthan Bank
"Neither a borrower nor a lender be
For loan oft loses itself and friend
And borrowing dulls the edge of husbandry"
FOUR hundred years ago, what Shakespeare had advised in Hamlet through Lord Polonius, might have been appropriate for his time. But time has changed. Today credit is the lifeblood of an economy. Credit is now catalytic power in effective and efficient conversion of input into output. Now lending and borrowing are like the diastolic and systolic pressures of the blood stream of an economy.
But in spite of colossal influence of credit on the economy, problems still remain. Most of the people in the world are still poor. Poverty is not an isolated issue but a global one. Despite changes in development paradigms in the last half of the 20th century, the promise to bring welfare to all human beings remains unfulfilled. As it stands, more than 100 million children of primary school age have never stepped inside a class room, about 29,000 children die each day from largely preventable malnutrition and disease and more than 1.2 billion people in the world are struggling to survive -- at the margins of human existence -- on less than a dollar a day. Poverty is still a problem for all countries irrespective of their level of development.
Although intensity of poverty has lessened in Bangladesh due to the efforts made over the last three decades, its depth and severity still persists. The United Nations Development Programme (UNDP) provides two measures of poverty in Bangladesh: absolute poverty and hard core poverty. Both types are defined in terms of calorie intake. Absolute poverty prevails when a person consumes less than 2122 calories per day, while hardcore poverty prevails when a person consumes less than 1805 calories a day. The absolute poverty line is a proxy for poverty line used by the government.
Addressing the poverty problem is a great challenge mainly due to resource constrains. Bangladesh has so far implemented five-year plan and one two-year plan and a three-year PRSP rolling plan. The searching goals of these plans were to accelerate economic growth and poverty reduction. As an outcome of these development activities, Bangladesh has made commendable progress in terms of reduction of income and human poverty. Bangladesh has received universal appreciation for attaining success in reduction of human poverty in education, health, and nutrition. A recent survey shows downward trend in income poverty. According to the Basic Needs (CBN) method, the incidence of poverty at the national level declined from 48.9 per cent in 2000 to 40.0 per cent in 2005. According to Lower Poverty Line, poverty declined to 25.1 per cent in 2005 from 34.3 per cent in 2000. Direct Calorie Intake Method (DCI) shows, poverty declined from 44.3 per cent in 2000 to 40.4 per cent in 2005. The incidence of hard-core poverty line also showed a declining trend in the same period. Between 2000 and 2005, the depth (measured by poverty gap) and severity (measured by squared poverty gap) of poverty declined simultaneously both in urban and rural areas.
In the light of Millennium Development Goals (MDGs) set by the United Nations in 2000, the government is implementing the Poverty Reduction Strategy Paper (PRSP) titled, "Unlocking the Potential for Accelerated Poverty Reduction. The government has been implementing the three year rolling plan as outlined in the PRSP. The second PRSP is underway. Both the government and non-government organisations have been implementing a number of programmes for employment and income generation and improvement in the condition of the poor. These programs continue to enhance the entitlement of the poor and at the same time their empowerment and awareness building.
Micro credit has special contribution to the achievement of poverty reduction in the country. The aforesaid poverty alleviation in Bangladesh has been largely possible due to involvement and deep attention of Micro Finance Institutions (MFIs). Due to intervention of micro credit, a significant change has been attained in the lives of the poor. It has created immense scope for employment, income has been increased, women's status has been upgraded, rate of literacy has enhanced and a lot of successes have been achieved in the field of health, nutrition and sanitation. In fact at present poverty alleviation through micro credit has occupied the most important positions among topics of discussion throughout the world. Demands for poverty reduction have risen all over the world. The world leaders have come to a consensus on the issue and designed Millennium Development Goals (MDGs) that target to reduce poverty by half within 2015.
Micro credit programmes are poverty focused ones that can be defined as a system of finance that provide credit and savings services to the poor for generating self-employment and income. It is the system of credit delivery and savings mobilising scheme, especially designed to meet the unique financial requirement of the poor. The financing scheme allows the recipients to improve their standard of living through access to additional capital without collateral. The micro financing approach has evolved as an economic development tool intended to benefit low income women and men. It is not simple banking. It is a development tool having financial as well as social intermediation. Social intermediation includes services such as group formation, development of self-confidence and training in financial literacy and management capabilities among members of a group. Micro credit programs aim at involving bottom line people in productive activities through easy and quick credit delivery, generating additional income, reducing poverty, increasing standard of living, and empowering them which means they have better access to food/nutrition, housing, health, sanitation, education, plantation, family planning, family role, social status, etc., after utilizing the credit. Credit, savings and credit plus services are the components of micro credit.
Collateral-free micro credit dates back to 1905 when Rabindranath Tagore founded Kaligram Krishi Bank in Patishar in the district of Naogaon for group-based small loans to rural farmers. Between 1905 and 1974, there was no financial institution for providing non-collateralised loans to farmers. In 1972, a Non Government Organization named Bangladesh Rural Advancement Committee popularly known as BRAC was established. In 1974, BRAC started a programme of providing collateral-free loans to the poor people. It was the first model of "micro credit" offered to the poor borrowers after the demise of Kaligram Krishi Bank. Thereafter the Grameen Bank project went into operation in 1976 with the cooperation of Bangladesh Krishi Bank. Dr. Muhammad Yunus started the GB project as an experiment in collateral banking for the poor in 1976. The GB project was transformed into a bank and Grameen Bank started its full-fledged operation in 1983. Since mid 1970's the nationalised banks of Bangladesh were involved in rural and agricultural credit delivery. Because of inappropriate financial technology and hostile internal and external environment, the achievements of the banks have been very frustrating, especially in terms of their outreach and repayment. When Grameen Bank and some non-government organisations (NGOs) came up with their successful and viable models of alleviating poverty through providing credit to the poor people, the public sector banks, encouraged by the success of Grameen Bank and NGOs, emerged as partners in the alleviation of poverty programs of the government and introduced a number of micro credit scheme/projects. Micro credit activities got momentum when a large number of NGOs opened up micro finance section and started operation of collateral-free micro credit in 1983.
Micro credit and Dr. Muhammad Yunus are now synonymous words. It is Dr. Muhammad Yunus, founder of Grameen Bank, who propagated and popularized micro credit concept throughout the world. Grameen Bank Approach (GBA), because of its path-breaking efforts has become a model for many who are committed to use micro credit as a tool for poverty reduction and brought Nobel Prize for Dr. Muhammad Yunus and Grameen Bank.
The micro credit market in Bangladesh provides an interesting dichotomy: The Grameen Bank is not an NGO and stands alone on its own. On the other hand, the Micro Finance Institutions (MFIs), mainly characterized as NGOs and get their resources from donors, commercial banks and government. From this point of view, micro finance industry of the country is mainly characterized by three types of markets: a regulated monopoly (Grameen Bank), an oligopoly or cartel of three big MFIs (BRAC, Proshikha and ASA) and a monopolistic competition of nearly 600 MFIs. The public sector banks, some private banks and some government departments/agencies have come up recently as partners in the alleviation of poverty programs of the government and introduced a number of miicro credit schemes/projects.
The writer is general manager, Karmasangsthan Bank