MFIs' role in poverty alleviation
Wednesday, 10 November 2010
MICROFINANCE institutions (MFIs) have earned both plaudits and criticism from different quarters in their bid to helping the hardcore poor, who are otherwise considered 'un-bankable' by the formal financial entities including banks. The role of the Bangladesh MFIs, particularly that of a few giant ones, has been well appreciated both at home and abroad for their unrelenting support extended to the poor at the grassroots for helping the latter eke out a living through various small-scale economic activities. The praise for the MFIs has been rather loud and profuse, particularly for making the rural poor women economically empowered. The global recognition of the role of the Bangladesh MFIs reached its peak when the micro-credit guru, Dr. Muhammad Yunus of Grameen Bank was awarded the Nobel Peace Prize in 2008 for his innovative ways of helping the poor. The Grameen Bank micro-credit operations are now being replicated in many countries across the globe, including the affluent ones such as the United States.
However, with the expansion of their role and clout, the MFIs have come under close scrutiny from different quarters, including policymakers. The first and foremost criticism that is made about the MFIs relates to their high rates of lending to their clients, the poor. The MFIs are also considered to be maintaining a sort of traditional patron-beneficiary relationship that lead to comfortable lifestyle of the people at their helm in many areas. No organisation or industry is without any pitfall and the MFIs are no exceptions. But one striking feature noticed in recent years has been the growing criticism of the MFIs from the political circles, including the policymakers. This is also happening in neighbouring India where microfinance operation is fairly large. An instance here in this country to this effect is the criticism of the MFIs' role that has come from none other than Finance Minister AMA Muhith. The finance minister has, however, lauded the role of the MFIs on many counts. He has been critical, on a number of occasions, of the MFIs for their failure to improve the economic conditions of around 20 million hardcore poor, despite their operations in this field for nearly three decades. The MFIs are involved in providing financial services, valued at about Tk. 170 billion, to nearly 30 million people.
One particular factor -- the high lending rates charged by the MFI -- is considered to be one of the reasons for keeping the hardcore poor in the debt-trap continuously. The lending rates of the MFIs largely depend on the sources of their funds and their operational costs. The micro-credit providers, according to the latest Bangladesh Bank report, finance nearly a half of the lending operations with their own resources and the rest come from banks, large non-government organisations (NGOs) and donors. The involvement of the banks in micro-credit operations in Bangladesh is not much significant and a substantial part of such credits comes from donors. So, the lending rates charged by the MFIs under the given circumstances might appear unreasonable and those need to be reviewed to help avoid any political backlash.
Notwithstanding the fact that the MFIs have been performing well below the expectation, the government does need to look at its own scorecard. Primarily, it is a constitutional obligation of the government to improve the living conditions of the poor by employing all means under its command and ensuring equitable distribution of resources. Over the last two decades, there have been some successes, albeit slowly, of poverty alleviation efforts, despite a rising income inequality. An assessment of contributions made by the government and other players to this effect might help people know who did what for alleviation of poverty in the country.
However, with the expansion of their role and clout, the MFIs have come under close scrutiny from different quarters, including policymakers. The first and foremost criticism that is made about the MFIs relates to their high rates of lending to their clients, the poor. The MFIs are also considered to be maintaining a sort of traditional patron-beneficiary relationship that lead to comfortable lifestyle of the people at their helm in many areas. No organisation or industry is without any pitfall and the MFIs are no exceptions. But one striking feature noticed in recent years has been the growing criticism of the MFIs from the political circles, including the policymakers. This is also happening in neighbouring India where microfinance operation is fairly large. An instance here in this country to this effect is the criticism of the MFIs' role that has come from none other than Finance Minister AMA Muhith. The finance minister has, however, lauded the role of the MFIs on many counts. He has been critical, on a number of occasions, of the MFIs for their failure to improve the economic conditions of around 20 million hardcore poor, despite their operations in this field for nearly three decades. The MFIs are involved in providing financial services, valued at about Tk. 170 billion, to nearly 30 million people.
One particular factor -- the high lending rates charged by the MFI -- is considered to be one of the reasons for keeping the hardcore poor in the debt-trap continuously. The lending rates of the MFIs largely depend on the sources of their funds and their operational costs. The micro-credit providers, according to the latest Bangladesh Bank report, finance nearly a half of the lending operations with their own resources and the rest come from banks, large non-government organisations (NGOs) and donors. The involvement of the banks in micro-credit operations in Bangladesh is not much significant and a substantial part of such credits comes from donors. So, the lending rates charged by the MFIs under the given circumstances might appear unreasonable and those need to be reviewed to help avoid any political backlash.
Notwithstanding the fact that the MFIs have been performing well below the expectation, the government does need to look at its own scorecard. Primarily, it is a constitutional obligation of the government to improve the living conditions of the poor by employing all means under its command and ensuring equitable distribution of resources. Over the last two decades, there have been some successes, albeit slowly, of poverty alleviation efforts, despite a rising income inequality. An assessment of contributions made by the government and other players to this effect might help people know who did what for alleviation of poverty in the country.