Micro credit differs from traditional credit
Friday, 10 October 2008
Md Dilwar Hossain Bhuiyan
AT present, poverty alleviation through micro credit is the dominant theme of most discussions throughout the world. Demands for taking effective actions to help alleviate poverty have been raised everywhere. The world leaders came to the consensus on the issue and designed Millennium Development Goals (MDGs) that target to reduce poverty by a half within 1015.
According to the World Bank, the income poverty in Bangladesh has been reduced at the rate of 1.0% each year since 1990. In fact, micro credit has special contribution to this development. It has been possible due to involvement and deep attention of Micro Finance Institutions (MFIs) in the field.
By now about 15.00 million poor families of the country have been covered with micro finance services extended by 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 been enhanced and a lot of success has been achieved in the field of health, nutrition and sanitation.
The Grameen Bank Approach(GBA) for its path breaking efforts has become a model for micro credit all over the world for poverty reduction. This brought Nobel Prize for Dr. Muhammad Yunus and Grameen Bank.
Micro credit is a system of credit delivery and savings' mobilisation scheme especially designed to meet the unique financial requirement of the poor. The financing scheme allows the recipients to improve their standards of living through access to additional capital without collateral. The micro finance programmes are poverty focused with the objectives of employment creation, income generation, poverty alleviation, increase of standard of living and finally empowerment of target groups.
Micro credit differs from traditional credit in many ways. Traditional credit is provided to conventional sectors/activities by the formal sectors only. Whereas micro credit is extended for income generating activities only by formal sectors, semi-formal sectors and informal sectors. The target groups of conventional credits are more or less affluent class of the society. But target groups of micro credit are the bottom-line people. The size of the traditional credit is normally large but micro credit deals with small amounts, normally not beyond Tk. 25000. The borrowers of traditional credit possess some own resources and loans are purely collateral based. No collateral is required for micro credit.
The traditional credit suffers from supervisory lapses and, as a result, its cost of supervision is low. Micro credit is absolutely supervised credit and naturally its cost of supervision is comparatively high. Traditional credit is normally provided in the urban /semi urban areas and business-focused localities. Micro credit is provided in the suburban and rural areas. Formal detailed appraisals are made for traditional credit and credit delivery mechanism is time consuming and complicated.
In respect of micro credit, only informal appraisals of borrowers/investment proposals are made and credit delivery system is simple, quick and easy. Sustainability is another important element by which micro credit differs from traditional credit. MFIs are more capable of operating independently out of own revenue generation in the most cost efficient manner. Operational and financial self sufficiency of a MFI is a combined function of its outreach, cost of fund, cost of operation, credit recovery and interest/service realised.
Traditional credit is normally provided with profit motive but the objective of micro credit programmes is social development. Savings products are integral part of micro credit programmes with objectives of creation of sound financial base of the borrowers but in traditional credit, it is absent. As the selection of borrowers is made properly and supervision of credit is very close and intensive, rate of recovery of micro credit is very high. This is reverse in case of traditional credit.
Training of borrowers before credit delivery is integral part of micro credit programmes. But the formal organizations involved in traditional credit do not practice such training. There is a graduation process in the micro credit programmes. Credit is delivered to right persons, for right purposes, at right amount and at right time. One can borrow more and more as subsequent loans as one grows in confidence and skill. But in case of traditional credits, such a process is not normally followed. In most of the micro credit programmes there is a built-in system on peer support within the framework of five to seven group members and the broader framework of a centre. Traditional credit does not allow such system.
Micro credit practises problem-solving culture and puts total trust in the creative potential of the staff and clientele in crisis management. Trust is foundation of micro credit programmes. Unlike traditional credit, micro credit is a decentralized system. It always delegates decision-making power to the lower levels -- to the branch, centre and group. It follows a transparent system so that everything remains visible to everyone. It follows the participatory process.
Though cost of transaction in micro credit is higher compared to that of traditional credit, it is affordable and the borrowers need not pay for any inefficiency of the system or luxury of management. Another difference between traditional credit and micro credit is that main thrust in the former is male clients but the later focuses on loan for women as females have higher repayment rate compared to males.
Micro credit system believes in value building. The principles of self esteem, self confidence, self discovery, self reliance, unity and discipline are very important aspects of micro credits. Such a scenario is not available in traditional credit. The organizations involved in micro credits are happy if they have satisfied clients. But the MFIs are happy only when they have satisfied as well as loyal clients.
Empowerment is essential element of micro credit which is absent in traditional credit. Micro credit delivery mechanism aims at making its clients involved in productive activities, generating surplus income, alleviating poverty, increasing standard of income and empowering them which means that the clients have better access to food, health, education, sanitation, family planning, family role, social status etc., after availing themselves of the credit facilities.
The writer is General Manager, Karmasangsthan Bank
AT present, poverty alleviation through micro credit is the dominant theme of most discussions throughout the world. Demands for taking effective actions to help alleviate poverty have been raised everywhere. The world leaders came to the consensus on the issue and designed Millennium Development Goals (MDGs) that target to reduce poverty by a half within 1015.
According to the World Bank, the income poverty in Bangladesh has been reduced at the rate of 1.0% each year since 1990. In fact, micro credit has special contribution to this development. It has been possible due to involvement and deep attention of Micro Finance Institutions (MFIs) in the field.
By now about 15.00 million poor families of the country have been covered with micro finance services extended by 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 been enhanced and a lot of success has been achieved in the field of health, nutrition and sanitation.
The Grameen Bank Approach(GBA) for its path breaking efforts has become a model for micro credit all over the world for poverty reduction. This brought Nobel Prize for Dr. Muhammad Yunus and Grameen Bank.
Micro credit is a system of credit delivery and savings' mobilisation scheme especially designed to meet the unique financial requirement of the poor. The financing scheme allows the recipients to improve their standards of living through access to additional capital without collateral. The micro finance programmes are poverty focused with the objectives of employment creation, income generation, poverty alleviation, increase of standard of living and finally empowerment of target groups.
Micro credit differs from traditional credit in many ways. Traditional credit is provided to conventional sectors/activities by the formal sectors only. Whereas micro credit is extended for income generating activities only by formal sectors, semi-formal sectors and informal sectors. The target groups of conventional credits are more or less affluent class of the society. But target groups of micro credit are the bottom-line people. The size of the traditional credit is normally large but micro credit deals with small amounts, normally not beyond Tk. 25000. The borrowers of traditional credit possess some own resources and loans are purely collateral based. No collateral is required for micro credit.
The traditional credit suffers from supervisory lapses and, as a result, its cost of supervision is low. Micro credit is absolutely supervised credit and naturally its cost of supervision is comparatively high. Traditional credit is normally provided in the urban /semi urban areas and business-focused localities. Micro credit is provided in the suburban and rural areas. Formal detailed appraisals are made for traditional credit and credit delivery mechanism is time consuming and complicated.
In respect of micro credit, only informal appraisals of borrowers/investment proposals are made and credit delivery system is simple, quick and easy. Sustainability is another important element by which micro credit differs from traditional credit. MFIs are more capable of operating independently out of own revenue generation in the most cost efficient manner. Operational and financial self sufficiency of a MFI is a combined function of its outreach, cost of fund, cost of operation, credit recovery and interest/service realised.
Traditional credit is normally provided with profit motive but the objective of micro credit programmes is social development. Savings products are integral part of micro credit programmes with objectives of creation of sound financial base of the borrowers but in traditional credit, it is absent. As the selection of borrowers is made properly and supervision of credit is very close and intensive, rate of recovery of micro credit is very high. This is reverse in case of traditional credit.
Training of borrowers before credit delivery is integral part of micro credit programmes. But the formal organizations involved in traditional credit do not practice such training. There is a graduation process in the micro credit programmes. Credit is delivered to right persons, for right purposes, at right amount and at right time. One can borrow more and more as subsequent loans as one grows in confidence and skill. But in case of traditional credits, such a process is not normally followed. In most of the micro credit programmes there is a built-in system on peer support within the framework of five to seven group members and the broader framework of a centre. Traditional credit does not allow such system.
Micro credit practises problem-solving culture and puts total trust in the creative potential of the staff and clientele in crisis management. Trust is foundation of micro credit programmes. Unlike traditional credit, micro credit is a decentralized system. It always delegates decision-making power to the lower levels -- to the branch, centre and group. It follows a transparent system so that everything remains visible to everyone. It follows the participatory process.
Though cost of transaction in micro credit is higher compared to that of traditional credit, it is affordable and the borrowers need not pay for any inefficiency of the system or luxury of management. Another difference between traditional credit and micro credit is that main thrust in the former is male clients but the later focuses on loan for women as females have higher repayment rate compared to males.
Micro credit system believes in value building. The principles of self esteem, self confidence, self discovery, self reliance, unity and discipline are very important aspects of micro credits. Such a scenario is not available in traditional credit. The organizations involved in micro credits are happy if they have satisfied clients. But the MFIs are happy only when they have satisfied as well as loyal clients.
Empowerment is essential element of micro credit which is absent in traditional credit. Micro credit delivery mechanism aims at making its clients involved in productive activities, generating surplus income, alleviating poverty, increasing standard of income and empowering them which means that the clients have better access to food, health, education, sanitation, family planning, family role, social status etc., after availing themselves of the credit facilities.
The writer is General Manager, Karmasangsthan Bank