Micro-credit's role in poverty alleviation
Sunday, 13 December 2009
Shahiduzzaman Khan
LENDING by the micro-finance institutions (MFIs) to the poor has failed to improve the country's poverty situation significantly. The graduation of the poor people to self-reliance is not really high in number. As such, MFIs should rather finance the small and medium enterprises (SMEs), instead of poor individuals.
Some financial analysts, entrepreneurs and bankers viewed this at a recent seminar in the city. They were also critical about the present SME banking of commercial banks and said the banks neither finance the small and medium industries nor give any special incentives to the best-performing borrower for timely repayment of loans. In fact, when a borrower wants to repay all his loans at a time, the banks don't offer him any special incentives but rather encourage the customers to repay the loan instalments spread throughout the lending period which creates room for becoming defaulter.
How far micro-credit has helped in the reduction of poverty or in other words helped the poor to graduate out of poverty is now a matter of debate since credit alone cannot on its own significantly contribute to poverty alleviation. Improvement of infrastructure, availability of adequate health services, access to safe drinking water and sanitation are all commonly needed to reduce poverty. What is significant however is that easy access to credit can be the determining factor for a change in the lives of the poor.
A recent World Bank study said at least 53 per cent of the country's rural enterprises -- both agricultural and non-agricultural -- still consider the lack of access to finance a major roadblock to their operations. The rural small businesses and farmers are severely constrained by the lack of their access to finance, it said. The study also found some challenges in lending to the agriculture sector, which included government interventions, internal and external constraints, and non-performing assets. There should be considerable investments in the country's agriculture sector to make the sector more commercial and add an impetus to its non-agriculture activities, it said. According to the report, a half of every taka deposited or collected in rural areas goes back as loans. This is mainly because of inability of the institutions operating in rural areas to develop appropriate financial products matching the demands from the farmers or small rural businesses, it added.
Nevertheless, the Micro-credit Regulatory Authority (MRA) is poorly equipped to deal with hundreds of unlicensed micro-finance institutions (MFIs) despite the fact that it is the sole authority to regulate the institutions. It has nothing to do even with thousands of non-government organisations (NGOs) registered under different authorities offering micro-financing services. No NGOs are allowed to do microfinancing without the licences from MRA under a law that came into effect three years back.
The main criticism against this form of credit is the service charge realised. This usually varies from 12 percent to 16 percent among different MFIs. The principal and the interest are calculated over the period the loan is given, which is to be repaid as a fixed amount on a weekly or monthly basis. The bone of contention lies here. Critics point out that whereas the service charge or the rate of interest is declared to be around 12 percent to 16 percent, the effective rate comes out to be around 25 percent to 30 percent. But the fact remains that those people who are left out of the institutional banking sector because of their inability to furnish any collateral as well as the hassle of paperwork and the shuttling between the bank branches and their place of abode, MFIs reach these services at the doorstep of the beneficiaries through the field workers. Moreover since the loan is to be paid on a weekly or monthly basis, the burden on the member in tolerable. This becomes evident when one looks at the repayment rate of the MFIs, which varies between 90 percent and 100 percent.
Bangladesh is home to 65 million poverty-stricken people who live below the international poverty line and cannot afford to wait for the promised benefits of national economic growth to trickle down to their level. In the early 1980s, a programme to give poor, mostly landless people a new chance through small loans was started by Grameen Bank, one of Bangladesh's largest NGOs, which has also gained status as a specialised bank. Today, Bangladesh's micro-credit programme is the largest in the world, and the government has made providing micro-credit a significant component of its plan for halving the number of people living in poverty in Bangladesh by the year 2015. The World Bank is the largest provider of global micro-credit assistance to Bangladesh, with more than 5.5 million people having received loans through World Bank-supported Poverty Alleviation Micro-credit Projects.
Micro-credit operation of Grameen Bank and NGOs like BRAC, ASA and Proshika has spread all over the country. These three NGOs and Grameen Bank together account for more than 80 per cent of total market share of micro-credit both in terms of coverage and disbursement. While micro-credit leaves a significant impact on the lives of millions of Bangladeshis, millions more have yet to be reached, and studies show that approximately 12 million individuals, or 2.5 million households in Bangladesh, who are considered to be the poorest of the poor, are regularly shut out of traditional micro-credit programmes.
Disadvantaged people in Bangladesh, like elsewhere in the world, are easily trapped in a cycle of poverty. Those without land and little to no education or income face tougher obstacles in finding adequate employment, bringing up healthy families, and weathering economic downturns. Women, lacking in social position and legal rights and traditionally earning less than half the wage rate of men, are particularly vulnerable. Markets exist throughout the country for enterprises such as poultry farming, milk production, petty trade, shop keeping, cow fattening, pottery, and small hotels, but without start-up money, it is nearly impossible for poor people to establish small businesses to capitalise on the demand.
Micro-credit has allowed millions of poor people to overcome these obstacles and improve their lives. Through such programmes, loans and training are provided to individuals, who have never been involved in the economy, and to small entrepreneurs to help them scale up their activities and create employment for the poorest people. Most borrowers are women.
Against this backdrop, there is a need to continue this micro-credit programme throughout the country brushing aside the criticism whatsoever coming from any quarters. Millions of people are in dire need of subsistence only. They need micro-credit for their survival. The programme can be diversified, but cannot be stopped putting blame on the lending institutions. As of now, they are doing a good job bringing thousands of poverty-hit people under the lending programme and providing them with an opportunity to survive in this grim world.
szkhan@thefinancialexpress-bd.com
LENDING by the micro-finance institutions (MFIs) to the poor has failed to improve the country's poverty situation significantly. The graduation of the poor people to self-reliance is not really high in number. As such, MFIs should rather finance the small and medium enterprises (SMEs), instead of poor individuals.
Some financial analysts, entrepreneurs and bankers viewed this at a recent seminar in the city. They were also critical about the present SME banking of commercial banks and said the banks neither finance the small and medium industries nor give any special incentives to the best-performing borrower for timely repayment of loans. In fact, when a borrower wants to repay all his loans at a time, the banks don't offer him any special incentives but rather encourage the customers to repay the loan instalments spread throughout the lending period which creates room for becoming defaulter.
How far micro-credit has helped in the reduction of poverty or in other words helped the poor to graduate out of poverty is now a matter of debate since credit alone cannot on its own significantly contribute to poverty alleviation. Improvement of infrastructure, availability of adequate health services, access to safe drinking water and sanitation are all commonly needed to reduce poverty. What is significant however is that easy access to credit can be the determining factor for a change in the lives of the poor.
A recent World Bank study said at least 53 per cent of the country's rural enterprises -- both agricultural and non-agricultural -- still consider the lack of access to finance a major roadblock to their operations. The rural small businesses and farmers are severely constrained by the lack of their access to finance, it said. The study also found some challenges in lending to the agriculture sector, which included government interventions, internal and external constraints, and non-performing assets. There should be considerable investments in the country's agriculture sector to make the sector more commercial and add an impetus to its non-agriculture activities, it said. According to the report, a half of every taka deposited or collected in rural areas goes back as loans. This is mainly because of inability of the institutions operating in rural areas to develop appropriate financial products matching the demands from the farmers or small rural businesses, it added.
Nevertheless, the Micro-credit Regulatory Authority (MRA) is poorly equipped to deal with hundreds of unlicensed micro-finance institutions (MFIs) despite the fact that it is the sole authority to regulate the institutions. It has nothing to do even with thousands of non-government organisations (NGOs) registered under different authorities offering micro-financing services. No NGOs are allowed to do microfinancing without the licences from MRA under a law that came into effect three years back.
The main criticism against this form of credit is the service charge realised. This usually varies from 12 percent to 16 percent among different MFIs. The principal and the interest are calculated over the period the loan is given, which is to be repaid as a fixed amount on a weekly or monthly basis. The bone of contention lies here. Critics point out that whereas the service charge or the rate of interest is declared to be around 12 percent to 16 percent, the effective rate comes out to be around 25 percent to 30 percent. But the fact remains that those people who are left out of the institutional banking sector because of their inability to furnish any collateral as well as the hassle of paperwork and the shuttling between the bank branches and their place of abode, MFIs reach these services at the doorstep of the beneficiaries through the field workers. Moreover since the loan is to be paid on a weekly or monthly basis, the burden on the member in tolerable. This becomes evident when one looks at the repayment rate of the MFIs, which varies between 90 percent and 100 percent.
Bangladesh is home to 65 million poverty-stricken people who live below the international poverty line and cannot afford to wait for the promised benefits of national economic growth to trickle down to their level. In the early 1980s, a programme to give poor, mostly landless people a new chance through small loans was started by Grameen Bank, one of Bangladesh's largest NGOs, which has also gained status as a specialised bank. Today, Bangladesh's micro-credit programme is the largest in the world, and the government has made providing micro-credit a significant component of its plan for halving the number of people living in poverty in Bangladesh by the year 2015. The World Bank is the largest provider of global micro-credit assistance to Bangladesh, with more than 5.5 million people having received loans through World Bank-supported Poverty Alleviation Micro-credit Projects.
Micro-credit operation of Grameen Bank and NGOs like BRAC, ASA and Proshika has spread all over the country. These three NGOs and Grameen Bank together account for more than 80 per cent of total market share of micro-credit both in terms of coverage and disbursement. While micro-credit leaves a significant impact on the lives of millions of Bangladeshis, millions more have yet to be reached, and studies show that approximately 12 million individuals, or 2.5 million households in Bangladesh, who are considered to be the poorest of the poor, are regularly shut out of traditional micro-credit programmes.
Disadvantaged people in Bangladesh, like elsewhere in the world, are easily trapped in a cycle of poverty. Those without land and little to no education or income face tougher obstacles in finding adequate employment, bringing up healthy families, and weathering economic downturns. Women, lacking in social position and legal rights and traditionally earning less than half the wage rate of men, are particularly vulnerable. Markets exist throughout the country for enterprises such as poultry farming, milk production, petty trade, shop keeping, cow fattening, pottery, and small hotels, but without start-up money, it is nearly impossible for poor people to establish small businesses to capitalise on the demand.
Micro-credit has allowed millions of poor people to overcome these obstacles and improve their lives. Through such programmes, loans and training are provided to individuals, who have never been involved in the economy, and to small entrepreneurs to help them scale up their activities and create employment for the poorest people. Most borrowers are women.
Against this backdrop, there is a need to continue this micro-credit programme throughout the country brushing aside the criticism whatsoever coming from any quarters. Millions of people are in dire need of subsistence only. They need micro-credit for their survival. The programme can be diversified, but cannot be stopped putting blame on the lending institutions. As of now, they are doing a good job bringing thousands of poverty-hit people under the lending programme and providing them with an opportunity to survive in this grim world.
szkhan@thefinancialexpress-bd.com