Microcredit and misgivings

In a recent book titled Poverty and Vulnerability in Rural Bangladesh (2015), S.R. Osmani, with others on board, reinforces the positive role of microcredit in alleviating poverty in rural Bangladesh. His findings are based on a large sample drawn from two comparable dataset - Household Income and Expenditure Survey (HIES), and the survey carried out by the Institute of Microfinance (lnM Survey), each covering 6,000 households.
To start with, the study sheds important light on the rural credit market as a whole that has undergone radical transformation over time. It appears from Osmani's account that nearly 70 per cent of rural households have taken some sort of loan in three years preceding the survey. Again, almost half of the households have taken microcredit (with or without other types of loans) and a similar number has borrowed from the informal sectors (friends, relatives, money lenders, landlords etc.). Only 6 per cent of rural households are reported to have taken loan from the formal sector.
As far as microcredit is concerned, it has been spreading at a phenomenal rate in rural Bangladesh covering more than half of rural households taking credit at some stage in their lives. But there are churning in and out of the sector. It is estimated that roughly 40 per cent of those who ever took microcredit stopped taking it at some point of time. The majority returned at some stage to resume taking microcredit. The net result is that 46 per cent of all rural households at the time of the survey were found to be current borrowers leaving 9 per cent as past borrowers and 45 per cent as non-borrowers.  It is true that the proportion of borrowers is high among target groups such as landless and functionally landless compared to other groups. But a large proportion of them still - 37 and 46 percent respectively- is still out of reach.
A popular hypothesis is that individuals who are entrepreneurially superior are the ones who generally self-select themselves. By contrast, the authors find strong evidence for alternative hypothesis that self-selection into microcredit programmes is driven mainly by relative disadvantage of households. Those who suffer from initial disadvantage in terms of inherited assets and schooling of the household head, adverse demographic features such as higher dependency burden, and relative lack of access to remittance income (both foreign and domestic) are more likely to take microcredit as compared to those who suffer from the loss of such disadvantages. The decision to take microcredit may thus be seen largely as a strategy of the relatively more disadvantaged segments of the rural society to try and overcome the multifarious handicaps they face in their economic life.
The use of credit is often a bone of contention. It is generally alleged that users mostly divert the credit to unproductive channels like consumption. There is, however, a long-drawn debate as to whether consumption through credit is crisis-creating or crisis-coping mechanism for poor households faced with severe food insecurity. The research, conducted by Osmani, finds that major share of the loan is devoted to productive use (income generation 39 per cent and asset augmentation 21 per cent). The rest goes for 'unproductive' purposes especially to meet consumption contingencies such as buying food from the market.  
But, as the researcher argues, the spending is not wasted or useless as they are used from portfolio management, especially consumption smoothening. In fact, nearly a quarter of the loan is stipulated on this account. However, it needs no mention perhaps that those who use microcredit primarily for income-generating activities, stand to earn quite a high rate of return relative to the interest rates they have to pay.
The average rate of return to all loan-financed activities turns out to be 62 per cent - much higher and eyebrow-raising than even the upper range of interest charged by MFIs of Bangladesh. It could further be found that only 4 per cent of borrowers are locked in debt trap thus rejecting the conventional concern that microcredit creates 'death trap' in terms of debt trap for loaners.
By and large, careful econometric analysis by Osmani and others shows that the spread of microcredit has helped reduce rural poverty by almost 29 per cent from what it otherwise has been. The most interesting part of the exercise carried out by him and others -possibly not found elsewhere - is a comparison of the effectiveness of different poverty-reducing pockets. By way of comparison, the contribution of foreign remittance in poverty reduction is about 12 per cent and that of domestic remittance 7 per cent.
"As far as reduction of extreme poverty is concerned, the contribution of microcredit is even greater - almost 40 per cent which is far greater than the contributions made by either foreign or domestic remittance. Thus, among the three external factors that have been transforming the rural scene over the last few decades - viz., microcredit, foreign remittance and domestic remittance - microcredit has played by far the most important role in reducing poverty".
The current flow of income (or perception thereof) often may not reflect the true contribution of credit. What is needed here is the degree of accumulation of assets through microcredit. The improvement in socio-economic condition has mainly been through accumulation of assets over time. By accessing credit, the poor could overcome the initial disadvantage partially, if not fully. In the absence of the assets that they now hold, the 'lock-in effect' would spiral to keep poor households at relatively more disadvantaged than others. Access to microcredit has enabled borrowers to build up non-land assets at a faster rate compared to non-borrowers. What they initially lacked in terms of assets, compared to poor non-borrowers, made up for it by working harder to build up non-land assets, so that the initial gap has now virtually disappeared.
"The overall conclusion is that access to microcredit has not only enabled poor borrowers to improve their consumption level enough to substantially increase the probability of crossing the poverty threshold, it has also increased their household income regardless of whether they used it for productive or consumption purposes. And these effects have been stronger the longer a household has been involved in the microcredit sector".

The writer is Professor of Economics at Jahangirnagar University.
abdul [email protected]