Microfinance: Hero or villain?

Microcredit or microfinance for that matter, has long been a bone of contention. Attacks on this 30-year old programme seem to have got further steam after what has been happening to Professor Muhammad Yunus' fate as Managing Director of Grameen Bank. The purpose of this write-up is not to comment on any person per se but the concept of microcredit and its impact on the poor. The moot question is whether the stance, for or against microcredit, is well-grounded theoretically and supported by empirical evidences. Historically and especially in this part of the world, non-institutional sources of credit dominated the dualistic and segmented rural credit market. The cost of credit from these sources was astoundingly high (10-12 per cent a month) adducible mostly to moral hazards and adverse selection. The government came into the scene to solve the problem and began establishing agricultural credit banks. The interest rate is low but the loan is not collateral free. As such, only land owners could access credit from that source leaving the credit-hungry poor in the hands of the 'credit-kulaks'. Further, although the interest rate for agricultural loan was fixed at, say 8-10 per cent, the transport and transaction costs including bribes used to push it up to 15-25 per cent. However, the NGOs stepped into this field following the foot prints of the Grameen Bank model. Thousands of NGOs are working in Bangladesh providing collateral free loans to the poor. We may glance at the following facts. In 1988, the share of rural households seeking loans from institutional sources was only 13 per cent (banks: 9 and NGOs: about 4). The share of households seeking loans from non-institutional sources was about 32 per cent (money lenders: about 15, friends and relatives: about 17). In 2008, the pendulum sharply swung when 39 per cent went for institutional source (banks: about 5, NGOs: 34 per cent). The non-institutional sources were dashed to only 10 per cent (money lenders, and friends and relatives 5 per cent each). The figures point to a few important developments. First, in the absence of banks, NGOs helped households with credit (say at 30 per cent interest rate) by downsizing the role of money lenders that used to charge 120 per cent. The interest charged by NGOs is admittedly very high but much lower than the money lenders. Second, the average size of loans by NGOs was US $184, banks $735 and money lenders $184, showing that both banks and money lenders cater to the needs of the rich. Third, in 1988, only about 16 per cent of households seeking loans from banks owned up to 0.40 hectare of land that went down to 8.0 per cent in 2008. On the other hand, only 10 per cent of that land owning group accessed credit from NGOs in 1988 and about 70 per cent in 2008! It is very surprising that the poor went more for high interest bearing source than the lower ones. Were they irrational? Possibly not. It is simply because cheaper sources were 'dearer' in terms of availability. What would be the impact of a low priced commodity if it is not accessible? Any campaign against microfinance should take these figures into account. More importantly, the microcredit agencies are mostly for women and they perform many social responsibilities besides giving credit. Most of the criticisms on microcredit are derived from case studies. One may vindicate the validity of the proposition. In some cases, micro credit has caused horrendous hardships to the recipients. It may be 10,000 out of 100,000. But allow me to introduce you to Mrs. Khorshed Alam of Charnta village under Manikgonj municipality. She borrowed Tk.20,000 from Grameen Bank at about 25 per cent interest rate. To quell the critics, I shall add another 5 percent to make it about 35 per cent. Few years before, she bought a cow with that borrowed money. Already she has sold two livestock worth Tk. 60,000. She has now three more worth Tk. 70,000 in her possession. In an enquiry to the impacts, one has to consider not how much she owes but how much she owns through her accumulation of financial debt. Anyway, we should not go for grandiose generalisation that all GB credit recipients became resilient this way. From a survey of households in 62 villages, an econometric study shows that a household with NGO membership has 12-15 per cent more income than a household without it. In fact, the share should be higher than this since NGO loans are used to accumulate agricultural and non-agricultural assets which account for about 14 per cent of household income. Thus, about one-fourth of household income of the functionally landless households comes from their access to NGOs. The same study shows that following credit availability, about one-third of recipient households perceived a net deterioration in economic condition, about 42 per cent perceived improvement and about 27 per cent saw no change. This positive aspect excludes the impacts on non-income parameters like education, health, nutrition and empowerment of women. Many of the critics contend that, it is not microcredit but lumpy investment and high rate of economic growth that are needed most to lift the poor out of poverty in a big way. The premise is mistaken on two counts. First, microcredit will always (if at all) help with a small jump but not with a big leap. It is because you cannot expect a big jump from a small push. The economic justification of small loans is small absorptive capacity of the poor households (This is not also static but the capacity expands as windows of opportunities open up). Second, even if you inject 8.0-9.0 per cent rate of economic growth, the poor may not benefit unless they can participate in such growth process. The bottom line is the elasticity poverty of reduction with respect to growth. The recent attempt by the Bangladesh Bank to provide loans to the share croppers at 10 per cent rate of interest (and on average Tk.10-20 thousand) has seemingly shown how microfinance could come to the rescue of the economically disadvantaged ones. This can be called microcredit from the public purse. The benefits of such loans cannot be understood sitting in air-conditioned rooms. During my recent visits to some villages, I observed how such a meagre amount of money could come to reduce the crisis of the poor. The role of microfinance is still important for the poor. Microcredit is not to be seen as the panacea of poverty reduction; it is one of the instruments of addressing the poor. Like economic growth, it is necessary but not sufficient. The irregularities, non-transparent way of running microcredit programmes, cozy and cosmopolitan way of life of the NGO leaders, as alleged by the critics, should be seen as villains against the peace. But peace of the poor should not be forfeited by making microcredit programme a villain. If poverty in Bangladesh had fallen, microcredit must have made a contribution. The writer is a Professor of Economics at Jahangirnagar University, and can be reached at e-mail: abdulbayes@yahoo. com