Myth and reality

Credit market in rural Bangladesh has been in operation since time immemorial. However the market was informal, and controlled mostly by professional moneylenders (Mohajans), land owners, and traders. They used to charge usurious rate of interest - commonly more than 10 per cent per month  against collateral of land, jewelry or other assets. Researchers have explained how this usury was inter linked with other rural markets, and contributed to perpetual dependence of asset-poor households on those who control assets. There was also a mutual support system among friends and relatives who exchanged credits free of charge or at a low rate of interest.
  The inception of the formal financial system for providing rural credit started with the establishment of Agricultural Development Bank in the 1960s. Later the government also encouraged commercial banks to set up branches in rural areas for financial inclusion. In 1977 a special agricultural credit program called, "Matir Dak" was launched. As a result the number of branches in rural areas increased from 854 in 1975/76 to 3,225 in 1983/84. The rural branches were engaged both in the collection of savings and provision of credit.  
According to the critics, the history of Government's involvement in extending agricultural credit to rural households and credit to entrepreneurs in agricultural related activities is a "history of frustrations and wasteful endeavours". The loan recovery rate against outstanding loans   has averaged 22 per cent from 1998-2010. The annual rate of increase in disbursement averaged 17 per cent and the annual rate of repayment averaged 12 per cent. This gap between rates of disbursement and repayment resulted in accumulation of outstanding loans. A world report also says that the importance of banks and cooperatives in rural lending has declined while the importance of micro-finance institutions (MFIs) has increased.
Despite the gloomy picture, in recent years some qualitative changes have been brought in credit disbursement as well as facilities have been increased in agricultural credit. Especially monitoring of the central bank has been strengthened in disbursing agricultural credit transparently, hassle-free and timely. Priority is given to credit support for women in agriculture to increase women participation. Emphasis has been laid on development of marketing facilities for agricultural products to ensure fair price. Priority has been given to disburse credit in relatively impoverished and neglected region such a char (island), haor and coastal areas. State-owned commercial  banks as well as private and foreign banks are disbursing minimum 2 percent of their total loans in agriculture.
Bangladesh Bank announces 'Agricultural and Rural Credit Policy and Programme' at the beginning of new fiscal year. Bangladesh Bank has given instructions to banks to disburse agricultural loan openly in the presence of local representatives from union, concerned agricultural officers, teachers and other respected persons to ensure transparency.  Another innovative step towards financial inclusion is the opening of bank account by farmers (at Tk.10), so that credit, subsidies and other transfer could easily be completed in farmers accounts. Bangladesh Bank has brought 13.2 million people under banking service that includes farmers, hardcore poor, unemployed young men/women.
A Silent Revolution!
The perturbed position of 'financial exclusion' of the poor in the formal credit market somewhat faded with the advent of innovative institutions in the 1980s. Led by the Grameen Bank, a number of NGOs - roughly 3000- targeted the functionally landless households (owning up to 50 decimals of land) to provide credit. As opposed to the monopoly of the state parastatal in the realm of rural credit market in the early years after independence, NGOs with microcredit for the poor appeared as other options. They organized the households into groups to foster group-based lending. Obviously, conscientization and strict supervision and proper polices were key to the credit provision under the changing milieu.
The most dramatic change has been in the sources of credit. As we have argued earlier, the credit market was monopolized by the informal or non-institutional sources in the past. Over time, two important developments have shaped the course of credit. First, a shift from a predominantly non-institutional to institutional source is quite visible. Second, within the institutional sources, the change has been from banks to NGOs. In support of the premises, we cite the following example: in 1988, 30 per cent of loan seeking households received credit from non-institutional pockets such as village money lenders land owners, friends and relatives etc. with a share of this source to total loans at 73 per cent. By 2013, the figures heavily dropped at 12 and 29 per cent respectively. On the contrary, proportion of households seeking loans from institutional sources jumped from 12 to 37 per cent and the share of loan from 27 to 77 per cent during the comparable periods. But till now roughly one-fifths of households are found accessing credit from informal sources. Informal source now account for around 30 per cent of total credit flows in rural areas. We presume that important reasons such as lesser transaction costs, little hazards, bigger loan size etc. invite informal sources
We now take on the second change that reveals interesting insights. It is that microcredit/finance has overtaken banks as far as delivery of credit is concerned. The proportion of households accessing credit from banks declined marginally between 2000 and 2013 but that from NGOs rose 7 times - from a bare 8 per cent to 63 per cent - during the same period of time. It also appears that banks' share in total loans increased marginally from 20 to 29 percent but that of NGOs shot up from 7 to 45 per cent. In other words, the NGOs have replaced banks to become the main players in rural credit market.
  There reasons are perhaps not far to seek. Banks require collateral, processing time and transaction costs, speed money etc. which only large and medium farms can afford to comply with. It is thus not surprising that for these reasons alone, functionally landless and marginal households have always been excluded from formal financing. It could be observed that only 5 per cent of poor households (owning up to 0.2 ha) accessed credit from banks in 1988 which have halved in 2008 whereas only 4 per cent of this group obtained loans from  microfinance organizations that shot up to 40 per cent during the same period of time. The same source also reveals that access to commercial bank credit increased only for large land owning groups (more than 2 ha) while though poor groups' access to commercial bank credit declined over time, that to microfinance has increased 5-10 times.
Over time the access bank credit by land owning groups have increased (also the share of total loans) by taking advantage of three 'C's - collateral, connection and confidence. Lucky as they are, their access to NGOs has also increased. This perhaps implies that NGOs have been extending loans to the land owning groups that seemingly goes against their original charter. However, heavy dependence of this group on the non-institutional sources of credit dwindled over time. On the other hand, and as has been argued earlier, the access to bank credit by the functionally landless group has reduced over time but that from NGOs increased many fold. This supports the earlier contention that Bank credit has traditionally served the land-rich households at the peril of the poorer ones.
Utilisation of Credit
Microfinance organizations in Bangladesh have long been accused of bypassing the agricultural sector and the chronic poor. The critics were perhaps right as these organizations targeted only functionally landless households (having 50 decimals of land), and funded non-farm activities. Over time, however, things have changed. Of late, the chronic poor have been brought under the net of microcredit by some NGOs (especially BRAC), and credit has also been extended to pursue agricultural activities. For example, and as shown by Table 8, 40 per cent of the loans from microfinance organizations were used for agricultural investment in 2013 compared to 26 per cent in 2000. This could also be due to NGOs channeling a part of banks' loan. However, the opposite holds in the case of bank loans. The use of loans for non-agricultural purposes has declined for both. It appears that with a view to meeting the requirement of working capital of the poor farmers, microfinance organizations are growingly stepping into agricultural sector. Two other important observation need to be mentioned. First, the utilization of loan money for food expense by NGO or informal loans has gone down over time. And of late, both NGOs and informal sources are reported to finance migration in a wider scale.
Rural Indebtedness
Rural indebtedness is a burning issue in Bangladesh, and the gun is pointed at microfinance institutions. It is being alleged that owing to a very high interest rate charged by these institutions, poor households get trapped into indebtedness to dispose off valuable assets in repayment of loans. Empirical evidences on this do not seem to accept the hypothesis. For example, roughly one-fifths of the borrowers reported indebtedness in a Census of rural households in 62 villages conducted in 2013. A deep peep into the data set reveals eyebrow raising observations to confound the critics: only 12 per cent of the poor borrowers (up to 50 decimals) reported indebtedness as against 20-25 per cent for medium and large land owning groups. Thus the incidence of indebtedness seems to rise with rise in land size. It may be reiterated here that the relatively richer segment draws most of their credit from agricultural or commercial banks, and the size of loan is relatively high, whereas the poorer ones access credit from NGOs with smaller size. Data generated by the Census reveal that 43 per cent of the borrowers from commercial bank as well as a large part of those borrowing from non-institutional sources have reported to be in debt. As opposed to this, and surprisingly perhaps the proportion of indebted households is relatively much less in case of microfinance institutions.
Concluding Remarks
Microfinance is a mature industry in Bangladesh providing financial services to at least half of the households. The average size of the loan has increased over time, but at a rate lower than the rate of inflation. So the real value of the loan has declined. As a result about 40% borrowers now access loans from a number of MFIs and also take large size loans from the informal market for financing lumpy expenditures.
A particular point in this context is BRAC. BRAC microfinance programme has diversified their portfolio over time by providing relatively large size loans to small entrepreneurs, mostly men, the so called "missing middle" who do not have access to credit from formal financial institution but disqualified to receive poverty reduction loan.  The small enterprise loan now accounts more than 40 per cent of the loan portfolio. BRAC has also introduced a scheme for loans to tenant farmers at a lower rate of interest supported by a low-cost loan fund from the Central Bank. The scheme targets marginal farmers who are bypassed by the commercial banks and specialized financial institution. BRAC has also started financing overseas migration and has introduced a "top up loan" for those who have good repayment records and have the capacity to utilize large size loans.
The period of rapid expansion of BRAC, as well other MFIs, was 2000 to 2008, when loan funds were available from formal financial institutions to support rapid growth of the loan portfolio. As targets were set from above without considering the absorptive capacity at the ground level, it led to adoption of fraudulent practices by some loan officers to fulfill the targets. It had a negative effect on portfolio quality and ultimately on the recovery of loans. The cost of loan funds also increased as larger proportion of loan fund was financed by borrowing from commercial banks which was the highest cost source. The experience led BRAC microfinance to stop disbursing additional loan for two years (2009 and 2010) and go for a rigorous screening the borrower's capacity to productively utilize the loans and reducing the loan officers through closing of loss making branches. As a result the number of VO members has declined from over six million in 2008 to about four million in 2012. The disbursement of loans has started increasing again from 2011.
There is further scope for expansion of financial services with scaling up of new innovations and increasing the size of loan. Financing overseas migration still covers a small portion of potential migrants, and the coverage of credit is low. The credit is given only for one year which is suitable for financing working capital needs. But opportunities exist to finance investments such as acquisition of agricultural machinery and durable consumer goods, for which medium term or long term loans are needed.
.........................................
The authors are, respectively, Professor of Economics at Jahangirnagar University and Advisor to Executive Director, BRAC.
Email: [email protected] and [email protected]