Plea for subsidy on micro-credits

Eminent economist Prof Wahid Uddin Mahmud finds little scope for reducing the interest rate on micro-credits under the current operational framework and suggested a change compatible with a new definition of microfinance.
He said interest cuts can only be possible provided necessary government subsidy is available in this respect.
Prof Mahmud was speaking at a press briefing on the launch of 10th Citi Micro-entrepreneurship Awards at a city hotel Saturday. Citi Foundation, the philanthropic arm of Citigroup and Credit Development Forum (CDF), organised the press meet.
"If the government provides subsidy to the micro-credit sector, then only the interest rate can be brought down. The government allocates huge amounts for the safety-net programmes and micro-credit can be included as a poverty-alleviation programme," he said to a question.
Referring to a research, the former adviser of caretaker government said the demand for micro-credit would go up if the interest rate falls. In that case, the moneylenders will be affected.
Micro-credit management in Bangladesh is most skillful and the cost of operations is less. That's why a loan officer can manage 100 to 150 borrowers, which is not possible even in neighbouring India, he added.
"There is no foreign fund for micro-credit sector and no government support. If the banks provide loans to the microfinance institutions (MFIs) at a lower interest rate, then the interest rate on micro-credits can be reduced," said the chairman of the advisory council on the awards.
Mr Mahmud said only Palli Karma Shahayak Foundation (PKSF) has initiated some subsidised programmes. He indicated the government can allocate Tk 200 to 250 billion in the annual budget to support micro-credit programmes.
"Unless the government provides subsidy, the interest rate will remain like this," he said, adding: the issue of lowering the micro-credit interest rate is under consideration.  
He said Bangladesh is the only country where micro-credit is operated ideally with an aim to do social welfare and not with a commercial attitude. In India or Latin America, sometimes the interest rate is even 100 per cent and their attitude is commercial.  
Mr Mahmud said the definition of micro-credit has changed as it does not mean only for poverty reduction and self-employment. Rather, for the first time in Bangladesh, how micro-credit has been contributing to GDP growth, employment generation and productivity is being examined.  
"Credit flow in micro-credit sector has increased as not only the extreme poor but the poor with ability to become entrepreneurs not being served by the banks are getting loans from MFIs. This is not traditional micro-credit," he explained.
About Tk 500 billion is disbursed in micro-credit sector every year and more than 40 per cent of it is the borrowers' savings and the rest comes from current profit.
In his opening remarks, CDF executive director Abdul Awal said Bangladesh Bank has undertaken various favourable programmes for micro-credit. To address the credit crisis it is providing funds of the development partners to the banks at lower interest rate. But the MFIs are unable to avail the opportunity due to "irregularities" and "unfriendly" attitude of the banks.
"Commercial banks are instructed to provide the development partners' funds to the MFIs at a lower interest rate. But they charge excessive interest with various hidden costs and ask for collateral from the MFIs," he told the press meet.
Channel I head of news Shykh Seraj said a vast riverine area of Bangladesh has been filled up due to the impact of climate change. MFIs and financial institutions can think of spreading their support to these char areas to create economic activities.
Bangladesh Women Chamber of Commerce and Industry founder-president Salima Ahmad said micro-entrepreneurs want to be included in the mainstream-banking system as they want to contribute to society.
The final Citi awards presentation will be held in June 2015. The awards will be presented in five categories this year and each winner will receive a crest, certificate and prize money.
The categories are: best agricultural micro-entrepreneur of the year, best women micro-entrepreneur of the year, best micro-entrepreneur of the year, best MFI of the year and most innovative MFI of the year.