The role of micro-credit in poverty alleviation
Sunday, 7 June 2009
Shahiduzzaman Khan
Over 21 million people have joined the group of the chronically hungry in Bangladesh due to the fallouts from the price hike and the global financial crisis, bringing the figure to a 40-year high, said a UNICEF report released recently. The poor, who have borne the brunt of the economic trouble, desperately need support requiring the government to spend more on food, health care and education to alleviate the crisis.
The UNICEF report highlighted the impact of the economic crisis on women and children in eight South Asian countries - Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka. The poor people are facing double trouble as the price hike reduces their purchasing power and the global financial crisis cuts their employment opportunities, The cumulative effects of the two factors -- the price hike started in 2007 and the financial crisis in July of 2008 -- have pushed a large number of people below the poverty line. The purchasing power problem is more acute in Bangladesh than in any other Asian country as the financial crisis has cost a less number of jobs. The report is suggestive of how the poverty situation in Bangladesh is so dismal.
Successive governments in Bangladesh had taken up innumerable steps in a bid to reduce the poverty. Yet none of the programmes proved much effective excepting micro-credit operations. Micro-finance is undoubtedly a powerful tool for poverty reduction. But the micro-credit operation is yet to be linked to the mainstream economy. It should no longer be a part of the informal economy. The micro-lenders need to expand the micro-finance operations to the farm sector in order to offset the food shortage. Diversified use of micro-credit and public-private initiatives could prove effective for the anti-poverty initiatives.
Although micro-credit programmes were expanded to sectors like agriculture, livestock and fisheries, they should be scaled up to make a dent in poverty. As the poor's isolation from the market system unleashed poverty, they should be brought into the mainstream to improve their lives. The micro-finance industry is still a part of the informal sector as it is yet to be governed by proper regulations. As many people are still living in the grey area of law, the micro-credit regulatory authority should play the role of a facilitator rather than a harsh regulator. Some non-government organisations (NGOs) with their micro-credit programme have succeeded in building a positive image of Bangladesh in the international arena. That micro-credit of Bangladesh is really helpful in containing poverty has been recognised by the world community now. And the greatest of recognition came in 2006 through winning of Nobel Peace Prize jointly by Dr. Muhammad Yunus and Grameen Bank.
Micro-credit is not the panacea for poverty eradication. There is no panacea as such. But micro-credit is one of the most effective tools for poverty alleviation. And of course there are other tools. But micro-credit perhaps has proven itself more effective by now. Quite a few big and many small NGOs are active with their micro-credit programme across the country. Not that they have turned each poor solvent, but their coverage of the poor is rising. Bangladesh is a country of more than 140 million and majority of them are poor.
Today, Bangladesh's micro-credit programme is the largest in the world, and the government has been providing micro-credit a significant component of its plan for halving the number of people living in poverty in Bangladesh by the year 2015. 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 vicious 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.
A lack of collateral and an ability to borrow only small amounts at a time render most of Bangladesh's poorest people ineligible for loans from major national and private banks. In desperation to get out of poverty and to create opportunity for them, many turn to village "Mahajans" (unofficial money lenders), who offer loans at exorbitant interest rates, often exceeding 120 per cent per annum. Even if they receive such loans, people with low levels of literacy, skills, and knowledge run a high risk of failing at their business and defaulting on their loans. They often lose the collateral they provided, which might be, for example, the only piece of land they own, pushing them deeper into poverty.
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. Grameen Bank remains Bangladesh's largest provider of micro-credit.
The government maintains a sizeable micro-credit programme through its Pally Karma Sahayak Foundation (PKSF). The PKSF runs micro-credit operations directly among borrowers and it also finances non-government organisations (NGOs). But in both cases, it is considered to be charging interests rates, which are probably capable of being pushed down further. The government should not be so much inspired by profit motives in the first place when it comes to running programmes with poverty alleviation in view. Even nominal profits or a break-even state should be considered enough by the government considering that it is operating in an area where social needs are being addressed. The NGOs have a stake in running their operations profitably. But they, too, can reduce substantially their current lending rates on borrowings and still remain reasonably profitable. Therefore, the NGOs need to consider such a rationalisation of their lending rates on profits.
There is an authority to regulate micro-credit which was formed some time back. This body needs to streamline further its operations. For micro-credits to have the desired impact on the majority of people in the country who have a rural existence, the lending rates need to be readjusted significantly downward. This would also do justice to the rural customers of credits who have been bypassed in the recent move for reducing the lending rate on credits by banks serving mainly urban areas.
................................................................
szkhan@thefinancialexpress-bd.com
Over 21 million people have joined the group of the chronically hungry in Bangladesh due to the fallouts from the price hike and the global financial crisis, bringing the figure to a 40-year high, said a UNICEF report released recently. The poor, who have borne the brunt of the economic trouble, desperately need support requiring the government to spend more on food, health care and education to alleviate the crisis.
The UNICEF report highlighted the impact of the economic crisis on women and children in eight South Asian countries - Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka. The poor people are facing double trouble as the price hike reduces their purchasing power and the global financial crisis cuts their employment opportunities, The cumulative effects of the two factors -- the price hike started in 2007 and the financial crisis in July of 2008 -- have pushed a large number of people below the poverty line. The purchasing power problem is more acute in Bangladesh than in any other Asian country as the financial crisis has cost a less number of jobs. The report is suggestive of how the poverty situation in Bangladesh is so dismal.
Successive governments in Bangladesh had taken up innumerable steps in a bid to reduce the poverty. Yet none of the programmes proved much effective excepting micro-credit operations. Micro-finance is undoubtedly a powerful tool for poverty reduction. But the micro-credit operation is yet to be linked to the mainstream economy. It should no longer be a part of the informal economy. The micro-lenders need to expand the micro-finance operations to the farm sector in order to offset the food shortage. Diversified use of micro-credit and public-private initiatives could prove effective for the anti-poverty initiatives.
Although micro-credit programmes were expanded to sectors like agriculture, livestock and fisheries, they should be scaled up to make a dent in poverty. As the poor's isolation from the market system unleashed poverty, they should be brought into the mainstream to improve their lives. The micro-finance industry is still a part of the informal sector as it is yet to be governed by proper regulations. As many people are still living in the grey area of law, the micro-credit regulatory authority should play the role of a facilitator rather than a harsh regulator. Some non-government organisations (NGOs) with their micro-credit programme have succeeded in building a positive image of Bangladesh in the international arena. That micro-credit of Bangladesh is really helpful in containing poverty has been recognised by the world community now. And the greatest of recognition came in 2006 through winning of Nobel Peace Prize jointly by Dr. Muhammad Yunus and Grameen Bank.
Micro-credit is not the panacea for poverty eradication. There is no panacea as such. But micro-credit is one of the most effective tools for poverty alleviation. And of course there are other tools. But micro-credit perhaps has proven itself more effective by now. Quite a few big and many small NGOs are active with their micro-credit programme across the country. Not that they have turned each poor solvent, but their coverage of the poor is rising. Bangladesh is a country of more than 140 million and majority of them are poor.
Today, Bangladesh's micro-credit programme is the largest in the world, and the government has been providing micro-credit a significant component of its plan for halving the number of people living in poverty in Bangladesh by the year 2015. 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 vicious 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.
A lack of collateral and an ability to borrow only small amounts at a time render most of Bangladesh's poorest people ineligible for loans from major national and private banks. In desperation to get out of poverty and to create opportunity for them, many turn to village "Mahajans" (unofficial money lenders), who offer loans at exorbitant interest rates, often exceeding 120 per cent per annum. Even if they receive such loans, people with low levels of literacy, skills, and knowledge run a high risk of failing at their business and defaulting on their loans. They often lose the collateral they provided, which might be, for example, the only piece of land they own, pushing them deeper into poverty.
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. Grameen Bank remains Bangladesh's largest provider of micro-credit.
The government maintains a sizeable micro-credit programme through its Pally Karma Sahayak Foundation (PKSF). The PKSF runs micro-credit operations directly among borrowers and it also finances non-government organisations (NGOs). But in both cases, it is considered to be charging interests rates, which are probably capable of being pushed down further. The government should not be so much inspired by profit motives in the first place when it comes to running programmes with poverty alleviation in view. Even nominal profits or a break-even state should be considered enough by the government considering that it is operating in an area where social needs are being addressed. The NGOs have a stake in running their operations profitably. But they, too, can reduce substantially their current lending rates on borrowings and still remain reasonably profitable. Therefore, the NGOs need to consider such a rationalisation of their lending rates on profits.
There is an authority to regulate micro-credit which was formed some time back. This body needs to streamline further its operations. For micro-credits to have the desired impact on the majority of people in the country who have a rural existence, the lending rates need to be readjusted significantly downward. This would also do justice to the rural customers of credits who have been bypassed in the recent move for reducing the lending rate on credits by banks serving mainly urban areas.
................................................................
szkhan@thefinancialexpress-bd.com