What the microcredit clients do with the loan money?
Saturday, 15 March 2008
S. M. Rahman
A widespread misgiving prevails among many people around the globe as to what the microcredit clients indeed do with loan money, which they receive from various micro-finance institutions (MFIs). There is a dearth of information on the use of loan money. Sometimes this is confusing. We often hear the MFIs say that the clients are using cent percent loans in productive activities that generate income. While many think that the clients use cent per cent loan for day-to-day consumption. There are some people who think that they spend the money for a variety of activities deemed essential for their livelihoods. This write-up the outcome of a small field research involving the clients, living mostly in the rural areas.
Again there is another misconception in making the women as the prime clients of the microfinance programme. It is perceived widely that the MFIs are concerned with reduction of poverty of women only. This is not the case; however. MFIs are virtually concerned with the reduction of poverty of the households where the women are playing a progressive role. In the long past, microcredit was thought of creating self-employment for additional income. Now it has crossed that periphery and sometimes it generates gainful employments.
Why women are at the focal point of microfinance? Why women are at the helm of microfinance is questioned by many people. Women are truly the strategic clients of MFIs. Generally women take the loans and then give it to others in the family. There is no harm in handing over the loan money to their husbands, sons, daughters or even sisters. In many cases, the women themselves are directly using the money.
What the clients do with the loan money? Many people, particularly those who are not involved with the microcredit sector, still have no clear idea as to what the clients do with the loan money. Almost all MFIs have a policy stating some sub-sectors for investing in various income generating activities. The clients usually have to select a particular income generating activity as approved in the list in order to easily qualify for a loan. The clients sincerely say that in most cases, the loan money is used for a variety of purposes other than those specified in the loan applications. During the research enquiry, the clients who had taken at least three loans were consulted. They spring from large, mid-level and very small MFIs. One hundred clients who are women were interviewed in five districts viz. Dhaka, Narayangonj, Gazipur, Narsingdi and Tangail of Bangladesh. The findings reveal that microcredit is indeed a multi-purpose loan. Those who take loans for the first time use it mostly for consumption purposes, not least in food-related items.
In one of the country's large formal MFIs, it was found that about sixty eight per cent of the clients used 54% of their total loans for small trades. A few clients used 64% of the loan money for buying homestead and cropland. A small number of clients used 67% of the loans to build new houses. Some spent 15% of the total loan for medical treatment of their relatives and themselves. Some spent 19% of the total loan money for consumption purposes. A few clients used 29% of loan money for sending their relatives abroad for jobs. A smaller number of clients used 18% of their loan for major repairing of their dwelling houses. A handful of clients used 42% of the loan for buying television sets, furniture and gold ornaments, while others used the loan money in buying rickshaws, livestock and lending to others in a modicum scale.
In another large non-governmental organisation (NGO)-MFI, it was spotted that fifty per cent of the clients used 95% of the total loan money in trading businesses like vegetables, grocery, fish, and betel leaves, etc. A few clients used 40% of the loan money in repaying occasional borrowed debts. Some clients used 35% in agricultural farming. Some used 37% of the total loan for buying livestock for rearing. A few clients used 41% loan money for redeeming mortgaged cropland. Some clients used 61% of the loan money for sending relatives abroad. Again some used 34% of the loan money for meeting the debts from moneylenders. Some clients used 15% of the total loans in repaying loan installments of other NGOs. Some clients used 17% of the loan for medical treatment. Some used 100% loan for house construction, while others used the loans for buying land, rickshaw vans and consumption purposes.
Yet again in another large NGO-MFI in the country, about fifty per cent clients were noticed using 66% of the total loan in running their businesses. Several clients used 43% of the total loan for marriage ceremony of their family members. A few clients used 38% of the loan for house construction and repairing. Some used 32% of the total loans in repaying loans of the local moneylenders. A few clients used 59% of the loan for various litigation purposes. Some clients spent 41% in food consumption. Some clients used 67% loan for weaving purposes. Others used the loans for medical treatment, buying livestock, cropland, taking others land for cultivation and repaying loan installments of other NGOs.
In a mid-level MFI operating in the urban areas, cent per cent clients used 86% of the total loan in various types of businesses that include grocery, cattle hide, computer composing, photocopy service, commercial phone service, saree selling, etc. Some clients used 84% of the total loan for house construction. A few clients used 81% of the total loan in buying land in the villages where they hailed from.
In a pretty tiny NGO-MFI, some clients were found using 74% of the total loans for buying fishing equipment like nets and boats, etc. Some clients used 46% of the loan for buying livestock. A few used 74% of the loans as business capital. Some kept 52% of the loans as savings in the commercial banks, while others used the loan money for repairing houses and meeting medical costs.
Conclusion: The findings of the research should not be underrated on the hypothesis that it was based on a small sample. The outcomes were validated by a number of experienced field workers involved in the credit programmes different MFIs. Their ideas fully matched with the outcomes. Intriguingly, the field experience indicates a consistency in the use of loans by the clients in different organisations and places.
As propagated by most MFIs, the findings contradict that the borrowers use cent per cent loan for sheer income-generating purposes. In essence, the clients further reveal that about 50%-60% clients use more than fifty per cent of the total loans productively for fetching some earnings. The picture is interesting and encouraging and nothing alarming for microcredit. During the initial period of borrowing, loans are largely used for consumption, meeting educational expenses of the children, medical treatment costs, etc. Some loans are used for asset creation and renovation in terms of buying land, house construction and repairing. As time passes, the clients need more money than an MFI can provide. Many clients are found furtively flocking to several MFIs in order to optimize their basket of financial needs. To our surprise, some clients are also doing syndicate loan business whereby they borrow from one or more MFIs and then lend it again to others at a high rate.
It is abundantly clear from the findings that microfinance is not merely a business loan. It has indeed emerged as a multipurpose package loan. The use of loans as depicted in this write-up undoubtedly helps in poverty reduction and bringing about economic welfare in the family. It is definitely impractical that all the loans will be used productively for income generation. In many cases this happens, though.
The article is partly based on a field research done by the writer for CARE Bangladesh. The writer is a micro-finance specialist
A widespread misgiving prevails among many people around the globe as to what the microcredit clients indeed do with loan money, which they receive from various micro-finance institutions (MFIs). There is a dearth of information on the use of loan money. Sometimes this is confusing. We often hear the MFIs say that the clients are using cent percent loans in productive activities that generate income. While many think that the clients use cent per cent loan for day-to-day consumption. There are some people who think that they spend the money for a variety of activities deemed essential for their livelihoods. This write-up the outcome of a small field research involving the clients, living mostly in the rural areas.
Again there is another misconception in making the women as the prime clients of the microfinance programme. It is perceived widely that the MFIs are concerned with reduction of poverty of women only. This is not the case; however. MFIs are virtually concerned with the reduction of poverty of the households where the women are playing a progressive role. In the long past, microcredit was thought of creating self-employment for additional income. Now it has crossed that periphery and sometimes it generates gainful employments.
Why women are at the focal point of microfinance? Why women are at the helm of microfinance is questioned by many people. Women are truly the strategic clients of MFIs. Generally women take the loans and then give it to others in the family. There is no harm in handing over the loan money to their husbands, sons, daughters or even sisters. In many cases, the women themselves are directly using the money.
What the clients do with the loan money? Many people, particularly those who are not involved with the microcredit sector, still have no clear idea as to what the clients do with the loan money. Almost all MFIs have a policy stating some sub-sectors for investing in various income generating activities. The clients usually have to select a particular income generating activity as approved in the list in order to easily qualify for a loan. The clients sincerely say that in most cases, the loan money is used for a variety of purposes other than those specified in the loan applications. During the research enquiry, the clients who had taken at least three loans were consulted. They spring from large, mid-level and very small MFIs. One hundred clients who are women were interviewed in five districts viz. Dhaka, Narayangonj, Gazipur, Narsingdi and Tangail of Bangladesh. The findings reveal that microcredit is indeed a multi-purpose loan. Those who take loans for the first time use it mostly for consumption purposes, not least in food-related items.
In one of the country's large formal MFIs, it was found that about sixty eight per cent of the clients used 54% of their total loans for small trades. A few clients used 64% of the loan money for buying homestead and cropland. A small number of clients used 67% of the loans to build new houses. Some spent 15% of the total loan for medical treatment of their relatives and themselves. Some spent 19% of the total loan money for consumption purposes. A few clients used 29% of loan money for sending their relatives abroad for jobs. A smaller number of clients used 18% of their loan for major repairing of their dwelling houses. A handful of clients used 42% of the loan for buying television sets, furniture and gold ornaments, while others used the loan money in buying rickshaws, livestock and lending to others in a modicum scale.
In another large non-governmental organisation (NGO)-MFI, it was spotted that fifty per cent of the clients used 95% of the total loan money in trading businesses like vegetables, grocery, fish, and betel leaves, etc. A few clients used 40% of the loan money in repaying occasional borrowed debts. Some clients used 35% in agricultural farming. Some used 37% of the total loan for buying livestock for rearing. A few clients used 41% loan money for redeeming mortgaged cropland. Some clients used 61% of the loan money for sending relatives abroad. Again some used 34% of the loan money for meeting the debts from moneylenders. Some clients used 15% of the total loans in repaying loan installments of other NGOs. Some clients used 17% of the loan for medical treatment. Some used 100% loan for house construction, while others used the loans for buying land, rickshaw vans and consumption purposes.
Yet again in another large NGO-MFI in the country, about fifty per cent clients were noticed using 66% of the total loan in running their businesses. Several clients used 43% of the total loan for marriage ceremony of their family members. A few clients used 38% of the loan for house construction and repairing. Some used 32% of the total loans in repaying loans of the local moneylenders. A few clients used 59% of the loan for various litigation purposes. Some clients spent 41% in food consumption. Some clients used 67% loan for weaving purposes. Others used the loans for medical treatment, buying livestock, cropland, taking others land for cultivation and repaying loan installments of other NGOs.
In a mid-level MFI operating in the urban areas, cent per cent clients used 86% of the total loan in various types of businesses that include grocery, cattle hide, computer composing, photocopy service, commercial phone service, saree selling, etc. Some clients used 84% of the total loan for house construction. A few clients used 81% of the total loan in buying land in the villages where they hailed from.
In a pretty tiny NGO-MFI, some clients were found using 74% of the total loans for buying fishing equipment like nets and boats, etc. Some clients used 46% of the loan for buying livestock. A few used 74% of the loans as business capital. Some kept 52% of the loans as savings in the commercial banks, while others used the loan money for repairing houses and meeting medical costs.
Conclusion: The findings of the research should not be underrated on the hypothesis that it was based on a small sample. The outcomes were validated by a number of experienced field workers involved in the credit programmes different MFIs. Their ideas fully matched with the outcomes. Intriguingly, the field experience indicates a consistency in the use of loans by the clients in different organisations and places.
As propagated by most MFIs, the findings contradict that the borrowers use cent per cent loan for sheer income-generating purposes. In essence, the clients further reveal that about 50%-60% clients use more than fifty per cent of the total loans productively for fetching some earnings. The picture is interesting and encouraging and nothing alarming for microcredit. During the initial period of borrowing, loans are largely used for consumption, meeting educational expenses of the children, medical treatment costs, etc. Some loans are used for asset creation and renovation in terms of buying land, house construction and repairing. As time passes, the clients need more money than an MFI can provide. Many clients are found furtively flocking to several MFIs in order to optimize their basket of financial needs. To our surprise, some clients are also doing syndicate loan business whereby they borrow from one or more MFIs and then lend it again to others at a high rate.
It is abundantly clear from the findings that microfinance is not merely a business loan. It has indeed emerged as a multipurpose package loan. The use of loans as depicted in this write-up undoubtedly helps in poverty reduction and bringing about economic welfare in the family. It is definitely impractical that all the loans will be used productively for income generation. In many cases this happens, though.
The article is partly based on a field research done by the writer for CARE Bangladesh. The writer is a micro-finance specialist