Dr. Salehuddin Ahmed writes in the first of a two-part article
FINANCIAL services for the poor have proved to be a powerful instrument for poverty reduction enabling the poor to build assets, increase incomes and reduce the vulnerability to economic stress. Today, access to credit is recognised as a 'right' of people globally. About three decades ago the innovative experiment by Professor Muhammad Yunus in village Jobra of Bangladesh resulted in the formation of the world famous Grameen Bank, the pioneer of microcredit. The award of the Nobel Peace Prize 2006 to Professor Yunus and the Grameen Bank has brought microcredit at the centerplace of programmes of eradicating poverty from the face of the earth and thereby bring peace around the globe.
Over the years, there has been phenomenal growth in activities of microcredit in many countries of the world and a transition in the paradigm and modalities of microcredit. Microcredit Summit Meeting first held in Washington DC, USA in February 1997 launched a global movement to reach 100 million of the world's poorest families, especially the women of those families, with credit for self-employment and other financial and business services by the year 2005, The UN declared 2005 as the "International Year of Microcredit". The Global Microcredit Summit held in Halifax, Canada in November 2006 set the goal of reaching 175 million of the world's poorest families with microcredit by 2015.
Now is the time to reflect on the experiences of Bangladesh, the birthplace of microfinance and the country with the biggest and most vibrant microfinance sector.
Microfinance strategy for Poverty Reduction: Money begets money. More than 200 years back Adam Smith in his famous book "The Wealth of Nations" said: "Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little". It is very difficult for the poor to get small working capital from formal banking system for various reasons. Microcredit enables the poor to take a great leap forward.
About bare minimum of freedom -- food, drink, health, clothing, the philosopher Bertrand Russell said, "Now I shall regard it as a priori justifiable to deprive one person of comforts to supply another with necessaries. It may not be politically expedient, it may not be economically feasible, in a given community at a given moment; but it is not objectionable on the ground of freedom, because to deprive a man of necessaries is greater interference with freedom than to prevent him from accumulating superfluities." We must all now act to give the poor the bare necessaries; credit is one of them.
Among other factors, the basis of emergence of microfinance (specially in the semiformal sector) is the mismatch between, supply perspective (mostly formal sector) and the demand factors (need of microfinance).
Evolution of Microfinance Institutions (MFIs) in Bangladesh: Two decades of development practice in Bangladesh have established that microcredit, savings and other financial services are important tools to fight poverty. On-going efforts to at least contain poverty is thus crucial alongside specific poverty eliminating strategies. There is an argument to be made therefore, that financial services should be made accessible to all kinds of poor in Bangladesh. These efforts should aim not only to address the needs of today's poor and the poorest, but also to address the needs of tomorrow's poor as well.
During the late 1970s, when the 'Jobra' experiment was underway under Professor M. Yunus, the Dheki Rin Prokolpa was initiated by the Bangladesh Bank in collaboration with the Swanirvar Bangladesh, and several other pilot schemes were initiated by a handful of the non-government organisations (NGOs) which were active then. At that time, it was difficult to conceive that these initiatives would lead to a major microcredit movement, which would make Bangladesh known to the rest of the world. In 1979, Bangladesh Bank (the Central Bank) sponsored the Grameen Bank Prakalpa-(Grameen Bank Project) in order to help consolidate Professor Yunus' model and replicate Grameen model to other parts of the country.
Under the aegis of Bangladesh Bank, some nationalised banks and specialised government banks provided fund for the project, which became successful for replication in different parts of the country. In 1983, through a special enactment Grameen Bank Prakalpa was converted to a specialised bank named Grameen Bank. Even during the 1980s, in spite of Grameen Bank's success, the main discourse amongst development practitioners in Bangladesh centered around the desirability of microcredit programme as opposed to conscientization. By 1990, unhindered experimentation in the fields led to a quiet resolution of the debate and the country experienced a massive expansion of microfinance activities during the 1990s.
This rapid expansion drew attention from all important quarters-policymakers, academia and development practitioners-each trying to grapple with the unfolding stream of issues and trying to shape the course of the social and economic dynamics initiated due to introduction of microcredit. With a view to meet the demand for fund for re-lending by the development partners (NGO-micro-finance institutions or MFIs), and due to an urge to coordinate the flow of such funds to appropriate use, the Palli Karma-Sahayak Foundation (acronym PKSF and the full Bengali name can be translated in English as "Rural Employment Support Foundation") came into being in late 1990. Over the years, its share in the revolving loan fund of the MFIs increased from 9.0 per cent in 1996 to 23.64 per cent in 2001. PKSF contributed significantly to the expansion of microcredit programs in Bangladesh. Gradually, PKSF's share in the total market has decreased a bit, reasons could be the increase in share by the local banks.
In recent years MFIs have moved from the margins of the financial system towards the mainstream. It is now more widely accepted that populations traditionally excluded by the formal financial sector can, in fact, be a profitable market niche for innovative banking services. Much remains to be done, however, to integrate microfinancial systems, and for orthodox financial institutions, notably commercial banks, to recognise its full potential.
Coverage Under Microcredit Programmes: Microcredit programmes (MCPs) in Bangladesh are implemented by various formal financial institutions (nationalised commercial banks and specialised banks), specialised government organisations and semi-formal financial institutions (nearly 700 NGO-MFIs). The growth in the MFI sector, in terms of the number of MFI as well as total membership, was phenomenal during the 1990s and continues till today. The total coverage of MCPs in Bangladesh is approximately 24.25 million borrowers.
There is debate, however, on the extent of overlap- one borrower taking loan from more than one microfinance institution and the extent of overlapping may be as high as 40% (PKSF, 2006). The effective coverage would be around 17.32 million borrowers. Out of 17.31 million borrowers covered by MCPs, about 62% are below poverty line and so about 10.74 million poor borrowers are covered by MCPs. It is estimated that 42% of the total population of 131.45 million lies below the poverty line, which means 55.21 million people. Among this poor people 53% are economically active poor, the number would be 29.26 million who are the target group of microcredit operation. Therefore, there is still scope of extending the coverage of microcredit programme to an approximate 18.5.2 million borrowers. NGO-MFIs are the major providers of microcredit in Bangladesh.
Activities of Borrowers Financed by Microcredit Institutions in Bangladesh: Of the various employment activities (mainly self-employment), small-scale business/trade is the most important, accounting for more than 40% of fund disbursed by the MFIs. On the other hand, livestock, crops, food processing, transport, and housing sectors were getting relatively small portions of fund.
A transformation is taking place in the economic activities of the poor households in the rural areas. In the initial years of microcredit operation during eighties, the traditional sector including fisheries and poultry accounted for a larger segment of self-employment activities of the poor. BIDS surveys conducted during 1997 to 2000 on PKSF funded MFIs, show the predominance of small-scale trade and lately medium and large-scale trading has assumed prominence.
There are, however, some weaknesses of the non-farm sector; many of its activities are unable to accommodate a workforce round-the-year and also over a period of two or more years (BIDS, 2001). This aspect combined with the market constraints to the expansion of self employment has prompted the efforts of MFIs to finance micro enterprises for the borrowers graduating form income generating activities (IGAs).
Microcredit Apex Fund : The Missing Link: In most of the countries around the world donors, business houses, private individuals and governments are providing funds to various domestic microfinance institutions (MFIs) to carry out microcredit programmes (MCPs). The present mechanism of channeling funds to MFIs, especially government and donor funds, has proved to be inefficient. The total cost of providing finds directly to microcredit programs (or "retailers") is usually high when the cost of feasibility studies, appraisal missions, monitoring, evaluation, reporting and so on are included. This is particularly true in cases where the funding agency does not have a permanent office or adequately trained personnel near the MCP being funded. It is very difficult to give figures on how much donor funds go to the poor. Some estimates suggest that about 10% to 25% of donor funds actually reach the poorest, while the rest is spent on administration, overhead, training, institution building and consultants.
The writer is Governor of Bangladesh Bank. More on Saturday
Microfinance programmes in Bangladesh
FE Team | Published: November 14, 2007 00:00:00 | Updated: February 01, 2018 00:00:00
Share if you like