Shah A M S Kibria Memorial Lecture 2011
Microcredit: A Panacea or A Villain
By
Qazi Kholiquzzaman Ahmad
Chairman, Governing Body, Palli Karma-Sahayak Foundation (PKSF)
Chair, Governing Council, Dhaka School of Economics (DScE)
Organized by
Bangladesh Foundation for Development Research (BFDR)
Dhaka, 25 January 2011
Dedication
I have chosen the topic “Microcredit: A Panacea or A Villain” for my Shah A M S Kibria Memorial Lecture 2010. I thought this would be an appropriate topic to address in a lecture dedicated to his memory. Indeed, during his tenure as Finance Minister, Government of the People Republic of Bangladesh, one of his major concerns related to the issue of alleviation of the conditions of the downtrodden.
Before I start making my presentation, let me pay my respect to his departed soul and say a few words about him. Mr. Kibria was a national and international civil servant of highest calibre and with total dedication to his duties. He was in fact a super example to emulate for those younger people who worked under him or came in contact with him. He was the first Bangladeshi Under Secretary-General of the United Nations and served as the Executive Secretary of ESCAP for 11 years or so with high distinction. He brought similar commitment and more to his job when he turned a politician. His tenure as Finance Minister, Government of the People Republic of Bangladesh (1996-2001) was a great success. My respect for him has always been and continues to be unbounded. His cruel assassination was an outrage, and it is a mater of national shame that his killers have not yet been brought to book. I urge upon the concerned authorities to bring his killers to justice without further loss of time.
MICROCREDIT: A PANACEA OR A VILLAIN
Introduction
A meteoric expansion of microcredit operations have occurred over the past two decades, as bilateral and multilateral donors as well as private foundations and philanthropists provided billions of dollars to microcredit lenders while governments, politicians, social workers, and many observers showered praise and goodwill on the sector. But now there is a sharp reversal and the sector faces political hostility in various countries including Bolivia, Nicaragua, and India and in-depth scrutiny by development thinkers and researchers around the world.
Just as the rise of the sector was meteoric, the reversal it now faces is strong and sharp. In this paper, I wish to explore why such has been the case. I shall look at the nature of proliferation of microcredit operations, their impact on the poor micro-borrowers, why the reversal and how may the future in relation to flow of money to the poor be reshaped that ensures benefits for the poor while the credit providing institutions remain a viable sector. The context of Bangladesh is the focus of my analyses, although occasional references will be made to certain other countries where microcredit has also spread.
Proliferation
Microcredit, as we know it today, began its organized journey in Bangladesh nearly three decades ago with the advent of the Grameen Bank in 1983, although microcredit was being provided on a limited scale by such NGOs as BRAC, Proshika and Muhammad Yunus’s Jobra experiment from the mid-1970s. The phenomenal growth of microcredit in Bangladesh in terms of the number of microfinance institutions (MFIs), the amount of loans disbursed, and the number of micro-borrowers occurred from around the mid-1990s. Microcredit operations have now spread to many other countries around the world.
One estimate shows that, in Bangladesh, the number of MFIs rose to 8,000 by 2000 from around 4,500 in 1995 and around 1,500 in 1990.[1] At the present time, the number may be larger by several thousand more; but a reliable figure is not available.
As of December 2008, the number of active members of 673 MFIs was 35.9 million, of whom 29.8 million were micro-borrowers. These MFIs account for about 90% of the borrowers, as the total borrowers in the country was reportedly about 33 million (a definitive figure is not available). But, since a sizeable proportion of the micro-borrowers borrow from two or more sources, the actual number of borrowers is substantially lower. One estimate indicates 50% or more borrow from two or more sources. If it is conservatively assumed that 50% borrow from only two sources, the total number of actual borrowers of 673 MFIs would be two-thirds of 29.8 million or 19.8 million and for the country as a whole two-thirds of 33 million or 22 million. Cumulative disbursement and loan outstanding in the field of the same 673 MFIs as of December 2008 were respectively Tk.1,360 billion (or about US$ 19 billion at current exchange rate) and Tk.171 billion (about US$2.4 billion).[2]
The establishment of the Palli Karma-Sahayak Foundation (PKSF) in 1990 has been a major boost behind the accelerated expansion of microcredit in Bangladesh since the mid-1990s. Although its mandate is poverty reduction through employment generation, the PKSF embraced microcredit as its modus operandi in line with the dominant concept at the time of microcredit alone being the most efficacious method of addressing poverty. Although, along the way, the PKSF has introduced some innovative microcredit schemes, the traditional microcredit[3] remains the predominant mode of operation. The PKSF does not disburse money directly to individual borrowers; it extends funds to NGOs, first accepting them as partner organizations (POs) through a rigorous process of evaluation; and these NGOs use the funds to lend to microcredit takers from among their members.
The PKSF actually started its operations with 23 POs and Tk.30 lakh in 1991; but its reach expanded fast, with the number of POs rising to 189 with 2.92 million members, 2.31 million borrowers, a cumulative disbursement of Tk. 28.73 billion and the loan outstanding of Tk. 6.82 billion by 2000. By December 2008, the number of POs rose to 257, the number of members to 11.42 million, the number of borrowers to 8.26 million, cumulative disbursement to Tk.454.81 billion and loans outstanding to Tk. 45.8 billion—respectively 36%, 91%, 58%, 83%, and 72% larger compared to 2000.[4]
If one were to look at 10 large MFIs for which data are available for 1995 and 2008, the growth registered by them are phenomenal (Annex Table 2). The same is true of the Grameen Bank (Annex Table 3). Microcredit operations of commercial banks, specialized banks and Bangladesh Rural Development Board (BRDB) are also sizeable as can be seen from Annex Table 4.
Globally, by end of 2009, the number of microcreditors reached an estimated 91 million and loans totalled over US$ 70 billion. About half of all these micro borrowers are in India and Bangladesh.[5]
On the number of MFIs and their size, some data from the Microcredit Regulatory Authority (MRA), which became operational in August 2006, may be cited. With the MRA established, only those institutions which are registered with the MRA are authorized to operate in the microcredit sector. When applications for registration were invited by the MRA, 4,240 applications were received for registration. The minimum qualification for registration, relating to size, was that an institution must have Tk.4 million in outstanding loans in the field or 1,000 borrowers. On the basis of these and other criteria, only 558 could be registered. Others were given two years to fulfill the size requirements, but most of them have failed and have already been turned down or are unlikely to qualify. Clearly, the microcredit sector is characterized by a small number of medium to large and a large number small to tiny MFIs.
Furthermore, there are reports that many individuals and groups of individuals are engaged in microcredit operations. Reportedly, they make their own rules and employ musclemen to ensure that the borrowers obey those rules and also remain within their fold. In these cases, exploitation of the borrowers could be high.
Impact
The stated purpose of microcredit is to help the poor improve their living conditions. In this context, at least three major aspects that need to be looked into are: income effect, impact on social aspects such as health and education, and indebtedness. It is difficult to isolate income and social impacts of microcredit, given that there is a whole lot of other activities that the microcredit receivers undertake to eke out a living and improve their living conditions. At the same time, it is difficult to find a proper control group to compare the results from microcredit interventions. Therefore, the research studies have produced tentative, even conflicting results. Some studies have found that microcredit has generated important economic and social benefits for the borrowers, while others have suggested little or no benefit or debt trap for the borrowers.
An earlier study,[6] which reported positive impact of microcredit on household consumption, has been recently revisited by Roodman and Morduch 2009.[7] Looking at the same data, they have found opposite results and raised grave doubts about the methodology used.
In recent years, studies on microcredit have proliferated, but conclusive evidence one way or another in respect of economic and social benefits is yet to emerge.
It is sometimes argued that the micro-borrowers may justifiably utilize the money borrowed to increase their consumption or meet the costs of such social activities as the marriage of their daughters or sons, instead of looking to increase their income by investing the money for which it was borrowed. These are, it is argued, very important purposes for them to accomplish. I agree that these purposes are very important. But, if income does not increase, the loans cannot be repaid and indebtedness will increase. This is surely a recipe for further impoverishment. It is, therefore, important that the borrowers utilize the money for the purpose it is borrowed. The MFIs may help them accomplish the other purposes providing special loans from special funds or by connecting them with other sources from which such assistance may be available.
One study,[8] based on interviews with randomly selected 2,500 micro-borrowers from across Bangladesh, looked at both socio-economic and indebtedness-related impacts of microcredit in Bangladesh. The survey was conducted in early 2006 and the results were published in January 2007. Some of its major findings are as follows:
“Some of the micro-borrowers in Bangladesh have benefited in certain respects. A lot of them are struggling under the stringent terms of credit including high cost of borrowing and a weekly repayment schedule starting a week after a credit is taken. Many have gone further into indebtedness and face a bleak future. The micro-borrowers face the threat of expulsion and confiscation of their assets when they fail to pay up weekly installments; and some have in fact had their meagre assets confiscated when they failed to pay up. This threat is in effect collateral.
... ...
A large majority of the micro-credit households have remained condemned to a lowly and subservient state of living. The main culprits for this state of affairs include the glaring and accentuating socio-economic disparity and worsening iniquitous power relations in the country, neither of which is addressed or even recognized by the micro-credit institutions.”
Regarding empowerment of women micro-borrowers, the study reports that women borrowers by and large do not control the money they borrow. Only about 10% of the female respondents have indicated that they are in full control of and manage the economic activities undertaken with micro-credit. It would appear that they are often simply the conduit for some money coming into the family. However, women micro-borrowers are now generally more aware of things as they go about their work at home and outside; and many are consulted in the process of important family decisions being made. Moreover, tyranny of dowry has increased with respect to the marriage of women belonging to microcredit receiving households.
It may also be noted that the study has found that while the benefits enjoyed by most of the borrowers are uncertain and many face setbacks, the MFIs have generated for themselves large surpluses through high actual interest rates and other charges and burgeoning credit creation through a continuous process of loan collection and lending/relending.
Obviously, one may raise questions regarding the findings of this study also. But, the above mentioned conclusions are broadly consistent with field observations of mine and many others.
The PKSF has had several studies conducted by different consultants. The results produced remain subject to question marks. The PKSF is, therefore, embarking on a major microcredit impact study, covering its economic, social, and indebtedness-related impacts. Various types of microcredit are being looked at.
The study will address some key questions, which have never been seriously asked. These include: comparison between the effective rate of interest and the rate of return obtained by micro-borrowers on investments made with the microcredit taken; the nature and duration of employment generation; role of microcredit in promoting health and education; and how long a microcreditor should remain a microcreditor before graduating into a process of self-sustaining socio-economic progress.
This study will also examine the social setting within which the microcreditors live and work and how the constraints imposed by it may be overcome for financial flows to the poor through microcredit and other credit programmes to be more effective in helping them improve their living conditions on a sustained basis.
Mission Drift and Concerns
In the euphoric 1990s for microcredit, when it was fast expanding and widely regarded as the most efficacious intervention for poverty eradication, very few people raised questions as to whether it was really focusing on helping the poor, its stated mission. I, for one, raised some questions regarding the manner of operation and the impact of microcredit in my Dr. M. N. Huda Memorial Lecture 1995, organized by Bangladesh Economic Association.[9] In that lecture I strongly suggested, based on the insights I gained from my field visits to different areas of the country, that, in the context of the stated mission of microcredit, all was not well as claimed. The observations I made then may be summarized in the following two paragraphs.
I questioned the then emerging myth of ‘microcredit alone’ being the panacea that is enabling the poor to shake off poverty and move on to a process of sustained progress. In reality, most microcreditors tend to remain microcreditors, annually borrowing Tk.2,000 or Tk.4,000, for 10 or 20 years since coming under microcredit schemes. Indeed, small may be beautiful, but if small perpetuates it can be ugly. Expansion of microcredit has been fast and donor support enormous, given the minimalist ‘credit only’ intervention and the regular virtually full recovery of credit. But, the borrowers have generally remained caught at a low level poverty trap under the burden of high actual interest rates and stringent weekly repayment schedules starting just after one week. Many borrowers are getting more and more into debt, without viable exit options. Loan repayment is being strictly enforced, regardless of what happens to the economic conditions of the borrowers. Moreover, for not fulfilling minimum economic qualification, the poorest of the poor remain outside the microcredit net. On the other hand, the real for sure but also presumed benefits of microcredit are being drummed up nationally and internationally.
I further argued that the issues concerning productivity growth and an integrated approach to socio-economic uplift of the poor, which can lead to accelerated poverty reduction and sustained socio-economic progress for the poor, are totally ignored, given the dominant credo of microcredit alone and the consequent focus on fast expansion of microcredit that has been bringing fortune-fame-prizes to the microlenders. That is, as opposed to social service, commercial instincts, focused on expansion and profit making, seems to be increasingly becoming the driving force behind microcredit operations among many MFIs. The plight of the borrowers is not of much concern to these MFIs. Therefore, for many borrowers, not better life but increasing misfortune may be in the offing, it would appear.
The purpose of my comments was not to denigrate any good deed but to warn against the creeping pitfalls and conceptual limitation.
Needless to say, my comments were ignored at the time. But, today’s reality reflects in many ways the concerns I expressed then. In fact, Muhammad Yunus of microcredit fame and Nobel Laureate acknowledge the degeneration of microcredit in a recent article.[10] Let me quote his words:
“In the 1970s, when I began working here on what would eventually be called “microcredit,” one of my goals was to eliminate the presence of loan sharks who grow rich by preying on the poor. In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks. But, it has.”
In the same paper, Yunus has also said that microcredit has been widely commercialized, focusing on reaping ever-increasing profits and, as a result, the people whom microcredit was supposed to help are instead being harmed.
The crisis has already flared up in the micrecredit sector as a result of aggressive commercialization in Bolivia, India, Nicaragua, and Mexico, for example. In fact, microcredit banks have started raising money through public offerings. Two outstanding examples are: Mexican microcredit bank Compartamos went public in 2007 and the largest Indian microfinance bank SKS recently raised US$358 million in an initial public offering. Raising money in this manner obliges the concerned microlenders to be commercially aggressive, if only to protect and enhance the interests of their shareholders.
But, even otherwise, microlenders in various countries have been pursuing enhancement of their own interests through raising of interest rates, cajoling increasing numbers of poor people to borrow and borrow more than their economic conditions would permit, and enforcing loan repayment using coercion if need be. Many microlenders borrow money from commercial banks to microlend, which is an oft-repeated reason for raising microlending interest rates.
The MFIs and their financiers and many researchers are concerned with the sustainability of the MFIs only. This is the basic consideration behind fixing the interest rates and the emphais on 100% recovery regardless of the means used. How the borrowers may be doing seems to be no concern. As a matter of fact, a key selling point of microcredit has been the loan recovery rate of close to 100% routinely posted by the MFIs.
The attitude of the sector regarding the fixing of the interest rate is clearly reflected in the following observation of Muhammad Yunus:[11]
“The maximum interest rate should not exceed the cost of the fund—meaning the [microlending] cost that is incurred by the bank to procure the money to lend—plus 15 percent of the fund. The 15 percent goes to cover operational costs and contribute to profit.”
It is sometimes argued that since the loan recovery rate is 100% or close to 100%, the micro-borrowers are surely doing well. But, such a conclusion is unwarranted. Before drawing a conclusion in this context, one must look into the sources of money with which the micro-borrowers pay their weekly installments. The sources may include income from the activities undertaken with the credit taken as well as from sale of labour, from other economic activities the family members are engaged in, sale of commodities produced and even livestock and other assets, and borrowing from other MFIs or other sources.
It is surely untenable if only the sustainability of MFIs is considered ignoring the question of viability of the borrowers. Indeed, the viability of the sector depends on both. If the microcreditors cannot generate more than what they pay as interest plus the costs incurred in acquiring the credit, they will be impoverished as a result of micro-borrowing instead of making progress in terms of reduction of their poverty and improving their living conditions.
It may be noted that, in the quotation cited above, Yunus is talking about an interest rate based on declining balance method. However, the MFIs of Bangladesh charge flat rates. The flat rate is what the borrowers in general understand to be the actual rate charged. But, a flat rate means that the rate payable is significantly more than double the flat rate. The borrowers are not informed about that.
The way it works is as follows. The flat rate is applied, at the time a loan is sanctioned, to the total amount lent as if a borrower holds the total amount borrowed for the whole year. The total interest thus calculated is added to the amount lent to determine the total amount to be collected from the borrower. This amount is then divided by the number weeks in which it is to be repaid to determine the amount of equal weekly installments. Depending on the number of installments, which is now usually 46, and the flat rate charged, the rate of interest actually paid by the borrowers is determined.
It the flat rate is 15%, which is in fact charged currently by most of the MFIs that are not PKSF partners,[12] an estimate of the interest rate on the basis of average balance of loan, i.e. the rate actually payable, turns out as 33.9% when the amount lent and the total amount of interest are collected together in 46 weekly installments. In this calculation, no upfront obligatory savings deduction and no transaction cost (out of pocket expenses, passbook, application fee, processing fee, etc.) are taken into account. The estimate goes up to 35.2% if 5% of the amount lent is deducted upfront as obligatory savings and a 5% interest is paid on it by the MFI to the borrower. The estimated cost of credit is found to be 36.7% on average balance when a transaction cost of Tk.70 is taken into account with no upfront obligatory savings deduction. If both 5% upfront obligatory savings deduction and the cost of transaction are taken into account, the estimated effective cost of credit works out to be 38.1%.[13]
For transparency, a declining balance method, which shows the actually payable rate of interest, is the right approach.
The implications of mission drift and some of the key concerns have been outlined above. Other concerns arising from fast expansion and owing to mission drift, commercialization, management and accounting deficiencies, or misuse of money include the following.
· One major concern arises from the fact that, as indicated earlier, a large number of unregistered small and tiny institutions as also profit-motive-driven individuals and groups of individuals continue to operate in the microcredit sector illegally. Their activities are not monitored.
· Another concern relates to multiple borrowing by MFIs. Some studies have indicated that the major reason behind multiple borrowing is to meet loan repayment obligations to other MFIs and, therefore, it leads to increasing indebtedness. However, a study of the Institute of Microfinance,[14] based on a small sample, suggests that multiple borrowing does not reflect increasing indebtedness. Rather it is resorted to for accessing more funds for upgrading or expanding economic activities. However, the balance of available evidence, as of now, is in favour of increasing indebtedness. More research work is needed to better understand the reality.
· As microcredit has been expanding fast in the country, its productive use has faced a serious challenge, given a lack of attention by the MFIs to skill training required for the purpose at the borrowers’ level.
· There are increasing instances of transfer of funds generated through microcredit operations to such other uses as personal aggrandizement of the leaders of the particular MFIs and taking up commercial ventures or other activities with different purposes. But the funds so generated should be ploughed back into microcredit operations or employed to take up activities directly beneficial to the borrowers. Examples of untenable use of funds include acquiring personal assets (such as land, buildings, modern vehicles, various durable items) and setting up business operations. There are instances of large sums being diverted to meet the costs of foreign trips of top MFI functionaries, undertaken for purposes not relevant to the operations of microcredit and to defray costs of higher studies of their off-spings abroad.
· In some MFIs, overhead costs are too high mainly due to deficits in good management practices.
· Weekly installment payment, which includes the shares of the principal and the payable interest rate, is a big headache. The requirement of the first installment to be paid just one week after the loan is taken is torturous, as generating enough money for the purpose by utilizing the borrowed money in one week is like asking for a magic wand to be used.
· Generally, as much as Tk.40-70 is charged for processing the application, application form, passbook, etc. But, the estimated cost incurred by an MFI on these counts is only Tk.5-10, depending on the number of borrowers an MFI deals with.
· An obligatory savings deduction of 5% of the amount lent made upfront by many MFIs means that the amount available to the borrower is lower by 5%. Moreover, much lower rates of interest compared to market rates are paid by the MFIs to the borrowers on the obligatory savings as well as voluntary weekly and other type savings collected from the borrowers.
· Some MFIs adjust repayment of savings of a section of borrowers by using savings of another section of borrowers. This undesirable practice allows an MFI to increase its loan-portfolio, which may give rise to savings repayment problems later on.
· An insurance premium is also deducted by most MFIs upfront without any guaranteed benefits to be provided.
· The salary structure is so uneven in most MFIs that the lower level staff members are paid a small percentage of top salaries.
· Many MFIs do not maintain adequate liquidity, do not make loan-loss provision, and do not properly maintain the mandatory disaster-management fund.
· Poor accounting practices are observed in many MFIs, both at the head-office and branch levels.
· A particular concern in relation to the proliferation of microcredit is that there appears to be collusion between MFI officers and borrowers spreading at the field level, leading to a breach of transparency in loan distribution and making for syndicated loan practices (a single person taking loans in the names of real or fictitious borrowers).
· The expansion of microfinance activities in the field has not been accompanied by a commensurate growth of qualified manpower for proper management and efficient field operations. The MFIs, therefore, face serious problems in conducting their management and field operations properly to provide quality financial and related services to their borrowers.
· Sometimes there appears to be an alarming lack of supervision of branch offices. This often is the case for those MFIs which have gone for rapid expansion of branches and programmes. The lack of supervision of branch offices leads to financial irregularities in the branches; and when this phenomenon accumulates, the financial position of the concerned MFI is shaken.
Cleaning Up the Act
The act must be cleaned up fast in Bangladesh, centring around the social mission of genuinely helping the poor, for the microcredit sector, which has the potential to help poor, to avoid the situation heading into crisis along lines now raging in such countries as Bolivia, India, Nicaragua, and Mexico. Certain key actions to be undertaken in this context are outlined below.
For a start, the MFIs must dedicate/rededicate themselves and strictly adhere to the mission of genuinely helping the poor to get out of poverty and achieve sustained improvement in their living conditions. It is to be recognized that only microcredit will not do the trick. Therefore, microcredit has to be positioned as a key component of an integrated approach to poverty eradication and sustained economic growth. In particular, health, education, and best possible utilization of available resources must also be among the key components of the process.
Those MFIs, particularly the larger ones, which do not any more like to be in this category may seek and be allowed to convert themselves into specialized microcredit banks and come under appropriate banking regulations.
Many concerns raised in the previous section are largely due to the absence of a proper regulation of the sector. Indeed, there was no worthwhile Regulator until August 2006. Now that the Microcredit Regulatory Authority (MRA) has been established, it should perform its duties effectively. But, for the MRA to be able to do so, it should be equipped adequately in terms of manpower and financial and other resources. The MRA, in addition to registering MFIs, have recently adopted a set of rules relating to fixing the rate of interest and a number of other matters, to be implemented by the MFIs by June 2011. By adequately implementing these MRA decisions, the MFIs can move some distance towards mission (as stated earlier) adoption/restoration. The MRA on its part needs to monitor closely compliance by the MFIs and make sure that they undertake corrective actions as and when found necessary.
It is essential to take necessary steps in relation to the thousands of unauthorized small and tiny institutions operating in the microcredit sector in order to bring order into the sector. In this context, the first thing to do is to identify all the institutions, individuals, and groups of individuals that are engaged in microcredit operations without registration with the MRA. Then, steps must be taken to ensure that these operators fulfill necessary conditions within a given time period to qualify for registration with the MRA and come under MRA monitoring; and those which are unable to meet these requirements must be closed down. As to those which were already given time to fulfill qualification requirements and have failed to do so, immediate steps may be taken towards their liquidation. However, if some of such institutions still show good promise, they may be allowed a further short period of time to come up to the standard.
The rate of interest on microcredit must be fixed by taking into account both sustainability of the MFIs and viability of the micro-borrowers and, for transparency, on declining balance method. The MRA has recently fixed the interest rate at 27% as maximum on a declining balance method, to be implemented by the MFIs by June 2011. Given the cost of funds for the MFIs in general and the realities faced by the micro-borrowers, this rate is surely on the high side; and there is scope to reduce it further. A further reduction should be agreed and put into practice when the rate fixed now (i.e. 27%) is expected to be reviewed in a year’s time. This is necessary in the interest of the microcredit sector, as doing so would imply cutting down on commercialization and strengthening adherence to the mission of genuinely helping the poor and, at the same time, improving the prospects of the micro-borrowers and, hence, of the sector itself.
Since partner organizations of the PKSF have access to cheaper funds, maximum interest rate for them on declining balance method would be 25%.
The MRA has also taken the following decisions to be implemented by the MFIs by June 2011, towards decommercialization and improving social mission of the MFIs. These are:
· A 15 days grace period before the first installment is due.
· Ordinary microcredit will be recovered in 50 equal weekly installments.
· No deduction will be made upfront as obligatory savings, insurance premium or any other charges.
· A maximum of Tk.15 may be charged for application form and processing and passbook.
· An interest rate of at least 6% has to be paid on savings collected from the borrowers. Every MFI is required to announce the rate in advance, and it will not pay less than the rate announced.
· Every MFI is required to have a clear-cut salary structure, which it will provide to the MRA.
Other steps needed include :
· For productive utilization of microcredit, it is essential to promote skill development at the borrowers’ level. The MFIs may take the lead in this regard as part of services provided to the borrowers. The MRA and the PKSF can also play important supporting roles in this context, especially regarding mobilization of trainers and monitoring of the results. All training activities organized must be end-use focused.
· Steps must be taken to develop qualified manpower for the sector, as required. The MRA, the PKSF, and the MFIs may join hands to chalk out and implement training programmes. Relevant government ministries/departments may also be involved.
· At the same time, the trained people should be given such salaries and benefits as may encourage people to train and remain in the sector. The existing salary structure in most MFIs is highly iniquitous. A more equalitarian structure is called for, both for fairness and expediency of keeping trained people.
· The MFIs should refrain from committing financial irregularities, which seem to be occurring quite a lot in the sector. They should do so on their own given that their mission should be to help the poor. But, the MRA (for the sector as a whole) and the PKSF (in so far as its POs are concerned) should also take appropriate action. First of all, it is necessary to determine the facts and then steps should be taken to persuade the wrong-doers to correct themselves. If persuasion fails, other means including legal steps should be taken to rid the sector of financial irregularities.
· A strengthened regulatory body and an effective monitoring arrangement are needed to help the sector avoid the pitfalls such as those mentioned above and of other sorts that may tend to creep in.
Concluding Remarks
Microcredit is not a panacea. Nor need it be a villain. It can perform an important role. But the act must be cleaned up and kept clean. The social mission of genuinely helping the poor to take control of their destiny must be upheld on a continuous basis. Obviously, sustainability of the MFIs is essential, but they must refrain from commercialization. Under these terms, microcredit should be a genuinely useful tool of channeling much needed funds to the poor. But alone, it cannot go very far. For poverty eradication and sustained improvement in the living conditions of the poor an integrated approach is needed, of which the key components should include education, skill training, financing, best utilization of available assets, enhancement of assets, and social environment.
The PKSF has recently initiated, on a pilot basis, a comprehensive household-focused integrated approach to poverty eradication and beyond poverty sustained socio-economic progress in 21 unions in different parts of the country. The initiative is still at a very early stage of implementation, but it already shows high promise in relation to both implementability and expected results.[15]
Annex Table 1
Growth of PKSF Supported Microcredit Operations, 1995 to 2009
Year | No. of POs | No. of members (million) | No. of borrowers (million) | Outstanding loan (billion Taka) | Cumulative disbursement (billion Taka) |
1995 | 116 | 0.29 | - | 0.48 | 1.40 |
1996 | 128 | 0.44 | 0.44 | 0.81 | 2.42 |
1997 | 150 | 0.96 | 0.67 | 1.36 | 5.11 |
1998 | 170 | 1.65 | 1.21 | 3.02 | 10.68 |
1999 | 182 | 2.19 | 1.58 | 4.68 | 17.38 |
2000 | 189 | 2.92 | 2.31 | 6.82 | 28.73 |
2001 | 199 | 3.34 | 2.63 | 7.51 | 40.82 |
2002 | 205 | 5.51 | 3.86 | 12.37 | 68.88 |
2003 | 213 | 6.36 | 4.49 | 15.04 | 99.85 |
2004 | 219 | 7.24 | 5.10 | 17.64 | 130.62 |
2005 | 231 | 7.75 | 5.52 | 20.77 | 165.37 |
2006 | 243 | 9.45 | 6.78 | 25.72 | 220.72 |
2007 | 248 | 10.03 | 7.71 | 35.81 | 293.50 |
2008 | 257 | 11.17 | 8.28 | 41.95 | 369.65 |
2009 | 257 | 11.42 | 8.26 | 45.80 | 454.81 |
Source: PKSF Annual Report 2009.
Growth of 10 Large MFIs, December 1995 to December 2008
MFI | Cumulative disbursement (in million Taka) | Loan outstanding (in million Taka) | No. of members (000) | |||
1995 | 2008 | 1995 | 2008 | 1995 | 2008 | |
BRAC | 9,619 | 355,026 | 2,226 | 44,805 | 1,511 | 8,090 |
ASA | 2,917 | 238,044 | 607 | 32,022 | 404 | 7,277 |
Buro Bangladesh | 59 | 20,062 | 20 | 3,197 | 21 | 602 |
SSS, Tangail | 107 | 16,406 | 31 | 2,316 | 26 | 362 |
RDRS | 303 | 7,915 | 134 | 1,008 | 312 | 380 |
Uddipan | 62 | 7,633 | 17 | 1,298 | 15 | 211 |
Swanirvor Bangladesh | 1,328 | 7,624 | 310 | 1,616 | 642 | 988 |
RRF, Jessore | 65 | 6,096 | 18 | 866 | 16 | 205 |
Heed Bangladesh | 20 | 3,925 | 14 | 449 | 24 | 99 |
Codec, Chittagong | 117 | 3,190 | 42 | 305 | 20 | 53 |
Growth of Grameen Bank Operations, December 1996 to December 2008
Indicator | December 1996 | December 2008 |
Number of Members | 2,059,510 | 7,670,203 |
Loan outstanding (in million Taka) | 11,695 | 44,397 |
Cumulative disbursement (in million Taka) | 71,063 | 418,904 |
Annex Table 4
Cumulative Microcredit Operations by Banks and
Other Institutions as on December 2008
Type of institutions | Cumulative disbursement (million Taka) | No. of borrowers (000) | Outstanding loan (million Taka) |
Commercial Banks | 6,911 | 564 | 3,956 |
Specialised Banks | 36,800 | 1,375 | 1,233 |
BRDB | 66,227 | N/A | 9,608 |
· Average balance of loan (ABL) = roughly (Tk.5,000
2) = Tk. 2,500
2) = Tk. 2,500· RIAP = (8482500) x 100 = 33.9%
2500) x 100 = 33.9%· ABL = roughly (Tk.5,000 - Tk. 250) 2 = Tk. 2,375
2 = Tk. 2,375· RIAP2 = Tk. (835.52,375) x 100 = 35.2%
2,375) x 100 = 35.2%· Cost of credit = (Tk. 918Tk. 2,500) x 100 = 36.7%
Tk. 2,500) x 100 = 36.7%· Cost of Credit = (Tk. 905.5Tk.2,375) x 100 = Tk. 38.1
Tk.2,375) x 100 = Tk. 38.1[1] Salehuddin Ahmed and M. A. Hakim, Attacking Poverty with Microcredit, PKSF/UPL, Dhaka 2004, p. 29.
[2] Source: CDF and INM: Bangladesh
[3] Annual loans, weekly repayments in equal installments (loan plus interest), flat rate of interest implying the payable interest rate being significantly more than double, and rudimentary economic activities and petty trading are among the basic characteristics of what I refer to as traditional microcredit.
[4] Source: PKSF Annual Report 2009, reproduced in Annex Table 1.
[5] Vikas Bajaj, “Microlenders, Honored With Nobel, Are Struggling”, The New York Times, New York 5 January 2011 .
[6] Mark M. Pitt and S. R. Khandker 1998, “The Impact of Group-Based Credit Programmes on Poor Households in Bangladesh
[7] Richard Rosenberg, “Does Microcredit Really Help Poor People?”, Consultative Group to Assist the Poor (CGAP), Focus Note No. 59, Washington D.C.
[8] Qazi Kholiquzzaman Ahmad (ed), Socio-Economic and Indebtedness-Related Impact of Micro-Credit in Bangladesh, ActionAid/Bangladesh Unnayan Parishad (BUP)/University Press Limited, Dhaka, 2007.
[9] Qazi Kholiquzzaman Ahmad, “Nation Building in Bangladesh: Putting People First”, in Anisur Rahman and Bebapriya Bhattacharya (eds.) Bangladesh Journal of Political Economy, Vol. XIV, No. 1, Bangladesh Economic Association (BEA), Dhaka, May 1998, pp. 23-37. The Lecture was delivered in 1995 and published in 1998.
[10] Muhammad Yunus 2011, “Wrong Turn for Microcredit”, The Daily Star, Dhaka , 9 January 2011 .
[11] Muhammad Yunus, op.cit.
[12] PKSF POs levy a service charge of 12.5% flat rate.
[13] Annex Table 5 explains the computation of actual interest rate payable and the costs of credit shown in this paragraph.
[14] Multiple Memberships (Overlapping) in Microcredit Market—A study of Pathrail Union in Tangail, PKSF and the Institute of Microfinance Dhaka , 2008.
[15] See PKSF ENRICH: A Holistic Approach to Household-Focused Poverty Eradication; and other still unpublished documents.
[16] Since a borrower repays the amount borrowed in weekly installments, the amount of the lender’s money she holds goes down every week by the amount paid up weekly. It is the amount she holds in a particular week, on which she should be liable to pay interest in that week, and the amount held goes down continuously. A short-cut to capturing the declining liability of the borrower would be to work out the average balance held by her over the year and to compute the actually payable interest rate on that basis; rather than on the total amount borrowed as if the whole amount is held throughout the year, as is the case with the use of a flat rate by an MFI.
Its an excellent lecture. Nothing to disagree with this paper. Very clear concept.
ReplyDeleteFazlul Kader