Bangladesh is acclaimed globally for its success in microcredit operations. The world is appreciative of the country for its microcredit success as the poor have benefited through their access to credit from non-banking financial institutions.
Microcredit has, in fact, revolutionised the country's socio-economic sector. It has empowered the impoverished people to come forward and participate in economic activities. It has brought Bangladesh a Nobel Peace Prize for being a microcredit model. However, there is the flip side as well. While the non-governmental organisations (NGOs) involved in microcredit programmes flourished, the borrowers were perhaps not benefited in that proportion. The lending institutions started taking 30-40 per cent interest on loans. There were no fixed rules either.
A 'Microcredit Regularity Authority' (MRA) was formed in 2006 to ensure transparency in activities of the micro-lending institutions. The high interest rates of microcredit were widely criticised at home and abroad. Then the government fixed the interest ceiling at 27 per cent in 2010. It was said that gradually the rates would be reduced further, but nothing has been done about this over the last one decade.
The government has decided to slash down interest rates on microcredit provided by the NGOs by 3.0 per cent in order to attain the Sustainable Development Goals (SDGs). The finance ministry approved the interest rates at 24 per cent after an MRA board meeting introduced the recommendation.
The Palli Karma Sahayak Foundation (PKSF) is the main source of funding for microcredit operations. The NGOs receive loans from PKSF on only 4-6 per cent interest rate. So the rate of interest for microcredit should not exceed 20 per cent. There was an argument that the micro-creditors had to go to clients, while clients go to banks in conventional banking system.
The decision to reduce the rate of interest for microcredit is commendable. The apprehensions expressed by several quarters that the decision would affect the lending organisations are baseless. No organisation has ever turned bankrupt because of interest rates.
Rather, the wealth of the lending organisations increased gradually. In fact, sustainable poverty alleviation requires elimination of causes of structural poverty, along with access to property, socio-economic institutions such as education, market, health, sanitation and finance.
So, the question is: how is micro-credit doing in alleviating poverty? As of now, the country's poverty reduction programmes have made a good progress as a total of 330 million out of 400 million poor people are getting microcredit facilities over the last couple of years.
It is also true that by riding on contributions of the micro-finance institutions (MFIs), Bangladesh did achieve the Millennium Development Goal (MDG) on poverty much ahead of UN-set deadline.
However, microcredit alone is unable to alleviate poverty on a sustained basis as only borrowers with enterprising ability and skills can take advantage of it. In recent times, critics have otherwise painted microcredit as criminals while its proponents as panacea. But the fact remains that microcredit has been playing an important role in alleviating poverty despite its limitations.
In Bangladesh, there is a growing pressure for commercialisation of MFIs. Analysts say microcredit will not be able to succeed in combating poverty if the micro-lenders are run with a commercial bent. Commercialisation of the MFIs has, for example, failed in many countries such as India and Bolivia in recent times.
The most worrying fact is that many MFIs are charging 40-60 per cent as interest. Many MFI field staff members allegedly treat the clients badly. They encourage clients to take bigger loans, but if the debtors miss repayment schedule, they disgrace them in public and threaten them psychologically and physically.
In this context, analysts say Bangladesh should start a new round of microcredit programmes that will not only help alleviate poverty but also focus on job creation, healthcare and education to ensure sustainable development. The days of first generation microcredit are over.
On their parts, regulators and government authorities should encourage and support MFIs in minimising supervision costs, as much as possible, adopting a remote loan delivery and recovery mechanism in partnership with mobile phone operators and IT firms offering card-based financial service delivery.
The MFIs should also go beyond their financial services and adopt more human and social visions for greater benefit of society. They should be more transparent about their charges, terms and conditions. In fact, there is a need for introducing low cost systems to reduce the likelihood of client abuse and improve social performance.
There is no denying that micro-finance is just a small part of a national strategy for poverty reduction. As such, there is a need to get it into national perspective. The MFIs have to be efficient and competitive to survive. Also, the government should conduct a study to know how the potential of microcredit could be explored fully.
However, the government needs to decide whether it wants to see MFIs operate as commercial organisations or as social entities. It should then formulate policies accordingly. It is time to reassess the relations between MFIs and the government. The government's role has to be otherwise strengthened and involvement enhanced in this respect.
Microcredit has allowed millions of poor to overcome these obstacles and improve their lives. Through such programmes, loans and training are provided to individuals, who have never been involved in mainstream economic activities, and to small entrepreneurs to help them scale up their productivity and create employment for the poorest people. Most borrowers are women.
Everywhere, the poor were using loans as small as $25 or $30 to create income: raising chickens to sell eggs, opening small retail businesses, or buying sewing machines. Moreover, loans were being repaid on time at rates that would astonish mainline bankers.
Disadvantaged people in Bangladesh, like elsewhere in the world, are easily trapped in a cycle of poverty. Those without land and with little to no education or income face tougher obstacles to 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.
Against this backdrop, there is a vital need to continue this microcredit programme throughout the country brushing aside criticism whatsoever coming from any quarters. Millions of people are in dire need of subsistence only. They need microcredit for their survival.
The programme can be diversified, but cannot be stopped just putting blame on the lending institutions. As of now, they are doing good jobs bringing thousands of poverty-hit people under lending programme and offering them an opportunity to survive in this grim world.
