The impact of microfinance or micro credit
9. The impact of microfinance/ micro credit
In the 1970s, three out of four Bangladeshis lived in poverty and the country was considered a test case for development. Rapid population growth, frequent natural disasters, and low economic growth throughout the 1980s suggested that a large number of households would remain trapped in chronic poverty.
Defying this outlook, Bangladesh began experiencing more sustained economic growth since the 1990s, which was accompanied by impressive poverty reduction. For example, in 1991-92, about 60% of the population was below the poverty line and around 50% was below the extreme poverty line. By 2005, those figures had gone down to 40% and 25% respectively.
The Bangladesh economy began experiencing structural changes in the 1990s following trade liberalization and domestic market reforms. In urban areas, private sector growth and employment were spurred by rapid growth in garments exports while rural areas benefited from the deregulation of agriculture markets, boosting agricultural production. At the same time, relatively higher paying rural non-farm opportunities increased and the labor force slowly began to shift away from agriculture.
Two well known studies assess short and medium-term microfinance impacts from the borrowers' point of view, using repeated household surveys carried out in rural Bangladesh. Using nationally representative data, their findings suggest that poverty reduction among the borrowers due to microfinance is 1.6 percentage points per year. Moreover, microfinance programs have spillover effects on the non-borrowers -- their poverty level goes down by 0.3 percentage point a year.
Even without the income gains, the poor may still benefit from microcredit services if it helps them withstand income and non-income shocks such as an economic disaster resulting from the sudden death of a productive family member, the loss of an economic asset, or natural disasters. Without some form of insurance (either public or private), the poor may not be able to smooth consumption during those disasters, which may lead to sharp cut-backs in essential food and non-food expenditures. Several studies confirm that micro-credit programs help households partially insure against shocks so that they effectively play an important "safety net" role. One carefully designed study finds that microcredit borrowers are about 50% less prone to consumption fluctuation than their counterpart non-member poor households in Bangladesh.
However, on balance there is more evidence suggesting that microcredit does influence gender relations positively. Most published papers show that access to microcredit leads to women taking a greater role in household decision making, having a greater access to financial, economic and social resources and having greater mobility in Bangladesh. .
Finally, microfinance is not a panacea and will clearly not eliminate all poverty in any country. Thus, the potential of microfinance can be best exploited by recognizing the lessons from careful impact evaluation studies, strengthening programs on the basis of this research and field experience, and by incorporating micro-finance programs into Bangladesh's overall poverty-reduction strategy.
10. Breaking the vicious cycle of poverty through microcredit
The Grameen Bank is based on the voluntary formation of small groups of five people to provide mutual, morally binding group guarantees in lieu of the collateral required by conventional banks. At first only two members of a group are allowed to apply for a loan. Depending on their performance in repayment the next two borrowers can then apply and, subsequently, the fifth member as well.
The assumption is that if individual borrowers are given access to credit, they will be able to identify and engage in viable income-generating activities - simple processing such as paddy husking, lime-making, manufacturing such as pottery, weaving, and garment sewing, storage and marketing and transport services. Women were initially given equal access to the schemes, and proved not only reliable borrowers but astute entrepreneurs. As a result, they have raised their status, lessened their dependency on their husbands and improved their homes and the nutritional standards of their children. Today over 90 percent of borrowers are women.
It is estimated that the average household income of Grameen Bank members is about 50 percent higher than the target group in the control village, and 25 percent higher than the target group non-members in Grameen Bank villages. The landless have benefited most, followed by marginal landowners. This has resulted in a sharp reduction in the number of Grameen Bank members living below the poverty line, 20 percent compared to 56 percent for comparable non-Grameen Bank members. There has also been a shift from agricultural wage labor (considered to be socially inferior) to self-employment in petty trading. Such a shift in occupational patterns has an indirect positive effect on the employment and wages of other agricultural waged laborers. What started as an innovative local initiative, "a small bubble of hope", has thus grown to the point where it has made an impact on poverty alleviation at the national level ".
11. Do not misuse term microcredit: Muhammad Yunus
“People with a motive of making profits should not use the term microcredit to describe their activities,” thundered Prof Muhammad Yunus, often hailed as the father of microfinance.
The 2006 Nobel Peace Prize winner was reacting to questions by journalists on the commercialization of microfinance. The Bangladeshi economist said he was dismayed by the commercialization of the concept he pioneered, whose sole aim is to benefit the poor.
“When we started the concept of microcredit, we didn?t go there to make money. If you want to commercialize this activity, then choose another term to describe yourself. Don?t call yourself a microcredit player,” said Yunus. Who started the concept of giving micro-loans to the poor and eventually established the Grameen Bank to give microcredit to the needy.
Asked what he thought about Vikram Akula, founder of SKS Microfinance, Yunus said he was a great person who had started with Grameen, but later he went the money-making way.
“Both our countries need a regulatory authority which can help financial services reach the poorest. The interests of the receivers of microfinance should be protected,” said Yunus, adding that he is optimistic about the Malegam report which has capped interest rates at 24%.