Money begets money. Adam Smith in his famous book Wealth of Nations said, “When you have got a little, it is often easy to get more. The great difficult thing is to get that little.” Microcredit is a small size of the loan that is given to the poor for self-employment. Microcredit through institutional arrangement is a recent innovation for poverty reduction among the poor. Today, Bangladesh is called the land of Microcredit revolution. The Microcredit revolution started among rural women in 1970s. The revolution had its root in the recognition that poor people needed credit and more importantly, they could use credit more efficiently and responsibly.
Definition of Microcredit
Conceptually, microcredit can be described as
collateral free small loan offered to the poor to create Small employment in income generating activities based on group lending methodology.
Microcredit can broadly be defined as a program that provides credit for self-employment and other financial and business services including savings and technical assistance to the poor people.
Definition of Microfinance: Microfinance is a combination of savings, loans, investment opportunities, insurance options and other financial services.
Poverty, women’s empowerment, nutrition, health, family planning, education, housing, self-reliance, sustainability all are addressed by microfinance.
Features of Microcredit
In the microcredit system, service providers go to the doorsteps of the poor based on the principle that the people should not go to the bank rather than the bank should go to the people. The other important features of microcredit are:
– Microcredit is given with minimum paperwork. – Workers have to make regular visits to the borrower’s premises to offer advises and Supervision.
– The small size of the loan.
– It is collateral-free.
– Recovery rate is above 90%.
– All loans to be paid back in instalments on the weekly or bi-weekly basis.
Microcredit and Government Initiatives
The Government of Bangladesh is involved in Microcredit in two ways:
a. Funding to the NGOS: The PKSF (Palli Karma Sahayak Foundation) is an apex public organization providing credit and institutional services to NGOs. The government set up PKSF in 1990. Since then PKSF has not lent about US$ 252 to 250 NGOs covering more than 3.8 million borrowers. As the biggest microcredit funding organization in the world PKSFs standards, guidelines and modalities are being studied by different countries to develop their microcredit sectors.
b. Delivering Microcredits: At present, thirteen ministries and division of the Government of Bangladesh and their attached departments have been distributing Microcredit. Government departments and organizations have so far disbursed approximately Tk. 15,000 million to 10 million poor people through microcredit.
Microcredit and Poverty Alleviation
The main objective of microcredit is to create income in poor households and thereby alleviate poverty. Microcredit leads to improvement in income and the increase in income lift the poor above the poverty line.
The main objective of microcredit is to create income in poor households and thereby alleviate poverty. Microcredit leads to improvement in income and the increase in income lift the poor above the poverty line.
The former secretary general of UN Kofi Anan opines that eradicating poverty is perhaps the greatest global challenge. Out of 6 billion populations in the world 2.8, billion live on less than two dollars income a day. Of the 1.2 billion people 50 million live in Asia and 30 million in Africa. Microcredit programs in these regions show that microcredit is strong poverty alleviating weapon. More than 64 million of the world’s poorest people have taken part in the past seven years in microfinance projects with the purpose of coming out of the vicious circle of poverty.
Microcredit and Women Empowerment
Microcredit plays a significant positive role in empowering rural women. Through their involvement in microcredit, many Women have become leaders, instigating change in social practices and relationships and mobilizing social action. Women’s status, both in their homes and communities is improved when they are responsible for loans and for managing savings. When they generate and control their income, Women gain a level of power that means they can make decisions independently and command more respect. Poor women have the best credit ratings. In Bangladesh, for example, women default on loans less often than men and credit extended to Women has a much greater impact on household consumption and quality of life for children. The direct effect of microcredit programs on Women’s position in the community has been through the expansion of women’s mobility in the public spheres like a bank, thana headquarters, hospitals etc.
High-Interest Rate – A Dilemma
It is alleged that Microcredit distributors of Bangladesh are charging high-interest rate on credit. As a result, borrowers are becoming poorer. The critics say that NGO credit is much costlier for a poor borrower than that of a commercial bank. But the microcredit providers say that the existing interest rate is rational. Let us focus on both sides of this controversial issue.
Interest Rate is not high at all: – 15% flat interest rate on NGO credit is necessary for its long-term sustainability.
– NGOs bring services to the doorsteps of the borrowers which reduce borrower’s transportation costs and time.
– An NGO credit program can never be sustainable if it fails to cover the full costs of its operation, particularly the following: Staff salary costs Annual costs of funds – Annual costs of bad debts and cost of inflation
– We cannot deny the positive impact of intensive supervision and monitoring of NGOs operated credit on the household incomes of poor borrowers. The cost of supervision and monitoring make the present interest rate rational.
– Microcredit is not charity. The interest rates must match the cost of microlenders. Otherwise, these bodies would cease to exist. So let the market determine the rate.
The interest rate on Microcredit is high: NGOs are charging a high rate of interest on microcredit. They are doing business in the name of poverty alleviation. According to a study, the microcredit system charges interest as high as 30% to 40%. In this situation. Credit receivers take the opportunity of taking fresh loans from which they give the instalments. The reality is that microcredit perpetuates the poverty of the borrowers. Incidentally, the people who administer the programs are better off and have turned even rich.
Other Criticisms – The pros and cons of Microcredit System, its efficacy are a matter of debate.
– The cost of microcredit is very high. Microcredit operations can be labelled as Kabuliwalah’s business.
– Microcredit has serious procedural problems and does more harms than good.
– There is no good governance and transparency in the microcredit providing Organizations.
– The weekly recovery system creates pressure on the borrowers.
– There is no legal framework to control and oversee the operation of the microcredit providing organization. As a result, many unauthorized NGOs are cheating the poor people.
– Many unregistered local NGOs are doing business in the name of microcredit and poverty alleviation.
Recommended Policies
Microcredit system has some procedural and functional problems. Some recommendations have been placed to overcome these problems.
Microcredit system has some procedural and functional problems. Some recommendations have been placed to overcome these problems.
– Microcredit practitioners should concentrate on reducing poverty rather than using it as a business.
– They should cut the interest rate on credit. In doing this, they should reduce operational costs.
– The size of loans should be enlarged so that the poor people can come out from the poverty cycle.
– Microcredit banks under Government initiatives can be established in rural areas to streamline micro-financing.
– Every financial institution needs supervision and monitoring. A regulatory commission should be set up to oversee the functioning of microcredit programs.
– Good governance and transparency are crucial factors that should be ensured in the microcredit operation.
– In Bangladesh, most of the people are Muslims. We can see the Islamic economic system and the Islamic banking system in Islam. So the microcredit system should be in line with the principles of the ideals of Islam.
Conclusion
In spite of some limitations, microcredit has been accepted as an effective tool for poverty alleviation and as an approach to development. It is a matter of pride that Bangladesh is a global centre of excellence in microcredit and home to much successful microfinance providing institutions. Madam Mbeki, the first lady of South Africa, has rightly termed Bangladesh as the University of Microfinance’. The poverty of the world can be rooted out through effective microcredit program that originated in a poor country like Bangladesh.
