Socio-Economic and Indebtedness-Related Impact of Micro-Credit in Bangladesh
Edited by
Qazi Kholiquzzaman Ahmad
Conducted by
Bangladesh Unnayan Parishad (BUP)
Phones: 8853958-60 <>
ActionAid Bangladesh (AAB)
Phones: 8815991-2 <>
Published by
The University Press Limited (UPL), Dhaka
January 2007
Socio-Economic and Indebtedness-Related Impact of Micro-Credit in Bangladesh
Study Advisor and Coordinating Author
Qazi Kholiquzzaman Ahmad
Study Team Members
Jadab Chandra Saha
Md. Humayun Kabir Majumder
Nilufar Banu
Syed Shah Habib Ullah
Mirza Manbira Sultana
Support Staff
Jyotirmay Devnath
Nazma Banu
Md. Daudul Islam
Bangladesh Unnayan Parishad (BUP)
Phones: 8853958-60 <>
ActionAid Bangladesh (AAB)
Phones: 8815991-2 <
To the struggling, exploited, downtrodden multitudes in Bangladesh and everywhere else.
Contents
Contents
Foreword
Preface
Chapter 1: Introduction1
Chapter 2: Basic Information on Respondents
and Micro-Credit as Received by Them5
Chapter 3: Impact of Micro-Credit: Selected Socio-Economic Variables13
Chapter 4: Rate of Interest, Cost of Borrowing, Loan Repayment
and Velocity of Credit Creation
Chapter 5: Micro-Credit and Women Empowerment
Executive Summary and Conclusion
Bibliography
Annex 1: Expansion of Micro-Credit Programmes of Selected Leading MCIs
Annex 2:Distribution of Respondents by District
Annex 3:Background Information on Respondents
Annex 4:Computation of Effective Rate of Interest
and Effective Cost of Credit
Contributors
Qazi Kholiquzzaman Ahmad PhD is an economist and the Chairman of the Bangladesh Unnayan Parishad (BUP), Dhaka.
Jadab Chandra Saha PhD is Director, Centre for Economic Policy Research, BUP
Md. Humayun Kabir Majumder PhD has been a Consultant to BUP
Nilufar Banuis Director, Centre for Social Weather Analysis, BUP
Syed Shah Habib Ullahis Senior Fellow, BUP
Mirza Manbira Sultanais Senior Research Associate, BUP
Foreword
Micro-credit is a popular instrument used by many development and financial agencies in many parts of the world for serving low-income people, and is becoming more so after the Nobel Peace Award in 2006. How this instrument works naturally depends on the setting in which it is applied, and the manner of applying it. This very important study by Dr. Qazi Kholiquzzaman Ahmad and his colleagues of the working of micro-credit by the Grameen Bank and NGOs in Bangladesh reveals serious shortcomings in the operation of this instrument in this country given the general structure of the terms of its operation and the socio-economic context in which this instrument is being applied.
The terms of micro-credit in Bangladesh are stiff, and generally too restrictive by way of weekly repayment and saving commitments to allow free choice of avenues for utilisation of such credit. Even in the restrictive economic space permitted by its terms the borrowers often face hardships by way of need to sacrifice essential consumption or borrowing from other money lenders or diversion of resources from other activities to service the debt, and get into seemingly perpetual debt cycles. Very importantly, the desired women's empowerment in the preference to women as clients of micro-credit as an important social objective is more often than not unfulfilled because of the grip of the male-dominated culture in Bangladesh which the operation of micro-credit fails to address. Taken together, the study gives the stern warning that in the majority of cases the operation of micro-credit in Bangladesh is not yielding the desired improvements in the lives of its clients. On the other hand, it is working as a rather lucrative profit-yielding business to external agencies engaged in such operation.
This should enlighten all friends of disadvantaged people as to the proper place of micro-credit in poverty alleviation and women's empowerment. We know that there are many instances all over the world, including Bangladesh, of low-income women's groups moving forward without micro-credit from external sources. Some operate saving and micro-credit schemes through their own organizations by the strength of which they are already empowered to start with (an outstanding example is the renowned self-employed women's organisation - SEWA - in India). Some of them may be getting only technical assistance from friendly quarters to embark on productive activities. On the other hand some low-income persons, as individuals or as groups, are even taking bigger amounts of credit and embarking upon big-scale productive activities, thereby contributing not only to reduction of their own poverty but also to overall growth of the economy, showing thereby that they have the capability to contribute to the nation's growth process as a productive force and thus serve the dual objective of growth with equity.
An important lesson that emerges from this study is that, while micro-credit extended by external agencies may in specific circumstances and under appropriately favourable terms help advance the economic condition of low-income people, a careful prior examination of the totality of the socio-economic condition of the client(s) is needed in order to assess this potential. This seems all the more imperative for micro-credit to be extended to women of low-income families in oppressive male-dominated societies with the additional objective of promoting women's empowerment. As the study concludes, poverty is a "comprehensive" (systemic) concept and may not be overcome by monetary instruments alone.
This objective study by Dr. Ahmad and his team is a very timely and important word of caution and contribution to understanding the pitfalls of micro-credit for poverty alleviation and empowerment of women of disadvantaged groups, unless it is tempered with softer and flexible terms and associated with other relevant socio-cultural policies, measures and social movements as circumstances may warrant. Poverty alleviation thinking in the world is naturally dazzled today by the Nobel Prize, which has been a reward for sustained dedicated work over many years and in many countries that can justifiably make the Bangladesh nation proud. The same dedication warrants that lessons from experiments with micro-credit in a country like Bangladesh are acknowledged, and corrective steps are taken in working with this instrument in such a country.
The final warning in this important study is not to be complacent of the possibilities offered by free market systems toward poverty alleviation, insofar as such systems intrinsically strengthen existing power relations that "condemn the large majority to a lowly and subservient state of living" - in fact, power relations that create and recreate poverty. In this context the study also draws attention to the question of equity, and it should not need arguing that people's perception of poverty and misery from a sense of poverty - and hence also their willing co-operation with the system that causes them such misery - is a relative notion varying with the lifestyle of the elite in society. Together, this makes the effort of poverty alleviation in such systems like a kitten chasing its own tail - a question of macro structural change which should never be lost sight of at the peril of inviting rise of anti-social or fundamentalist forces in the society.
January 2007Md. Anisur Rahman
Former Professor of Economics
University of Dhaka
Preface
The focus of this study is on micro-credit operations in rural Bangladesh. A combined purposive and multistage random sampling procedure was used to select a country-wide representative sample of 2,501 rural micro-credit receivers for four years or more at the time of the survey. It was felt that in order to assess the impact meaningfully, micro-borrowing for four years or more would be necessary. Virtually all the respondents are female micro-borrowers; only less than one per cent are males. The larger enterprise credits provided by some micro finance institutions (MCIs) on a very limited scale are not included in this study.
The sample survey was conducted during January-February 2006 and the report was finalized in August 2006. It is now brought out between covers for wider circulation. Concerned ActionAid-Bangladesh officials, particularly the Interim Country Director Mr. Shoaib Siddiqui and the Acting Head of Livelihood Security & Risk Reduction Mr. AFM Shahidur Rahman,have shown keen interest in this regard.
The key questions which have been sought to be answered through this study relate to socio-economic and indebtedness-related impact of micro-credit on the households of micro-borrowers as well as empowerment of women as a result of micro-borrowing by them. While some micro-borrowers and their families have benefited in certain ways, in general the results are discouraging and in some ways even disparaging. This does not mean that credit is not useful to the poor and powerless. But poverty and powerlessness have to do with all aspects of life and living, involving in the main the essential material and human needs including socio-cultural aspirations; and the poor and powerless, identified accordingly, are under multiple economic, social, and political stresses. For sustained reduction of poverty in this sense, therefore, a comprehensive approach is essential. To be sure, human dignity for the poor and disadvantaged must be the cornerstone of comprehensive approaches to poverty eradication. Within the framework of such an approach, micro-credit with less stringent terms should be a useful key element.
The growth of micro-credit into a country-wide programme in Bangladesh and its adoption in various other countries has occurred given the fillips provided by the unflinchingly dedicated work of Dr. Muhammad Yunus over the past three decades and more in promoting it as a tool for poverty alleviation, with his Grameen Bank leading the way. In recognition, Dr. Yunus and the Grameen Bank were jointly awarded Nobel Peace Prize in October 2006, which has made the whole nation proud.
However, it is now even more important that pitfalls of the ongoing micro-credit operations are properly recognized and lessons learnt therefrom to take corrective steps. But, two stumbling blocks to meaningful and sustained poverty reduction are the glaring socio-economic disparity and highly iniquitous power relations in the country, which are being accentuated further by the free market system in vogue; but neither is addressed, even recognized in so far as the micro-credit operations are concerned. Arising from these two and other sources, multiple stresses combine to produce, reproduce and perpetuate poverty which is multifaceted. The existing exploitative elitism is a sure recipe for an eventual social implosion. It needs to be replaced by inclusiveness, equity, participation, and human dignity for all as guiding principles for creating an economically vibrant and socially and environmentally sustainable society.
We are thankful to Professor Md. Anisur Rahman for writing a thoughtful foreword to this book.
Dhaka, January 2007Q. K. Ahmad
Editor
Acknowledgements
Thanks are due to:
at Bangladesh Unnayan Parishad (BUP): all who have contributed to this study one way or another, including study team members, support staff, and field supervisors and field investigators; at ActionAid Bangladesh (AAB): all associated with the study, in particular Shihab Uddin Ahamed and Monisha Biswas; and the respondents who gave their time and energy to provide the information sought from them.
Special thanks are due to Professor Md. Anisur Rahman for his comments on an earlier draft.
The funding support provided by the AAB for this study is acknowledged with thanks.
Pictures on the cover from:
Chapter 1
INTRODUCTION
Background of the Study
Bangladesh economy is characterized by unfavourable per capita land, low per capita income, glaring and accentuating income disparity, high level of unemployment, low productivity, and persisting high levels of poverty and deprivation. Under the circumstances, micro-credit has been promoted to help the poor to take up self-employment on tiny/micro scales with a view to improving their living conditions.
As the public sector banks (there were no private commercial banks until the 1990s and, when established, these banks have been catering only to the rich people and organized sectors) failed to come forward with easily accessible credit for the poor people who, therefore, remained dependent on money lenders charging exorbitant rates of interest. There was, therefore, a huge gap between the need for credit among the rural population, particularly the poor (rural and also urban) and the availability of affordable credit lines for them. In fact, only Krishi bank has been providing agricultural loans to farmers, but on a very limited scale so that, in this case also, unmet demand has always been huge.
Micro-credit was conceived as a means of enabling the poor to have easy access to small amounts (few thousand Taka) of credit for undertaking economic activities. Given that the poor have little or no property or assets to offer as collateral which is required by formal banking system, micro-credit has responded to the predicament by offering collateral-free loans. The Grameen Bank led the way, starting in the mid-1970s. Now, there are hundreds of micro-credit providers of different operational sizes throughout the country, mostly in rural areas but also some in urban areas. The large ones include Grameen Bank, BRAC, ASA and PROSHIKA. In addition, there are also public sector micro-credit programmes. Annex 1 shows the expansion in terms of the number of borrowers and total credit disbursed by the large four and some other major micro-credit providers up to 2005 or early 2006, as available.
Micro-credit has by now reached a total of over 60 percent of all poor households of the country, and 37 percent of all households (see in Bibliography: World Bank 2005, p.25). In fact, the people can and do take micro-credit from multiple sources. Over the years evaluative studies of the micro-credit regime have been conducted with different purposes. A list of a number of such studies will be found in the bibliography appended.
However, there are lingering questions relating to the indebtedness of the micro-credit receivers and the contribution of micro-credit to improvement in their socio-economic conditions. To what extent the poor have benefited from micro-credit or are they getting ‘debt trapped’ at poverty, even below poverty level as some observers suggest? Data generated on relevant aspects are analyzed in the following chapters. This study was, therefore, designed to address these questions and create a knowledge base for future policy and operational guidance. The study has mainly used field survey data, both quantitative and qualitative, and also relevant secondary information when available.
This study focuses on micro-credit operations in rural Bangladesh. To ensure country-wide rural representation, a total of 2,501 rural micro-credit receivers, selected on the basis of a combined purposive and multistage random sampling procedure, have been interviewed using a pre-designed questionnaire. The sampling procedure followed was to select 16 districts from he six divisions and two upazilas from each district randomly but two unions from each upazila purposefully considering concentration of micro-credit programmes. Villages from those unions and respondents from those villages were then selected randomly. The study has been conducted with financial support from the ActionAid Bangladesh and is a joint activity of the Bangladesh Unnayan Parishad (BUP) and ActionAid Bangladesh.
Data Collection
A total of 2,501 rural respondents (henceforth respondents or micro-borrowers or borrowers) who have been borrowing funds from a variety of micro-credit institutions (MCIs), but mostly from Grameen Bank, BRAC, and ASA, have been selected using a purposive-cum-random sampling procedure form all the six administrative divisions of Bangladesh, as explained earlier. The study districts and district-wise distribution of the sampled borrowers are shown in Annex 2.
Primary data have been collected over a period of 35 days from 19 January 2006 to 22 February 2006. The randomly selected micro-borrowers of different MCIs have been interviewed in their homes, using a pre-designed questionnaire. The questionnaire was pre-tested in a few villages in Dhaka district. The field investigators and supervisors were thoroughly trained and six teams consisting of three investigators and one supervisor each were fielded.
It was felt that to make a judgment as to the impact of micro-credit, at least four years of micro-borrowing may be needed so that the borrowers interviewed were at the time of the interview had been micro-credit receivers for at least four years. In the process of random selection, any borrower who had been micro-borrowing for less than four years was passed over and the next one in sequence who had been borrowing for at least four years was interviewed. The data collection process was strictly supervised by field supervisors and field visits by core research team members.
The secondary data sources used include publications/annual reports of different MCIs, Credit and Development Forum (CDF), Bangladesh Bureau of Statistics, Palli Karma-Sahayak Foundation (PKSF), and Bangladesh Bank (BB).