1.0 Introduction:
1.1 Background of the Research:
Microfinance has been become a talked of topics for some years in Bangladesh. Microfinance helps very poor households meet basic needs and protect against risks and the use of this financial services by low-income households is associated with improvements in household economic welfare and enterprise stability or growth. Basically the poor people has not enough money to start an economic activities of their own so that they come to various NGO’s and Microfinance institutions like Grameen Bank, Brac, Asha, Proshika etc. in the country and receive micro credit but they have to pay a high interest rate against this debt receiving as micro credit. So they are no longer interested to take off capital from them as source of investment when their economic activities are expanded and they want to repay the loan to get rid of this debt. The present research is conducted to see the situation empirically.
1.2 The Problem with the justification:
The cost of acquiring borrowed capital is very high due to high interest rate for the microcredit recipients rather it is better for them to increase their own capital investment from their economic activities. So as their economic activities are expanded day by day they are more interested to pay the debt as soon as possible.
To gain an empirical knowledge the researcher has conducted the research on the issues mentioned above by applying a model called ESI (Entrepreneurial Success Index) model by taking into account recipient’s debt equity ratio and ESI (getting from ESI model) value of different year periods which refers entrepreneurial success level of micro credit recipients within the current year (2010) and the base year (2005).
1.3 Research Objective:
There are two objectives of the research:
§ To empirically test whether microcredit recipients want to shake off their take off capital and;
§ To find out the reasons why they shake off their capital
1.4Research Methodology:
1.4.1Sources of data collection:
There are two sources of information of data collection are used as follows:
q Primary- data are collected through personal interview of 25 micro credit recipients.
q Secondary- data are collected through web sites, books and business journals.
1.4.2 Sample method:
To conduct the study convenient sampling method is used. In this regard primary data of 25 respondents are collected from Munshiganj District and the area is chosen for personal convenience of the researcher. Sample size is determined based on researcher’s availability of resources. And to collect the data, time frame is used from 2005 to 2010 in which 2005 is considered as base year and current year is considered 2006-2010 for calculating individual ESI and Debt-equity ratio of the respondents within this five year periods. The financial data of respondents are collected and analyzed quantitatively.
1.4.3 Tools of data analysis:
The collected data is analyzed by using statistical tool (regression analysis by using SPSS software) and presented with graphs, tabulation where necessary in the report.
1.4.4 Techniques of data analysis:
The analysis (to calculate the ESI value and Debt-equity ratio value) is done by using the following formulas:
First of all researcher has calculated the cumulative average growth rate (CAGR) of weighted average total investment(WTI) to calculate ESI which can be found from individual calculation of cumulative average growth rate (CAGR) of OC(Own Capital),OCTY(Own Capacity to Invest),BC(Borrowed Capital)and TI(Total Investment).Now Formula for calculating CAGR is:
1
n-1
Ending Value
CAGR= 1
Beginning Value
CAGR = Cumulative Average annual growth rate (This is needed because absolute values of different variables and ratios measured at a particular point in time cannot indicate the growth patterns of this variables and ratios). Here n-refers the year of periods and beginning value refers the base year value and ending value refers the current year value.
And the cumulative average growth rate of weighted average total investment (CAGR of WTI) is given below:
CAGR of (WTI) = {[(CAGR of OC/CAGR of OCTY)] + [(CAGR of BC/CAGR of (OCTY)]}*CAGR of TI,
And financial data used in the whole calculation are:
OCTY = Own capacity to invest
OC = Own capital
BC = Borrowed capital
TI = Total investment
NPc = Current net profit
PRc = Current profit reinvested = current retained earning
TIc = Current OC + Current BC
WTI = Weighted Total Investment,
Finally, ESI = CAGR of (WTI)*[(NPc/TIc) + (PRc/NPc)
Here, (ESI refers Entrepreneurial Success Index which measure the level of entrepreneurial success of the respondents)
Now, the calculation of debt-equity ratio is shown below:
Borrowed Capital Invested
Debt-equity ratio =
Own Capital Invested
According to the model researcher has collected some financial data (amount of their Own capital, Borrowed capital, Total investment, Own capacity to invest, current retained earnings, Current net profit) from the respondents during the personal interview session. And then individual D/E ratio and ESI has been calculated year by year (from 2005-2010) to do regression analysis of 25 respondents.
Researcher has done regression analysis to find and to show the relationship of this two variable considering ESI as dependent variable and Debt-equity ratio as independent variable empirically.
Now some understanding about Regression analysis:
Regression analysis attempts to measure the degree of correlation between the dependent and independent variables, thereby establishing the latter's predictive value and regression analysis yields an equation that expresses the relationship.
It is a branch of statistical theory that is widely used in almost all the scientific disciplines. The regression analysis helps in three important ways:
1. It provides estimates of values of the dependent variables from independent variables. The device used to accomplish the estimation procedure is the regression line which describes the average relationship existing between X and Y variables.
2. The second goal of regression analysis is to obtain a measure of the error involved in using the regression line as a basis for estimations. For this purpose, the standard error of estimate is calculated. If the line fits the data closely, that is, if there is relatively little scatter of the observations around the regression line, good estimate can be made of Y variable. On the other hand, if there is a great deal of scatter of the observations around the fitted regression line, the line will not produce accurate estimates of the dependent variables.
3. With the help of regression analysis, we can obtain a measure of the degree of association or correlation that exists between the two variables. The coefficient of determination calculated for this purpose measures the strength of the relationship that exists between the variables. It assesses the proportion of variance that has been accounted for by the regression equation.
The general form of linear regression equation is Y = a + bX,
Where Y, read Y hat, is the estimated value of the Y variable for a selected X values, a is the Y-intercept. It is the estimated value of Y when X = 0. Another way to put it is: a is the estimated value of Y where the regression line crosses the Y-axis When X is zero, b is the slope of the line or the average change in Y-hat for each change of one unit (either increases or decreases) in the independent variable X and X is any value of the independent variable that is selected.
Thus it is presented above linear regression only as a descriptive tool. In other words it is a simple summary (Y = a + bX) of the relationship between the dependent Y variable and the independent X variable. When the data are a sample taken from a population, it has to do inferential statistics. In this case, it would model the linear relationship in the population by equation given below:
Y = α + βX where,
Y is any value of the dependent variable,
α is the Y-intercept (the value of Y when X = 0) in the population
β is the slope (the amount by which Y changes when X increases by one unit) of the population line
X is any value of the independent variable.
1.5 Limitation of the study:
This report may have some incompleteness due to some of the limitations researcher encountered while completing it due to lack of professional experience and expertise to conduct research work. And interviewing poor people is seems difficult as they are illiterate is also a limitation to conduct the study.
2.0 Some Information about Microfinance and Microcredit:
2.1 A Brief Overview of Microfinance:
Micro-finance is a general term to describe financial services to low-income individuals or to those who do not have access to typical banking services. Micro-finance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services. While some studies indicate that microfinance can play a role in the battle against poverty, it is also recognizes that is not always the appropriate method, and it should never be seen as the only tool for ending poverty. Bangladesh is in many ways, the most developed microfinance market in the South Asian region. Both India and Bangladesh count sixteen of the twenty largest microfinance institutions (MFI’s) of South Asian region. MFI’s in Bangladesh were left unregulated for a long time since their inception.
The government, with the close co-operation of the Bangladesh Bank, undertook efforts to establish a regulatory firm work which culminated in the enactment of the micro credit regulatory authority act, 2006. The main responsibilities of this authority include issuance and cancellation of the license for microcredit, overseeing servicing and facilitating the entire activities of MFI’s. The member-owned MFI’s have an explicit social agenda to cater to the needs of the poorer sections of populations, and have a particular focus toward rural women clients.
Microfinance is the provision of small-scale financial services such as credit, savings and insurance to the poor. The poor need these services to invest in their livelihoods, respond to unforeseen demands and plan for their future. In developing countries there are few jobs. The majority of the working-age populations make their living through self-employment or a family business. The poor often lack even the small amount of capital necessary to buy, for example, a vegetable stall in the market or a sewing machine to make clothes to sell.
Since the poor have no steady income and own no property, they have no access to financial services to help them get started. Microfinance fills that need. Microfinance differs from other development assistance because it empowers the poor rather than making them dependent upon charity. It enables beneficiaries to take responsibility for their lives by employing themselves, saving for their future, and investing according to their own priorities. We can describe the overview of microfinance through the following graph at a glance given below:
Figure1: A graphical overview of Microfinance
2.2 A Brief History of Microfinance and MFI’s in Bangladesh:
1970s : Rise of NGOs (BRAC, Proshika, ASA) post-war; Grameen Bank experiment.
1980s, early 1990s : Consolidation of Grameen model and expansion; establishment of PKSF.
Mid 1990s-on : Innovation in established (e.g. Grameen II) and new MFIs (BURO, Tangail; SafeSave).
The microcredit Regulatory Authority (MRA) has given license to 298 Micro-credit Organizations. The financial system also embraces insurance companies, stock exchanges and co-operative banks.
2.3 Micro Finance Institutions (MFIs) in Bangladesh:
The MFIs constitute a rapidly growing segment of the Rural Financial Market (RFM) in Bangladesh. Microcredit programs (MCP) in Bangladesh are implemented by various formal financial institutions (nationalized commercial banks and specialized banks), specialized government organizations and Non-Government Organizations (NGOs). The growth in the MFI sector, in terms of the number of MFIs as well as total membership, was phenomenal during the 1990s and continues till today. Over the period of June 2003 to June 2006 the growth rate was over 70% in terms of horizontal expansion of microcredit borrowers. The total coverage of MCP in Bangladesh is approximately 30.09 million borrowers without considering overlapping figures. Table-1 shows the coverage of major institutions in the formal and semi-formal sectors.
Table 1: Coverage of Microcredit Program
Organization / No. of Borrowers / Outstanding Loan(in million Taka)
NGO-MFIs (June 2006 / 18,415,878 / 78,930.57
Grameen Bank (June 2006) / 6,908,704 / 33,235.46
Government Program (December, 2005) / 1,997,240 / 7,710.05
Sub Total / 27,621,573 / 120,493.52
Nationalized Commercial Banks (December, 2005) / 2,311,150 / 32,783.45
Private Banks (December, 2005) / 164,113 / 11,06.46
Sub Total / 2,475,263 / 33,889.91
Grand Total / 30,096,836 / 154,383.43
Source: Microcredit Regulatory Authority, Grameen Bank
Now it will discuss about some renowned Microfinance Institution (MFI’s) of our country here.
BRAC, originally known as the originally known as the Bangladesh Rural Advancement Committee, is a ‘finance-plus’ NGO established in 1972. It houses a very large of non-financial ‘social’ programs. BRAC has major experience with a nationwide program came when it implemented an oral rehydration program to combat diarrheal disease. Over the past decade in particular, it has also developed its range of financial services to include a greater variety of savings products, and credit for small business. More recently, in 2001 and 1997 respectively BRAC Bank and the Delta BRAC Housing Finance Corporation were established as commercial interests to meet the financial requirements of non-poor Bangladesh. In 2001, BRAC established a university, and in 2002 and 2005 respectively, it started work in Afganistan and Srilanka.
The Gremeen Bank is a ‘finance-minimalist’ bank that offers a wide range of financial products, and limited organizational support. It was started as an action research project in 1976, and became a government-regulated bank through a special government ordinance in 1984. In 2001-02, all Grameen Bank branches began to operate the new, simpler and much more flexible ‘Grameen Generalized System’ (also called ‘Grameen II’), which offers four types of loan products: basic, housing, higher education and struggling members (beggers) loans. There is also a facility for larger small enterprise loans and a range of companies (commercial and not-for-profit) in the ‘Grameen family’. This includes Grameen Shikha (GS), established in 1997 to promote the education of non-literate Grameen Bank members; and use and promote new and innovative ideas and technologies for educational development.