Microcredit: Basic Concept and Appraisal November 18, 2012 S. Badruddoza Research Associate Institute of Microfinance (InM)Citation:S. Badruddoza, “Microcredit: Basic Concept and Apprisal” (paper presented at theDepartment of International Relations, University of Dhaka, Dhaka, November, 18, 2012).
Why should you know?• Poverty is a threat for security and microcredit is an effective tool to fight against poverty• Bangladesh is birthplace of microfinance• Thesis and job market perspective
You will know• Basic concept: – What is the underlying theory? – What is microcredit? – How microcredit works and how is it successful?• Appraisal – Evolution – Current status – What are the impacts? – Critics
Basic concept:What is the underlying theory?• Why we need microcredit? – The intertemporal substitution model – The life-cycle hypothesis• Problem of implementation – Asymmetric information (Adverse selection and Moral Hazard) – How to solve collateral problem? – What will be the rate of interest?
Basic concept:What is microcredit?• The Grameen Type microcredit – (Tangible) collateral free – Group-based – Pro-women• Microfinance – Microcredit – Microenterprise – Microsavings – Microinsurance – Money transfer services etc.
Basic concept:How microcredit works?• Voluntary savings (sometimes forced)• Weekly repayment• Flat and declining method of interest• Rebate and insurance system• Leverage• Seasonal and larger loans (Microenterprise)• Financing Microfinance Institutions (MFIs)• Public deposits and security
Statistics:Evolution• Microfinance existed in this country in one form or another for a long time. Collaterals for the poor were mainly social status/essential assets• Prof. Muhammad Yunus made the breakthrough with his action research in Jobra village of Chittagong in 1976 and then in Tangail in 1979• Established Grameen Bank in 1983• “Grameencredit” is collateral-free, pro-women credit system• Today Grameen Bank is predominantly (90%) owned by the rural poor whom it serves with 2,565 branches (July, 2011)• Prof. Yunus & the bank received Nobel peace prize in 2006• Some other large MFIs are BRAC, ASA, Proshika, BURO, TMSS, SSS, Shakti, Uddipan, PMUK, JCF. Specialized institutions, Government & commercial banks also retails microcredit.
Statistics:Current status Reported Trends of Bangladeshi Microfinance Sector (1996-2009) Outstanding Cumulative Year Reported MFIs Active members Net savings borrowers disbursement* 1996 351 6,006,419 3,120,555 27,837.24 2,390.72 2000 585 11,021,663 7,988,831 125,607.61 8,866.02 2005 690 18,793,990 13,941,823 431,230.50 20,343.67 2009 745 35,707,896 27,053,663 1,731,465.46 131,306.45 * Figures under cumulative disbursement and net savings are in Million BDT Source: Bangladesh Microfinance Statistics (CDF, 1996-2006; InM & CDF, 2007-2009)
Appraisal:What are the impacts?• Access to finance for the poor who were otherwise not bankable• Women empowerment• Reduction of vulnerability• Asset creation• Employment generation• Social awareness• Non-monetary development (education, environment, family planning etc.)
Appraisal:What are the impacts? (Contd.)• Poverty impact of microfinance has been studied several times.• Khandker et. al. (1998): 5% of Grameen participants lifted out of poverty, the figure is 1% per annum in rural areas.• Zohir et. al. (2001): 4.7% in 3 years among borrowers of PKSF Partner Organizations.• Hossain & Bayes (2009): 7% in 1987-2007• Bangladesh has 10 percentages point decrease in poverty rate in last decade. Osmani et. al. (2011) estimated the contribution of microfinance into this reduction as 4%; remittance, education of the household head & employment opportunity were estimated 4.8%, 20.3% & 16.2% respectively
Appraisal:What are the impacts? (Contd.)Other Socio-economic impact of microfinance• Access to finance & breaking mahajans’ circles (Khalily, 2011)• Helps mitigating seasonal hunger & shocks (Rabbani, 2010)• Promotes employment & productivity (Rahman & Khandker 1994)• Facilitates savings & builds up asset (Khandker, 2000)• Empowers women (Pitt, Khandker & Cartwright, 2006)• Fertility transition & contraceptive use (Hashemi, Schuler & Riley, 1997)• Self-employment, favorable agricultural contract (Pitt, 2000)• Migration (Ahsan, 2007)• Rural power structure (Rahman, 2002)
Impact of microfinance on household income/expenditure Name of organization Income or expenditure per Control (non-Source Participants % difference studied annum (BDT) participants)Hossain 1984 GB Income, per capita 1762 1346 30.9Hossain 1988 GB Income, per capita 3524 2523 39.7BIDS 1990 BRDB Income, per household 6204 4260 45.6BIDS 1990 BRAC-RDP Income, per household 2844 1560 82.3IMEC 1995 Proshika Income, per household 22,244 17,482 27.2Rahman 1996 PKSF Expenditure, per household 26,390 23,802 10.9Khandker 1998 BRAC Expenditure, per capita 5180 4202 23.8Khandker 1998 GB Expenditure, per capita 5050 4335 16.5Khandker 1998 RD-12 Expenditure, per capita 4931 4279 15.2Halder 1998 BRAC Expenditure, per capita 8244 6480 27.2BIDS 1999 PKSF Expenditure, per capita 36,528 33,732 8.3IMEC 1999 Proshika Income, per household 48,635 43,584 11.6Zohir 2001 PKSF Wage income, per capita 5858 5559 5.3Hossain 2002 GB Income, per household 18134 14204 27.7Khandker 2003 GB, BRAC, RD-12 Expenditure, per capita 3923 3838 2.2Rahman, Atiur 2005 PKSF Annual Income, per household 58109 38968 49.1Khalily 2010 PRIME-2 of PKSF Annual income, per household 53394 48505 10.1Rabbani 2011 PRIME-3 of PKSF Annual Income, per household 61530 45680 (benchmark) 34.7Khalily 2011 FSVGD & UP of PKSF Monthly Income, per household 5224 4463 (early dropouts) 17.0 Source: Faruqee and Badruddoza (2012) Institute of Microfinance (InM)
Appraisal:Critics• Works for moderate poor• Coercive loan collection tactics• Over-indebtedness• Multiple borrowing• Suicide• The Younus debate
Appraisal:Critics (Contd.)Adverse effect of microfinance program:• Little or no impact (Morduch, 1998) but reestablished by Pitt (1999)• Works mainly on moderate poor, no long run impact (Zaman, 1999)• Some borrowers benefitted but a lot struggling, over-indebtedness and asset loss (Ahmad, 2011)
ConclusionProblems (Solutions):• High interest rate (MRA set a ceiling of 27% declining)• Overlapping (not leading to over-indebtedness, Khalily et. al. 2010)• Strict repayment schedule (MRA’s 46 weeks, technology?)• Diversion of credit use (skill development needed)• Product diversion & credit-plus programs (who will provide?)• Social or commercial (increase efficiency?)• Exogenous factors: Infrastructure, information & insecurity issues• What if there is no microfinance? 15