1. Microcredit In Bangladesh 1
Impact of Microcredit in the context of Bangladesh
Mohammad Arshad Hossain
Ashland University

2. Microcredit In Bangladesh 2
Abstract
This paper is to examine the impact of micro financing in Bangladesh. Bangladesh is a pioneer
and home of conceptualizing micro-credit program. Micro-credit program has flourished across
this country with the passage of time and now it has turned into a big industry in Bangladesh.
Needless to say that Micro financing has led remarkable developments in the socio-economic
sectors in Bangladesh particularly in rural areas over the last few decades. It has also ensured the
empowerment of women overwhelmingly in the society. Microfinance however these days has
lost its appeals due to several of reasons. Micro financing is now facing growing challenges in
Bangladesh which is leaving its effectiveness in doubt. This paper attempts to display the
impacts of micro-credit as a whole in the context of Bangladesh.
Introduction
Today Micro-credit is considered as one of effective poverty alleviation tools across the world.
Micro financing has gained tremendous responses ever since it came into light. Bangladesh is
known as the home of micro financing and where it has impacts in greater scale. Microfinance
refers to small amount of money given to the poor people as a loan in order to build their own
businesses and increase their income. This idea emerged because poor people usually have
limited access to services from formal financial institutions in less developed countries due to not
having adequate physical collateral. Another significant reason is lack of supply of credit in the
rural areas related to urban biased banking networks and credit allocations. Here the poor with no
physical collateral are allowed to form a group to gain access to credit and the repayment rate is
kept high because of, for example, mutual monitoring, sanction against non-repayment of the
member or incentives to retain the individual reputation or credit within a community (e.g.
Armendariz and Morduch, 2005, Besley and coate, 1995, Ahlin and Townsend, 2007).

3. Microcredit In Bangladesh 3
Micro-credit is considered as one of the vital tools for poverty alleviation in Bangladesh (The
role of Micro-credit in poverty alleviation, 2009). Micro-credit, according to Otero (1999), is
considered to be the “the provision of financial services to low-income poor and very poor self-
employed poor”. The existing evidence on the impact of micro-credit on poverty in Bangladesh
is ambiguous. There are handful of research papers suggest that access to credit has the potential
to significantly reduce poverty (khandker 1998). On the other hand there is also research which
argues that micro-credit has minimal impact on poverty reduction (Morduch 1998).
The evidence on reducing vulnerability is somewhat clearer. The provision of micro-credit has
been found to strengthen crisis-coping mechanisms, diversify income-earning sources, build
assets and improve the status of women (Hashemi et al 1996, Montgomery et al 1996, Morduch
1998, Husain et al 1998).
Objective
The main objective of this report is to reflect the status of overall microfinance sector in
Bangladesh. This report aims to identify the factors associated with micro-credit helping poor
and improving socio-economic condition of the country. It also has reflected on the challenges
appear with the presence of micro financing in Bangladesh.
Methodology
This paper is prepared based on secondary and published information. The major sources of
information are published research reports and papers, unpublished reports from renowned
organizations. Some information and data are gathered from major institutions such as PKSF,
InM, Microcredit Regulatory Authority (MRA), Grameen Bank, BRAC, ASA and handful of
smaller but growing microfinance institutions of Bangladesh. Data is also taken from network
agencies such as credit and Development Forum (CDF), several international non-governmental

4. Microcredit In Bangladesh 4
organizations (NGOs) operating in Bangladesh and commercial banks. Some data from the
reports published by Bangladesh Bank has also played significant roles in preparing this report.
Bangladesh Economy
Bangladesh economy has remained steady for a while. In Bangladesh, economic growth in fiscal
year of 2014 was 6.1% slightly improved from 6.0% in 2013. Bangladesh has been maintaining
6.0% growth rate for last few years. Agriculture has been expanded up to 3.3% with
overwhelming government support. Industry growth slumped to 8.4% from 9.6% a year earlier.
Export trend demonstrates upward as garment export has increased remarkably over the years.
Investment has risen slightly to 28.7% of the gross domestic product (GDP) in 2014 from 28.4%
was in the last year as private investment fall to 21.4% of GDP from 21.8%. Private investment
has not been encouraged by the unsettle political environment, difficulties with infrastructures
and skills deficits. Foreign direct investment has remained low.
Impact of microfinancing
Impact of micro financing in Bangladesh is overwhelming particularly in rural areas of this
country. It has been playing remarkable roles to change the condition of the poor ever since it
came into action. Nobody could deny the significance of it in the country’s economy. Micro
financing has changed many people’s lives and its still counting. Micro financing however these
days have been criticized for its few features appeared as a no friendly approach to the
borrowers. People have started doubting on its effectiveness as it was before.
Economic growth has remarkably increased in the rural areas due to micro financing. Nearly
everyone in the village has access to micro financing. Many of them have been able to change
their economical condition with the blessings of it. Economic growth has been achievable due to

5. Microcredit In Bangladesh 5
range of factors directly associated with micro financing. To begin with, empowerment of
women. It has gained tremendous advancement in Bangladesh due to the appearance of micro
financing particularly in rural areas. “There are strong evidences that microcredit programs
contribute to women’s empowerment” (Ahmed, S. 2009). Women now get to take part in many
activities in the society besides men. As women earn money they take significant decisions in the
family such as family planning, buying and selling properties and children’s marriage. As
discussed in the research paper of Ahmed, women participation has increased in the activities of
local government due to the microcredit programs in Bangladesh. Women get to hold important
post in the activities according to their merits and qualifications. These days women play
remarkable roles in community activities and organizing for social change (Ahmed, S. 2009).
Secondly, creation of the employments in the rural areas. As borrowers invest their money in
different sectors, it creates many opportunities for others to work. “Wage and self-employment
in non-agricultural sector is also higher for the participant households due to their access to
microcredit program” (Ahmed, S. 2009). Besides that, microfinance organizations themselves
are creating employment opportunities for the people in rural areas. “Employment creation by
the MFIs themselves has been enormous” (Hulme, D., & Moore, K. 2006). Microfinance
institutions are playing very important roles in rural areas to remove poverty. They are not only
providing loans to the poor but also creating employment for them. “An estimated 171599 are
directly employed by the MFIs excluding the Grameen Bank” (Alamgir, D. 2009). Then comes
wage which reflects how well people in rural areas get valued for their labor. Wage scale has
tremendously improved in Bangladesh ever since microcredit came into operation. “Microcredit
helped participant households to earn about 8 percent higher income than that of the non-
participants” (Ahmed, S. 2009). It simply shows that standard of lives of the people has

6. Microcredit In Bangladesh 6
improved like never before because of microcredit. As wage increased, annual income of the
people in rural areas has increased as well. People now are living their lives more comfortably
than before. As income has risen, they are having access into good accommodation and some
other amenities. Also, socially they are being valued and recognized. In one survey which was
conducted in 1998 found that participant households earn more than the non-participants
annually (Ahmed, S. 2009). So, it simply refers that those who are affiliated with microcredit
earn higher than the people who are not. According to Mazumder, M., & Wencong, L. ,
microcredit recipients have increased their economic status, farm as well as households assets. In
terms of food security, it has improved remarkably in rural areas since people have source of
income. “The BIDS study finds the program participants, due to greater access to sharecropping,
had better food security and about 26 percent of rice consumption out of own production after
sale which was also marginally higher than the non-participants” (Ahmed, S. 2009). Majority of
the people in rural areas are involved with agriculture. They either lease or own land for
cultivation. Poor people who don’t have sufficient money to own land mostly lease for particular
period of time. Now because of microcredit this tendency has increased remarkably and farmers
are being successful. They tend to sale their products to the market along with ensuring food
security for themselves. “Asset in the form of livestock increased by 26% per year” (Alamgir, D.
2009). It’s now quite apparent that because of microcredit people in rural areas get to change
their economic and social conditions. Poverty rate has dropped significantly. Moreover, people
now know how to tackle poverty. “Microfinance especially female credit also reduces poverty”
(Khandker, S., & Samad, H. 2014). Microcredit has played crucial role in diminishing poverty in
Bangladesh. Poverty rate has lessened in great deal gradually because of microcredit in
Bangladesh. “The success of microcredit Bangladesh has led to using it as a major tool in

7. Microcredit In Bangladesh 7
national poverty reduction strategy by both the governmental and non-governmental
organizations” (Alamgir, D. 2009). Microcredit institutions have brought several changes in the
mindset of the people of the rural areas of Bangladesh. People earlier would spend money
without having any plan for the future. Illiteracy was the main reason behind this. Microcredit
institutions have started educating people over how to spend money plan wise besides proving
loans to them. They greatly encourage people to visit them for consultancy or any kind of
support. Microcredit institutions stresses on saving money for the future so that they can spend it
for right reason on right time. It has seen that people now tend to save more money than
spending. People saved money in ASA, BRAC, Grameen respectively 11264, 16306 and 64177
(million taka) in 2008 (Alamgir, D. 2009). It indicates that people have got to realize the
significance of saving money in life.
Microcredit institutions in Bangladesh are no longer the institutions of saving and lending money
since they involve themselves with many developmental affairs of the country. They deal with
many projects concern developing social structure. Social and other development impacts are
huge in Bangladesh. Social development program such as fertility and contraceptive use, health
and nutrition, sanitation and drinking water, literacy and social mobility have been on effect
across the country. Its wiping out gradually all those long standing problems particularly in rural
areas. To begin with, in terms of fertility and contraceptive use, its much better than ever before.
Earlier people had little knowledge in this regard but now they know adequate of it. In study it
was found that fertility and contraceptive use has increased in Bangladesh and cause of changes
are program participation and female methods domination (Ahmed, S. 2009). Microcredit
institutions are also trying to reduce the vulnerability of the women across the country. “The
reduction in female vulnerability in a particular society is illustrated using 16 female

8. Microcredit In Bangladesh 8
empowerment indicators developed from data on 1568 women and the result suggests that
micro-credit’s greatest impact is on the set of indicators relating to female control over assets and
knowledge of social issues” (Zaman, H. 1999). Women now actively participate in the several
activities run by microcredit institutions in the rural areas across the country and that’s what
reflcts promotion of women empowerment. Health and nutrition rate is now better than before as
microcredit institutions consult people from time to time. “There is a positive program placement
effect on nutrition status” (Ahmed, S. 2009). People are now more conscious about their food
habits and know how to stay healthy. Sanitation and drinking water is another big factor to put
into consideration to remain healthy. People in rural areas used to drink pond water which is
hazardous for their health and cause them to suffer from time to time greatly. They had also little
idea about healthy sanitation but now people tend to use proper sanitation. Microcredit
institutions have played great roles to make it happen. BIDS study found positive influence of
participation on waste disposal and use of sanitary toilets among the land poor households
(Ahmed, S. 2009). Literacy and school enrollment of children have been increased significantly.
Parents now send their children to the local schools after certain age besides home education.
Not only has that but also adult literacy rate greatly increased. In study it was found that adult
literacy is significantly higher among the eligible participants and it has positive impacts on their
children (Ahmed, S. 2009). Microcredit institutions have brought gradual changes to the people
of rural areas in Bangladesh. They have brought dramatic changes in the standard of living of the
people. Here standard of living refers to sources of drinking water, toilet condition, Medicare,
number of clothing per year, resident facility and electricity consumption. Study shows every
area has been changed dramatically right after taking loans from the microcredit institutions
(Mazumder, M., & Wencong, L. 2013). Microcredit institutions in Bangladesh not only give

9. Microcredit In Bangladesh 9
loans but also provide proper guidance to the people. “The involvement in a credit program had a
positive impact on different dimensions of the participants standard of living” (Mazumder, M., &
Wencong, L. 2013).
Microcredit promotes investments across the country. After taking loans majority of the people
do something with a view to making profits. Study shows that most of the people prefer to put
money on either poultry or agricultural business (Alamgir, D. 2009). Study shows that people
tend to put their money in productive capital (e.g. rickshaw, poultry, grocery shop) as it starts to
pay back immediately (Zaman, H. 1999). People in rural areas are also interested in creating
assets which they regard as a most profitable ivestment. This is quite apparent almost in every
village. Survey shows that microcredit encouages asset creation because it improves
creditworthiness and reduces covariant risk (Zaman, H. 1999). However, sometimes it is hard to
identify the actual areas of investment because of two reasons. One reason is borrowers keep on
changing IGAs within year and another reason is often loan money is mixed with other family
money. Microcredit institutions inspire borrowers from time t time to notify them about their
investment so that they can provide assistance and guidance. Research paper exhibits that there
are common areas of investment. They are agricultural sector (crops, livstock, fisheries),
processing and industries sector (food processing, cottage industries), Trade and Transport
sectors (small business, transport) and social sectors (Alamgir, D. 2009).
On the other hand, Microcredit systems in Bangladesh are not well regulated and it sometimes
fails to improve the condition of the poor people. There are some reasons why microcredit
institutions are struggling now to deal with these problems. To begin with, huge rivalry among
microcredit institutions. Earlier there was only one microcredit institution which is “Greameen
Bank” but now so many are operating throughout the country. Among them Grameen Bank,

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Brac, ASA, Ghasful, IDF, MSS, PROSHIKA, TMSS are remarkable. Initially it was thought that
it would be good for the people but truly now the result has been other way around. As there is
no regulatory body people sometimes take the advantages out of it. They take loans from many
institutions at a time and don’t pay off which affects the institutions badly. “There were no
directions from regulators or government or recommendations from industry body” (Chen, G.
2013). As there were no regulations any institutions could have access into it and ultimately it
had been saturated. It brought some negative consequences as a result. “They began to sense the
negative consequences of market saturation of the core microcredit market” (Chen, G. 2013).
Multiple borrowing or overlapping loan problems appeared as a biggest threat to the microcredit
institutions. Microcredit institutions have suffered lot because of it. “Multiple borrowing refers to
borrowing simultaneously from two or more MFIs by a single borrower had long been noticed in
Bangladesh, where it is commonly referred to as ‘overlapping’” (Chen, G. 2013). Overlapping
problems has reached to unprecedented level. Studies show that 30% of the borrowers had
collected loans from many microcredit institutions (Chen, G. 2013). Failure of collective action
affects microcredit institutions badly. According to Chen, ASA, BRAC, Buro and Grameen Bank
had set up a forum to get the overlapping problem solved but their measures turned out abortive.
Falling repayments and rapid savings withdrawal have been matter of great concern for the
microcredit institution these days. People have started taking loans from different microcredit
institutions simultaneously and fail to pay them off on time and that is what causes severe
damage to the institutions. It has to be stopped immediately. “If borrowers take too many loans
they will run into repayment problems and would stop repaying me or someone else” (Chen, G.
2013). Now all microcredit institutions have started to consider this matter seriously. Another
great problem is absence of credit information beaurue. Hence, people are mistreating

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microcredit organizations in Bangladesh. However, so many steps have been taken lately to
prevent all these fraudulent activities.
Few studies show that microcredit is not popular anymore in Bangladesh. It has lost its appeal
due to several of reasons. First of all, high interest rate. Most of the microcredit institutions
impose high interest rate as they lend money to the poor. “There are claims of interest rates
ranging from 30 percent to 100 percent on an annulized basis” (Chowdhury, A. 2009). There is
also indignation among the people of the village as far as interest rate is concerned. Jonathan
Morduch (2008) found that many microcredit institutions used to charge between 20%-40% per
year after taking inflation into consideration. However, this argument weakens the claim that
microcredit institutions charge more than typical local banks since its still less compared to
commercial banks because of lower information gathering and processing cost and higher
repayment rates requiring less provisioning for bad loans. Secondly, tight installment procedure.
Nearly all microcredit institutions tend to be strict in collecting installments upon distributed
loans. Sometimes it has seen that if borrower do not spend their money wisely they fail to pay
their installment on time and creditors are not willing to accept any causes behind that. “They
face difficulty in the payment and become overdue borrowers as a result of an unmanageable
burden of payment” (Yuge, Y. 2011). Many microcredit institutions become even harder on poor
people if they fail to pay their installment. Some of their actions have become really
controversial and its reflecting on the whole microcredit field. There are number of research
papers illustrates that micro financing is no longer popular in Bangladesh and its losing its long
standing appeals every single day. As competition has increased incredibly they have started to
turn into commercial institutions rather than being non-profit organizations.

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Concluding remarks
Microcredit system is the creation of Bangladesh and Bangladesh is greatly proud of it since now
this formula has gained widespread popularity across the world. It is now being considered as an
effective tool of poverty reduction. However, many research papers argue on it. After working
on this paper or reviewing number of journals I have come to learn that microcredit is quite
successful in Bangladesh. It has played significant roles in reducing poverty across the country.
It has created employments, inspired investments and most importantly empowered women.
Bangladesh is now role model in front of the world because of the successful implementation of
microcredit. However, microcredit is not completely flawless. It has number of problems need to
be addressed very soon. All microcredit organizations have to be monitored at regular basis it
order to make sure its accuracy. Number of changes has to be brought so as to keep up with the
pace of modern world.

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References
Ahmed, S. (2009). Microfinance institutions in Bangladesh: Achievements and challenges.
Managerial Finance, 999-1010.
Hulme, D., & Moore, K. (2006). WHY HAS MICROFINANCE BEEN A POLICY SUCCESS
IN BANGLADESH (AND BEYOND).
Mazumder, M., & Wencong, L. (2013). Micro-Credit and Poverty Reduction: A Case of
Bangladesh. PRAGUE ECONOMIC PAPERS, 403-417.
Alamgir, D. (2009). State of Microfinance in Bangladesh.
Khandker, S., & Samad, H. (2014). Dynamic effects of microcredit in Bangladesh. Washington,
D.C.: World Bank.
Zaman, H. (1999). Assessing the Impact of Micro-credit on Poverty and Vulnerability in
Bangladesh. Policy Research Working Papers.
Chen, G. (2013). A Microcredit Crisis Averted: The Case of Bangladesh.
Chowdhury, A. (2009). Microfinance as a Poverty Reduction Tool— A Critical Assessment.
Yuge, Y. (2011). The Current Situation of Microfinance in Bangladesh: A Growing Concern
about Overlapping Loan Problems.