ASSIGNMENT NO: 1
An Assignment on Microcredit in Bangladesh
Name of the
Assignment
Course No. AFB-505
Course Title Microfinance Management
SUBMITTED TO SUBMITTED BY
Professor Dr. Jiban Krishna Saha ID No: 2201040104
Professor, Reg. No: 3725
Department of Agricultural Finance Session: 2016-17
and Banking, MS in Agricultural Economics
Sylhet Agricultural University, (Production Economics)
Sylhet-3100. Faculty of Agricultural Economic &
Business Studies
Date of Performance Date of Submission
29 05 2022 23 08 2022
An Assignment on Microcredit in Bangladesh
Introduction
Microcredit was founded on the premise that competent people in developing nations who
live outside the established banking and monetary systems might enter an economy with the
help of a small loan. Modern microcredit is typically attributed to the Grameen Bank model,
developed by economist Muhammad Yunus. This system started in Bangladesh in 1976,
with a group of women borrowing $27 to finance the group’s own small businesses. The
women repaid the loan and were able to sustain the business. The women in Bangladesh
who received microcredit did not have money to purchase the materials they needed to make
the bamboo stools that they would, in turn, sell and at the same time, each individual
borrower would be too risky to lend on their own. By borrowing as a group, the initial
financing gave them the resources to begin production, with an understanding that the loan
would be paid over time as they bought in revenue. The structure of microcredit
arrangements frequently differs from traditional banking, wherein collateral may be required
or other terms established to guarantee repayment. There might not be a written agreement
at all. In some instance, the microcredit was guaranteed by an agreement with the members
of the borrower’s community, who would be expected to compel the borrower to work
toward repaying the debt. As borrowers successfully pay off their microcredits, they may
become eligible for loans of larger and larger amounts.
Definition of microcredit
Microcredit is common form of microfinance that involves an extremely small loan given to
an individual to help them become self-employed or grow a small business. These borrowers
tend to be low-income individuals, especially from less developed countries (LDCs).
Microcredit is also known as “microlending” or “microloan”.
Microcredit is the extension of very loans (microloans) to impoverished borrowers who
typically lack collateral, steady employment or a verifiable credit history. It is designed to
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support entrepreneurship and alleviate poverty. Many recipients are illiterate, and therefore
unable to complete paperwork required to get conventional loans.
History of microcredit
Microfinance started in Bangladesh and parts of Latin America in the mid-1970s to provide
credit to the poor, who were generally excluded from formal financial services. The model
gained popularity and has since been replicated in low- and high-income countries.
Ideas relating to microcredit can be found at various times in modern history, such as the
Starr-Bowkett Society. Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th
centuries. In the mid-19th century, Individualist anarchist Lysander Spooner wrote about the
benefits of numerous small loans for entrepreneurial activities to the poor as a way to
alleviate poverty. At about the same time, but independently to Spooner, Friedrich Wilhelm
Raiffeisen founded the first cooperative lending banks to support farmers in rural Germany.
In the 1950s, Akhtar Hameed Khan began distributing group-oriented credit in East
Pakistan. Khan used the Comilla Model, in which credit is distributed through community-
based initiatives. The project failed due to the over-involvement of the Pakistani
government, and the hierarchies created within communities as certain members began to
exert more control over loans than others. The origins of microcredit in its current practical
incarnation can be linked to several organizations founded in Bangladesh, especially the
Grameen Bank. The Grameen Bank, which is generally considered the first modern
microcredit institution, was founded in 1983 by Muhammad Yunus. Yunus began the
project in a small town called Jobra, using his own money to deliver small loans at low-
interest rates to the rural poor. Grameen Bank was followed by organizations such as BRAC
in 1972 and ASA in 1978.
During the late 1970s, when the 'Jobra' experiment was underway under Professor M.
Yunus, the Dheki Rin Prokolpa was initiated by the Bangladesh Bank in collaboration with
the Swanirvar Bangladesh, and several other pilot schemes were initiated by a handful of the
NGOs which were active then. At that time, it was difficult to conceive that these initiatives
would lead to a major microcredit movement, which would make Bangladesh known to the
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rest of the world. Even during the 1980s, in spite of Grameen Bank’s success, the main
discourse amongst development practitioners in Bangladesh centered around the desirability
of microcredit program as opposed to conscientization. By 1990, unhindered
experimentation in the fields led to a quiet resolution of the debate and the country
experienced a massive expansion of microfinance activities during the 1990s. The
devastating 1998 floods have challenged the substantial achievements of Bangladesh's
microfinance programs. But many of these programs have proven to be resilient and are now
getting back on their feet. A new World Bank study further confirms that microcredit
programs can raise living standards - particularly for women and their households - but
concludes that microfinance should not be the sole instrument for poverty reduction.
How does Microcredit work?
A micro-entrepreneur must apply for microcredit from a loan officer working for an MFI.
Here are the main steps in obtaining microcredit:
Project Selection: the loan officer analyses the request from the micro-entrepreneur in an
interview, which often takes place at the micro-entrepreneur’s residence. The decision is
based on the evaluating the capability of repaying the loan as well as the viability of the
project. Once the short list is complete, a decision is made by a selection committee
made of several loan officers and the MFI’s managers.
Technical Support for the Beneficiary: An MFI’s doesn’t only grant a microcredit, it will
also adapt its offer to the needs of the microentrepreneur and their family. This is why
microcredits are often accompanied with other financial services (micro-savings, micro-
insurance) and training programs, offering beneficiaries better coverage while
encouraging responsible use of their income.
Repayment: The beneficiary repays the loan by going directly to the MFI (in urban
areas), or by providing payment in person to the loan officer, who visits on either a
weekly or monthly basis (in rural areas). The average repayment rate in microfinance is
97%.
Who are microcredit beneficiaries?
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The greatest number of microcredit beneficiaries are micro entrepreneurs in the informal
sector: Small shopkeepers, peddlers, craftsmen or farmers. Everyone them acquired the
know-how and requested microcredit in order to expand a small activity, allowing them to
generate a regular income. Women are granted 75% of microcredits for a variety of reasons:
They represent a population more stricken by poverty (70% of people living below the
poverty line are women)
Studies prove that women’s projects are reliable and sustainable investments because
they register higher repayment rates.
Income generated thanks to microcredits directly benefit children and the community, as
spending priorities tend to be on children’s education, health and nutrition.
Microcredit Institutions in Bangladesh
In Bangladesh there are mainly four types of institutions involved in micro-finance
activities. These are 1) Grameen Bank (GB), a member owned specialized institution, 2)
around 1500 Non- Governmental Organizations (NGO) like BRAC, Proshika, ASA, BURO-
Tangail, BEES, CODEC, SUS, TMSS, Action- Aid etc. 3) Commercial and Specialized
banks like Bangladesh Krishi Bank (BKB), Rajshahi Krishi Unnayan Bank (RAKUB) and
4) Government sponsored micro finance projects/ Programs like BRDB, Swanirvar
Bangladesh, RD-12 and others which are run through several ministries viz., Ministry of
Women & Children Affairs, Ministry of Youth & Sports, Ministry of Social Welfare etc. All
the programs are targeted at the functionally landless rural poor. All the MFIs provide
mostly small, un-collateralized one-year term loans to individuals belonging to jointly liable
peer groups, and they use similar on-site loan disbursement and weekly collection methods
by forming village organizations or centers.
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Figure-1: Institution-wise Cumulative Loan Disbursement
Research reveals that NGOs started credit program in mid-eighties and their activities
increased noticeably higher after 1990 (CDF, 2000). With the increasing number of
collateral free micro credit disbursement by MFIs, some Nationalized Commercial Banks
(NCBs), and Specialized Banks like BKB and RAKUBhave been encouraged to provide a
considerable amount of their rural credit to the poor without security. However, the amount
is much less compared to the deposit mobilization from the rural sector of the country.
Today, some of the Private Commercial Banks (PCBs) have also started direct and linkage
programs with NGOs. Total loan disbursement (cumulative) by these four kinds of
institutions till December 2001 was taka 434.55 billion; of which disbursement under
Government program was taka 37.77 billion (8.69%), Grameen Bank disbursed taka 154.11
billion (35.46%), other Banks and MF-NGOs disbursed taka 78.41 billion (18%) and taka
164.26 billion (37.80%) respectively (figure-1). Recovery rate of all these organizations
excluding formal banks and government sponsored programs stood at 95 percent.
All the non-government organizations are involved in micro-finance activity but they are not
under the same regulatory authority / monitoring agency. Therefore, there is no single source
of information about them. However, Credit and Development Forum (CDF) an NGO who
collects information of MF-NGOs reveals that 629 MF-NGOs have mobilized about 13.85
million poor people (11.24% of the total population who are under absolute poverty, among
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them 11.85 million are female and only 2 million are male. Out of 13.85 million of poor
people near about 9 million are outstanding borrowers. About 90% of the borrowers of those
MF-NGOs are from rural area and only 10% are from urban area. These MF-NGOs
disbursed taka 164.26 billion with outstanding loan amount of taka 25.88 billion. The
outstanding amount of micro-finance extended under government program is taka 7.46
billion, the outstanding balance of Grameen Bank is taka 12.73 billion and that of other
banks is taka 7.55 billion. Grameen Bank, BRAC, ASA and Proshika are top four MFIs in
terms of loan disbursement, outstanding loan and saving mobilization (figure-2). It has been
seen that top 4 institutions including Grameen Bank served more than 70% of the market.
Figure-2: Top Four MFIs in terms of Disbursement, Outstanding and Savings in Billion Taka
Current State of Microcredit in Bangladesh
The term “microfinance” refers to the full set of financial services that target poor and low-
income households. Microfinance has been an instrumental tool in disseminating loans and
capital for those unable to apply for formal banking and financial services due to income and
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Sector-wise disbursement of loans by MFIs in 2016-17
credit barriers. As of 2017, BDT 1,207.54 billion (USD 14 billion) has been disbursed to 33
million people as loan through MFIs are relatively higher compared to rural agent banking
channels, with effective interest rates charged by MFIs ranging between 9%-16% on loans.
Modern microfinance in Bangladesh has expanded its scope from home-based activities and
self-employment to savings and insurance, microenterprises, and productive employment
and has helped in diversifying borrower’s economic activities. Although historically
agriculture has remained the highest loan recipient sector, trade and business sector-based
borrowings are gradually increasing, indicating an increasing diversification of economic
activities.
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Loan disbursement over the last decade
Microfinance Institutions (MFIs) have captured a rapidly growing segment of the Rural
Financial Market in Bangladesh. Microcredit programs (MCP) in Bangladesh are
implemented by various formal financial institutions such as nationalized commercial banks
and specialized banks, specialized government organizations and Non-Government
Organization (NGOs). Although more than a thousand institutions are running microcredit
programs, only 10 large institutions and Grameen Bank represent 87% of total savings and
81% of the total outstanding loan of the sector.
Based on the amount outstanding loan in 2016-17, ten NGO-MFIs including the Grameen
Bank have been marked as the the top ten MFIs operating in Bangladesh. Most of the major
MFIs are self-sustaining, and they get their lending funds from a combination of their own
profits, deposits, and loans from bank. Organizations like Palli Karma-Sahayak Foundation
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(PKSF) and private Commercial Banks (PCBs), Specialized Banks (SBs), State-Owned
Commercial Banks (SCBs), Jubo Unnayan Adhidaptar, Palli Daridra Bimochan Foundation
(PDMF) have funded 619 MFIs during 2016-17 in the form of loans. A total amount of BDT
95,532 million (~USD 1.1 billion0 was disbured to the MFIs.
The increasing loan disbursement trend shows demand for loans will keep on growing with
increasing economic development and activity. If current CAGR of 23% holds, the projrcted
loan disbursed in 2018 was around BDT 1490 billion (~USD 17.7 billion) and is around
BDT 1830 billion (~USD 21.8 billion) in 2019 and will continue to grow at a similar rate.
Annual loan disbursement vs. loan recollection
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Impact of Micro-finance Services on Borrowers and on the Economy
The impact of micro-finance at macro level is not still clear (CPD, Task force Report, 2001),
even though it has some impact at micro level on the society both in terms of economy and
social value. There are a few studies on this impact assessment of micro-finance, findings of
those studies are as follows:
1. The dependency of poor people on the moneylender or richer people has been reduced
substantially in the society and people are getting access to institutional sources for credit.
Even the formal sectors have been keeping confidence on the poor for lending money, which
is a qualitative change in the rural society due to micro-finance intervention.
2. Employment opportunities of the poor have increased to a great extent in terms of both
longer working hours and new employment. The targeted households that are eligible for
participation in micro-finance programs have a higher probability of being self-employed
than their counterparts in non-program villages.
3. The labour force participation rate (LFPR) for more employment opportunity of the
participants was found higher than the non-participants. Before nineties the wage rate for
women labour force did not get importance because of social backwardness, women labour
was sold at a very low non-bargaining rate. This was equally true in case of male labour
force before the eighties. But with time passing situations have changed noticeably; it is
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recognized that there is now a days a serious scarcity of labour in rural areas, especially in
the peak season and this shortage even hampers agricultural production. The intervention of
micro-finance in the rural market is one of the main reasons for this change. Therefore, the
labour force of rural areas now has the ability to influence rural wage rate.
4. As the main target group of micro-finance is women, they have gained a special financial
power over men. Though women are dominated by men culturally, their access to get credit
and do their own business has increased their confidence on their own ability. This is
especially true for the rural poor women of the country. Now more and more rural women
move outside their home after joining micro-finance program. They now go to office, banks,
market and other places without a male company. This is a positive indicator of women
empowerment.
5. There is a controversy about the impact of micro-finance on poverty alleviation. The
poverty rate of the country did not decrease significantly in last few years. It did not increase
though. The main focus of micro-finance is to alleviate poverty, but it could not reach the
poorest of the poor till now. One of the reasons might be the failure to reach the hard-core
poor by these programs. Now MF-NGOs are seriously thinking about this issue and have
started some programs to solve this problem. But it is a challenging work to do, because this
group of the population first needs money for consumption. Without solving these problems,
they are not able to invest credit for cash flow, which they need to repay the loan in time.
Therefore, it has been seen that there are big successes of micro-finance at micro level that
do not show any significant impact at macro level. In the recent literature it is often
mentioned as the problem of "Macro-Micro Mis-match" (Sen, 2001).
Challenges for MF-NGOs and for the Government
The current challenge of MF-NGOs is whether they could run the program without subsidy,
because the flow of donor fund is declining over the years. Since the main objective of
micro-finance is to alleviate poverty, the question is whether they would be able to charge
real cost of service on the recipients. If it charges full cost, what would happen to the other
objective of outreaching the poorest of the poor? On the other hand, if full cost is not
charged, would they be financially sustainable in the long run? And the challenge for the
government is to bring this huge unorganized industry under a uniform umbrella where this
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industry would get proper direction and support to run the business and at the same time
serve the people who are the target group in such a way that they would be benefited in the
long run and would be able to overcome their financial backwardness. Ultimately these
institutions would become autonomous players in the main-stream economy.
Suggested Reforms to Face the Future Challenge
Since NGO-MFIs have to face the realities of declining subsidized fund, they should take
effort to reduce administrative and transaction cost which seems very high. Most of them do
not practice proper bookkeeping and accounting policies, lack professionalism in financial
transaction, therefore, training and capacity building in accounting and financial
management plus greater transparency in their operation is essential not only to make them
attractive to the donors but also to enable them to tap commercial markets and banks.
Formal commercial banks lack experience and expertise to operate in this market; they can
overcome this problem by linking them with NGO-MFIs who already have a ready set up of
operation and experience. This linkage program on one side can reduce operational cost of
commercial banks and on the other side can reduce the financial problem of NGO-MFIs.
Especially, smaller NGO-MFIs could be encouraged strongly to play the role of brokers
between the banks and the borrowers. Here the banks bear the credit risk by lending directly
to the borrowers and share a part of its spread with the NGO-MFIs. The NGOs will receive a
commission for identifying borrowers and ensuring repayments. Large NGO-MFIs can also
be integrated into this program of poverty alleviation by encouraging them to establish
themselves as banks. Present legal framework of formal financial institution can be changed
in favour of the rural poor. Under this framework moveable property, accounts receivables,
credit history or good previous repayment performance etc. are not useable as security to
access credit. But most of the rural poor people have only these things to offer as security.
These realistic changes in the legal framework can help poor people to enter into the formal
financial market easily.
Therefore, micro finance sector will have to develop a concrete long run vision of a flexible,
self-sustainable, well-regulated and pro-people micro finance industry capable of facing all
these challenges. That means the industry will:
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Design its product according to the market need - what kind of loan poor people really
need and which terms and conditions are applicable to them. They should not just follow
Grameen Bank model, rather they should be innovative in product designing,
Diversify its loan portfolio, not just depending only on the agricultural sector for
investment,
Identify the exact cost involved and find out reasonable service charge for each product
offered,
Apply internationally accepted accounting policy,
Formulate transparent policy for the stakeholders,
Acquire a corporate legal identity owned by the clients themselves or focus on a single
activity with corresponding single legal identity.
On the other side the government and the donors should try to help the industry to be
sustainable by developing infrastructure needed, providing training and technical assistance,
providing correct guidelines and regulation, offering proper incentive for positive
contribution and punishment for the opposite.
Conclusion
Microfinance sector has experienced a steep growth curve since its humble beginning back
in 1970s. despite performing strongly in terms of credit disbursement and loan repayment, a
number of drivers may cause a tectonic shift in the sector’s future growth trajectory. Broad
based economic development with resulting decline in absolute poverty levels, may alter the
nature of credit requirements from traditional borrowers. Penetration of alternate banking
channels such as agent banking, will further complicate the competitive scenario. The
country’s graduation as a middle-income nation would also help squeeze donor funding for
MFIs. the MFIs must, therefore, find ways to streamline operations, preferably using
technology, with a view to in calculating efficiency, ensuring transparency and reducing
overhead costs.
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Reference
https://en.wikipedia.org/wiki/Microcredit
https://www.investopedia.com/terms/m/microcredit.asp
https://corporatefinanceinstitute.com/resources/knowledge/credit/microcredit/
https://www.slideshare.net/neha0175120/a-report-on-microcredit-system-in-bangladesh
https://www.bb.org.bd/saarcfinance/seminar/cpbdesh.php
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