Adverse effect of microcredit policy in rural areas

Chapter: ONE

INTRODUCTION

Origin of the Report:

The research paper has conducted on “Adverse effect of Micro Credit Program in village area”. This report is a partial requirement of Research paper of EMBA program. Our course instructor “Mr. Md. Mahathy Hasan Jewel, Assistant Professor, Faculty of Business Studies, Department of Marketing, Jagannath University , assigned us to prepare a formal report on Adverse effect of Micro Credit Program in village area as Group work. this report is prepared to comply with that instruction.

Background:

Microcredit is relatively a new innovation in the age-old bankingindustry. With the untiring efforts of microcredit practitioner specially by Muhammad Yunus (Winner of Nobel peace prize-2006) for over 30 years in developing country. Microcredit has receiveda global recognition today not only as a powerful instrument for poverty reduction and empowerment of women, but also as a promising sector of financing for the banks, financial organizations and NGOs. Countries with sound Microcredit system have succeeded in reducing poverty and improving socio-economic conditions of women significantly. MDG calls for reducing world poverty in all its forms by the year of 2015 with significant improvement in education, gender equality, health care and overcoming hunger and environmental degradation through microfinance intervention. In the process of observations we visited Grameen Bank (rural branch, center meeting, group and

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individual) and interacted and received valuable insight about the World famous “Grameen Bank” and ASA.

Objectives of the Reports:

Objectives assist the researcher to advance objectively. Thefollowings objectives may be with this identified study aspresented below:

Knowing the Micro credit Program. Knowing the microcredit’s Grameen rate of interest and

Interest Rate Debate in Microfinance. Knowing the negative side of micro credit is to

consider the negative side as lessons learnt. Suchlessons can be used to prevent similar failures andinitiate new lending, borrowing and saving technologyin future microcredit programmers.

Knowing the impacts of the microcredit in rural areas.Therefore, it is a great incentive to learn why studieshave come to such diverging conclusions.

Sources of Information:

The sources of information are both primary and secondary whichhas given as follows:

Primary Sources:

Practical Desk work. Conversation with clients.

Secondary Source:

Practical case problems. Manual of Grameen Bank. Different manuals, books, existing soft information. Various website, books, newspaper’s editorial are use to

prepare this reports.

Methodology:2

Sample Design:  The study represents comprehensive data ofMicrocredit management guidelines.

Collection of information: To conduct this studyconsiderable information and expert opinion will becollected from primary as well as secondary sources.

Processing of information: A careful and systemicprocessing of information facilitates comparison andevaluates performance to make decision whether the policycompliances with present situation.

Analysis and interpretation: The information has beencollected will be duly analyzed and interpreted as toachieve the desired objectives.

Final Report Preparation: The final report has beenprepared on the basis of presentation, analysis andinterpretation of the information.

Case Study: Grameen Bank, Brac and ASA

In this research work, few indicators have been taken asyardstick of measuring the poverty line such as incomelevels, household consumption, nutrition, food intake,asset accumulation, job creation and also education for thechildren. From the case study of the mentioned NGOs, it hasbeen found that these indicators have been positivelyaffected by the induction of micro-credit programmes. Thissection has been developed to demonstrate the impact ofmicro-credit programmes of three NGOs on povertyalleviation on the basis of the factors identified.

Limitations:

To conduct research, there are many problems arisen, which hasthe purpose of the report. The limitations are:

It was very difficult to collect data from such a bigorganization.

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The concept of microcredit in academic course iscomparatively new in Bangladesh.

Sufficient books, publications, facts and figures arenot available. These constraints narrowed the scope ofaccurate analysis.

Difficult to collect information as concern people arereluctant to disclose information.

Microcredit program is a too big to cover wholly inthis limited scope. It required huge time and hugespace to cover. So, I have covered only some importanttopics of microcredit programs.

Access to only a number of information sources. Non-availability of secondary data.

Chapter: TWO

OVER VIEW OFMICRO CERDIT

History of Microcredit:

The history of micro-credit in Bangladesh spans four decades. It is admitted in the world that Bangladesh has introduced micro-credit. After liberation, the concept of micro-credit was introduced in the war-ravaged Bangladesh. As a continuity of it, micro-credit system has reached this level today. The recipients of loan from the micro-credit organisations at present number 30 million (03 crores) and the amount of loan has exceeded Tk. 200 billion (Tk 20000 crores). At the same time, the economy of Bangladesh has also been able to stand on a solid foundation today. Bangladesh has gone far ahead on the way of inclusive socio-economic progress; it has received the identity of a

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country of emerging developing economy world-wide. A giant transformation has taken place in the economy of the country. Thedependency on agriculture has been reduced; the importance of manufacturing industry and service sector has increased.

Well-regulated micro-credit is playing a big role in the sphere of elimination of poverty. Micro-credit ensures stability of the consumption of the rural poor. Outside government's initiatives, the NGOs (non-governmental organisations) are playing a significant role in many sectors, such as micro-credit, education, health, removal of poverty, tackling the natural disasters and so on. Therefore, the role of NGOs is indeed praise-worthy. Education lies at the core of success attained in Bangladesh in the control of population.

The NGOs have been playing an important role. With expanded activities of NGOs a kind of change has started to set in the villages. Rural economy has revived. The wages of the workers in the villages have substantially been increased. As a result of increase in wages, a large segment of rural people are giving labour to the non-agricultural sectors outside agriculture. The discussion on influence of micro-credit will remain incomplete ifits substantial subsidiary and inter-mediatory role is left unmentioned. The micro-credit organisations of Bangladesh are marked by other services outside loan. These embrace taking various social steps involving education, health and citizenry rights and ordinarily measures of various kinds of training.

What is Microcredit ?

Microcredit  programmes extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families.

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Definitions deffer, of course, from country to country. Some of the defining criteria used include- size – loans are micro, or very small in size target users – microenterpreneurs and low-income households utilization – the use of funds – for income generation, and enterprisedevelopment, but also for community use (health/education) etc. terms and conditions – most terms and conditions for microcredit loans are flexible and easy to understand, and suited to the local conditions ofthe community.

What is Microfinance ?

Microfinance is an economic development approach that involvesproviding financial services, through institutions, to low-incomeclients, where the market fails to provide appropriate services.The services provided by the Microfinance Institutions (MFIs)include credit saving and insurance services. Many microfinanceinstitutions also provide social intermediation services such astraining and education, organizational support, health and skillsin line with their development objectives.

Scope of Micro-Credit Financing:

Traditional banking sector cannot reach millions of poor for whomsmall loans could make huge differences. There are several reasons forthis. Most of the poor are rural, and they are very dispersed. Theyhave low education levels, if at all. As a result, administrative costof supplying loans to the poor population is extremely high. Anotherissue that makes it difficult to serve these customers throughtraditional banking is that the poor does not have any assets to useas a collateral. As a result, the poor had access to loans onlythrough local money-lenders at exorbitantly high interest rates.

Micro-credit financing starts with the assumption that the poor iswilling to pay high interest rates to have access to finance. Ingeneral, the system uses the social trust as the collateral. Althoughthere are different micro-credit financing models, the borrowers inthe pioneering models are usually members of small groups. Loans aregiven to individuals, but an entire group is responsible for the

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repayment. Hence, the borrower who does not fulfil his commitment torepay back will lose his/her social capital. Micro-credit institutionsreport that their repayment rates are above the commercial repaymentrates, sometimes as high as 97%. Today, there are millions of poorpeople around the world who turn to be entrepreneurs through themicro-credit sector.

The UN Millennium Project identifies micro-credit as “one of thedevelopment strategies … that should be implemented and supported to attain the boldambition of reducing world poverty by half.” A powerful endorsement of theimportance of the micro-finance has come from the United Nations withthe designation of 2005 as the International Year of Micro-credit. One of themost prestigious awards in the world, Nobel Peace Prize was given toMuhammad Yunus for his pioneering role in the development of themicro-credit sector.

Although micro-credit financing is considered as one of the most powerful tools for combating poverty, the sector still faces several serious problems. Despite high repayment rates, the cost of operating micro-credit financial institutions is much higher than their traditional commercial counterparts. These institutions are usually charge excessively high interest rates to cover the high administrative costs of the micro-loans they offer to the poor people.This reality creates a tension between sustainability of the micro-credit sector and the outreach. It also makes it a challenge to regulate micro-finance institutions.

Objectives of Microcredit Program:

The microcredit programmes are able to bring ‘changes’ in the lives of the poor households in Bangladesh. The main objective of Microcredit program is to prove that microcredit programmes are able to bring favorable changes in the lives of the poor households in Bangladesh. Microcredit programmes provide poor households with the minimum collateral-free capital to improve their employment status. Through improving employment status poor households increase their income, consumption and thus, improve the fulfillment of basic needs (education, health, shelter, clothing and the food availability).Gradually, these households move from below to above the

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poverty line, i.e. poverty of the borrowing households alleviates. Within this main objective, three secondary objectives also have been examined:

(a) Microcredit programme improves the employment status of the poor households and increase their income.

(b) Microcredit programme improves the consumption pattern of the poorhouseholds.

(c) Microcredit programme improves the fulfillment of basic needs(education, health, shelter, clothing and the food availability)of poor households.

Micro finance Institutions (MFIs): A microfinance institution isan organization, engaged in extending micro credit loans andother financial services to poor borrowers for income generatingand self-employment activities. An MFI is usually not a part ofthe formal banking industry or government. It is usually referredto as a NGO (Non-Government Organization

Microcredit's Grameen rate of interest:

It is often said that the financing charges, in the form of interest, as applicable to microcredit operations, including thatlevied by Grameen Bank in Bangladesh and elsewhere, are high compared to the prevailing interest rate in the conventional market. At the same time, overall experience gained suggests thatmicrocredit business continues to be popular and there is strong public demand for additional coverage.

It needs to be recognised, however, that the financing charge in the form of interest seems to have unique but divergent response and operational outcome from the two distinctly different markets. In the conventional market in Bangladesh, until recently, prevailing rate of interest was in the range of 12-14 percent; in some countries it was in single digit. While the rateapplicable to a microcredit borrower, in Bangladesh, Grameen Bankhad deliberately kept it low, allowing its rate of interest charges at  about 20 percent, for early removal of poverty. At

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the other end of the spectrum, Banco Compartamos in Mexico charged as high as 70 percent, arguing in favour of capital formation and early wider coverage.

Almost in all other countries, microcredit charges are alleged tobe relatively high with a common 'outcry' of 'high interest' impeding poverty reduction. But everywhere, recovery rate has been high. Grameen Bank experienced 99 percent recovery. Even in strife-torn Afghanistan, Brac has had a successful microcredit operations experiencing relatively high rate of recovery.

In view of high rate of return in microcredit operations, lendersin Bangladesh, India and Mexico have been charging relatively 'very high interest' rate. Entertaining this perception of 'high interest' and for protecting the poor, Bangladesh Bank has cappedthe rate of interest applicable to microcredit operation at 27 percent. The Economist (November 20, 2012), seemed to have questioned the wisdom of such a move, suggesting that such a stepmay “deter new entrants (lenders) and reduce competition”. In other words, it apparently argued that an unrestricted rise of interest could be justified if the relevant (mc) market would bear it, even though the clients were poor, seeking redress from poverty.

The experience of micro-lending at the so-called 'high interest' but experiencing, at the same time, a high recovery rate, and in view of the Economist's recent observations, effectively supporting an undeterred move towards a higher rate, lend one to ask if interest in the conventional market and the one for micro-lending are in fact two different products, in terms of cost consequence and operational outcome. Answers to these may help establish the fact that financing charge, called interest, applicable to microcredit operations is essentially a variant of conventional market interest, a distinctly different product, hence, logically, should be called differently. By way of name giving, it may be called “Grameen rate of interest” – 'gi', thereby help defining it more accurately, with the world already familiar with 'Grameen'.

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Interest Rate Debate in Microfinance:

The setting of interest rates in the field of microfinance (MF)has been hotly debated for years. On the one hand, it is claimedthat high interest rates are justified because of the elevatedoperating and processing costs of serving very small loanswithout collateral. 

On the other hand, it is argued that high interest rates occureither because the microfinance institution (MFI) is making toomuch money or is simply inefficient. For whatever reasons, highinterest rates are passed along to those who can least affordthem — poor, people. Thus, MF more than before, is faced with anethical question: should MFIs be mission driven or profitseeking? And, what is the “just” balance?

In the last few years, the commercialization of MF following thedownscaling of commercial banks (currently more than 80commercial banks worldwide operate in MF) and equity investorinvolvement has caused the MF sector to grow to approximatelyUS$60 billion, with more than 200 million micro-borrowers. At thesame time, to minimize the potential exploitation of micro-borrowers, more than forty countries have introduced ceilings orcaps on MF interest rates.Many MFIs use the Grameen Bank model,setting rates around +15% above the cost of funds. The originalvision of Professor Yunus, the author of this model, was thatinterest rates would decline with time, thus allowing MFIs topass along savings to micro-borrowers while competing and servingtheir social mission. Unfortunately, 30 years later this visionhas not been realized and the debate about interest rates remainsa sore point in many countries where micro loans can range from30% to 70% plus cost of funds.

The Evolution of Microfinance Program in Bangladesh:

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Providing credit is one way of enabling the poor to acquireassets and become productive. Targeted credit programs for thepoor were first tried in 1976, when Muhammad Yunus, a Bangladeshieconomics professor, introduced an experimental project to testwhether the poor were creditworthy and whether credit could beprovided without physical collateral. With the help of someBangladeshi banks, Yunus conducted an innovative experimentemphasizing group delivery of credit and exploring whatconstituted a manageable group size for effective financialintermediation. The central bank of Bangladesh later facilitatedYunus’ work by arranging for funding from the International Fundfor Agricultural Development (IFAD). In Yunus’ experiment, groupcollateral was substituted for physical collateral. The groupguarantee to repay individual loans became the hallmark of micro-lending. Using the mechanism, poor people with no physicalcollateral were able to form groups to gain access toinstitutional credit. The mechanism also allowed credit to reachthe poor, especially poor women.

The central premise of this targeted credit approach is that lackof access to credit is the greatest constraint on the economicadvancement of the rural poor. Yunus believes that withappropriate support, the poor can be productively employed inincome-generating activities, including processing andmanufacturing, transport, storage and marketing of agriculturalproducts, and poultry and livestock rising. After almost sevenyears of experimentation with a variety of group-basedmechanisms, his idea took shape as a bank with its own charter.With the government holding about 90 percent of the shares inpaid-up capital, Grameen Bank was established in 1983 to workexclusively with poor, defined as individuals owning less thanhalf an acre of land.

Where Grameen Bank believes that the most immediate need of thepoor is credit to create and expand selfemployment opportunities,the Bangladesh Rural Advancement committee (BRAC) believes thatthe poor need skills development and other organizational inputs.BRAC was established in 1972 as a charitable organization to helpresettle households displaced during the 1971 Independence War.

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BRAC soon realized that relief simply maintained the status quo;it was inadequate to alleviate poverty. BRAC’s relief experiencehelped it understand the causes of rural poverty and develop aframework for poverty alleviation.

Over the time BRAC and Grameen Bank have learned from oneanother. BRAC has learned that credit must be provided along withskills development training; Grameen Bank has realized thatcredit alone is not enough, that the poor need social developmentand organizational inputs to become more disciplined andproductive. BRAC continues to provide skills training and otherinputs before disbursing credit, however, while Grameen Bankcontinues to disburse credit before providing social developmentand organizational inputs.

Following the examples of Grameen Bank and BRAC, the governmentof Bangladesh introduced a groupbased targeted credit approachbased on the Comilla model of two-tier cooperatives. The Comillamodel rural development was designed and implemented by AkhterHamid Khan in the 1960s at the Academy for Rural Development inComilla, Bangladesh. The idea involves organizing farmers intocooperative societies in order to distribute modern inputs, suchas high-yielding crop varieties, fertilizer, pesticides,irrigation, and subsidized credit. The organizational approach,which established primary farmers’ cooperative societies thatwere federated into central cooperative societies at the thana (athana is the administrative center for a number of villages)level, was found to be effective in reaching farmers.

Following Bangladesh’s independence in 1971, the governmentadopted the Comilla model as the basis for the nationaldevelopment. This strategy led to the creation of two-tiercooperative system. The Comilla model was adopted throughout thenation as part of the Integrated Rural Development Program(IRDP). The Bangladesh Rural Development Board (BRDB), a semi-autonomous government agency under the Ministry of LocalGovernment, Rural Development and Cooperatives, (MLGRDC) wasestablished in 1982 to replace the IRDP. Like the IRDP, it wasbased on two-tier cooperatives, but it employed credit as themain input and included a component that specifically targeted

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the rural poor. The BRDB experimented with a number of projectsto increase income and employment opportunities for the ruralpoor by setting up a separate system of primary cooperatives. Theeligible poor depend on manual labor as their main source ofincome. These cooperatives provided members with skillsdevelopment, training in group leadership and management, andaccess to credit. Saving mobilization was also part of theprogram. With funds from Canadian International DevelopmentAgency, this program was strengthened in 1988 and renamed theRural Development Project12 (RD-12).

Chapter: THREE

IMPACT OF MICRO CREDITThe impact of microcredit is a subject of much controversy. Proponentsstate that it reduces poverty through higher employment and higher incomes. This is expected to lead to improved nutrition and improved education of the borrowers' children. Some argue that microcredit empowers women. In the US and Canada, it is argued that microcredit helps recipients to graduate from welfare programs. Critics say that microcredit has not increased incomes, but has driven poor households into a debt trap, in some cases even leading to suicide. They add thatthe money from loans is often used for durable consumer goods or consumption instead of being used for productive investments, that it fails to empower women, and that it has not improved health or education.

Some Negative Impact of MicroCredit:

a)High interest rate:

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High rate of interest is one of the most adverse effects of Microcredit program in rural area.In view of high rate of return in microcredit operations, lenders in Bangladesh, India and Mexico have been charging relatively 'very high interest' rate. There has been much criticism of the high interest rates charged to borrowers. The real average portfolio yield cited by the sample of 704microfinance institutions that voluntarily submitted reports to the MicroBanking Bulletin in 2006 was 22.3% annually. However, annual rates charged to clients are higher, as they also include local inflation and the bad debt expenses of the microfinance institution.[ Interest rates charged by the Mexican Banco Compartamos on their micro-loans reached 86% per year while it sold stocks in the stock market in 2007.

b)Multiple borrowing is a serious concern:

Multiple borrowing has become alarming currently. Recent experience shows that many female borrowers move away forever from their home due to inability to repay their multiple loans. More dangerously, there were many examples of suicide by the indebted borrowers in the different regions. Moreover, to repay the multiple borrowing, many poor households are compelled to go to the loan sharks, and many become landless.

c)Severe lack of training and education:

A great degree of inefficiency exists at the borrowers as well asthe management level of the microfinance institutions. The employees and the higher management of MFIs are not adequately skilled in delivering efficient financial services. This also prevents innovation from developing in this sector at the grass root level. 

d)High turnover rate and unfair competition:

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The turnover rate of skilled manpower is very high in the microfinance sector. This is quite evident that large MFIs alwaysattract highly skilled staffs of the relatively small MFIs. Because of the large deviation in terms of capabilities and size,relatively small MFIs always feel pressure in the market, and thus face unfair competition from the large MFIs not only in terms of skilled employee turnover but also increasing market share. This is a great concern that a chronic unhealthy competition exists among the NGOs in loan disbursement and increasing outreach. 

e)Misuse of credit causes more miserable lives for borrowers:

A major and probably the most responsible cause for the ineradicable misery of the poor people is the misuse of credit byborrowers. Borrowers either fail to utilize the credit properly due to inexperience or lack of capacity or they may intentionallyuse the loan amount for purposes other than the one promised wiletaking the loan. Such borrowers are often found defaulting on repayment of the loan. 

f)Lack of central database:

There must be a central database for the microfinance industry inBangladesh. The Credit and Development Forum (CDF) has been putting in their efforts for last couple of years but unfortunately they could not succeed up to the desired level as many NGOs are left out, and in many cases required information cannot be collected due to diverse nature of problems encountered.

g)Sectorial disbursement without technical experts:

The days of disbursing loan to any sector are over. In this huge industry, NGO MFIs disburse loan to many investment sectors but in major cases they do not have proper technical persons

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experienced in those investment sectors.

h)Lack of intention to serve in the apparently inaccessibly location: Despite the rapid growth of the microfinance sector anddisbursement of a large volume of money, yet there are many partsof the country out of the network of microfinance institutions. Experience shows that NGO MFIs do not intend to operate in many distant places (i.e. Char areas) that are termed as inaccessible and not cost-effective. They feel it as a burden, a complicated job and also hard-to-profit activity.

The current scenario of micro finance in Bangladesh has shown that the industry is at the juncture of evolution. The following factors or phenomena could be regarded as indicators to the same:

•    Highest Frequency of Prevailing Interest Rates.•    Evolving Microcredit Theme•    Individual Loans•    Product Diversification•    Enterprise Loans•    Overlapping•    Savings Collection from Non-Members•    Huge Uncalled For Consumption Loans

LIMITATIONS OF MICROCREDIT:

The sources of the success of microcredit are also the sources of

its weakness. Microcredit is self-targeting and hence cost-

effective. But not all rural poor are able to benefit from

microcredit programs; utilizing loans in productive activities

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requires entrepreneurial skills that most people lack.

Microcredit programs must target only those poor who have some

ability to initiate activities with growth potential but lack

capital. For the rural poor who are unable to become self-

employed, targeted food programs and wage employment may be more

appropriate. Microcredit also suffers from its limited ability to

increase the size of the loan per borrower because of the limited

capacity of borrowers to absorb loans. Because of the emphasis on

outreach, overhead costs are high, and subsidized funds are

required over long periods of time. Although group pressure

creates incentives to repay loans, enforcing group pressure and

discipline involves costs. Microcredit programs must find ways to

reduce administrative costs as well as subsidy dependence. One

way of increasing cost efficiency might be to modify the program

design. Microcredit programs could increase the size of the group

from 5-6 to 10 and the size of the center from 12 to 15-20. They

could also relax the landholding criterion to accommodate small

and medium-size farmers.

Increasing the target base would enable programs to reduce the

cost of forming and training groups and lending. At the same

time, programs could charge different rates for different types

of borrowers and different types of loans and customize loan

terms and conditions to meet individual borrowers' needs. By

customizing loans, microcredit programs could encourage more

successful borrowers to expand their enterprises by offering them

larger loans at reduced rates (Khandker 1996). Group-based

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microcredit programs could also introduce individual rather than

group liability for long-term borrowers with excellent repayment

records. Moreover, these loans could be repaid on a monthly

rather than weekly basis. In the long run the cost-effectiveness

of microcredit depends on how fast it can enhance borrowers'

abilities. Microcredit has a market niche because its

beneficiaries have no alternatives, Over the long run this

dependency could make microcredit vulnerable. Unless borrowers

increase their incomes, many will become permanently dependent on

microcredit. Loans to individual borrowers should be increased

only gradually, so that borrowers are not stretched bevond their

means.: The long-run cost-effectiveness of microcredit also

depends on the overall growth of the economy, which shapes the

nature and extent of borrowers' demand for credit. But relying

primarily on the credit demand of poorly educated entrepreneurs

may prove too costly for microcredit programs to survive and

become cost-effective. As the economy grows, commercial and

development banks could finance projects that produce goods

similar to those produced by microenterprises on a larger and

more profitable scale. Low-cost production by large-scale

enterprises would drive down the profit margins of small-scale

producers, eventually forcing them out of business. To be able to

compete with large-scale enterprises in the future, participants

in microcredit programs must become more efficient and they must

diversify their activities as the economy expands. Investment in

skills development, technology, and market promotion will be

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necessary to ensure that self-employment in rural nonfarm

activities remains viable for the rural poor.

Major Issues and Challenges of NGO-MFIs: a) Targeting the Poorest versus Achieving Financial

Sustainability:

The Dilemma in Microcredit: Some studies of microcredit programs show that MFIs have been successful in improving the economic condition of the members. Macro studies, however, show that therehas not been any significant decline in the overall levels of poverty. This apparent contradiction may be partially due to the fact that the microcredit programs have not been very successful in including the hard core poor, who constitute about half of thepoor in Bangladesh. The poorest may have been left out because quite often the destitute themselves feel they are not credit worthy and the microcredit programs also do not judge them to have the entrepreneurial ability necessary to handle money properly. Perhaps microcredit, especially in the form that is currently in practice, is not the answer for the hard core poor. Normally, the MFIs have been successful in expanding their outreach by providing microcredit to increasing numbers of borrowers who are near the poverty line, not well below that. TheMFIs adopt this approach to reach financial viability within a reasonable time frame. If the MFIs are to borrow (from PKSF and other sources) at a rate close to market rate of interest, the effort to reach financial viability may become difficult and delayed. The partner organizations (POs) of PKSF have achieved financial viability at the present (subsidized) rate of service charged by PKSF. Therefore, in the context of Bangladesh there seems to be a trade-off between outreach and sustainability of MFIs and they should strike a judicious balance between the two which may enable them to achieve financial

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sustainability.Experiences suggest that the financial needs of the poor are best served by encouraging a broad range of institutions to provide efficient and responsive lending, savings, insurance, and other financial services that poor peopleneed to build their business, increase income and assets, and reduce risks. Poor people need sustained access to an evolving set of financial products and services. These can only be provided by financially sustainable institutions, dealing with diverse segments and products, each in the position to increase outreach and grow with their clients.

b) Widening the Target Group:

New Products and New financial Technologies: The MFIs have some scope to expand horizontally devising ways to include more peoplefrom the target group. More important is, as older borrowers graduate to higher income brackets, new products need to be devised to meet their changing needs. These new products may alsohelp the MFIs to expand vertically by tapping borrowers outside the target group. A possible way to expand horizontally is to include more men. Research in Bangladesh and elsewhere show that men usually borrow larger amount. However, their repayment recordis not as good as women. Including more men will allow MFIs to attain sustainability quickly, but it will also mean that the repayment performance of an institution will suffer as well. As the microcredit movement matures it faces the varied requirementsof the borrowers and the need to offer a larger package of products.

c) Accessing Non-Donor Source of Financing:

It is fair to say that donor funding and enthusiasm for microcredit will diminish in the future. This means that MFIs have to look for new avenues to fund their activities, potential source of fund will be to mobilize saving deposits of members andnon-members. Another alternative is to try to tap commercial

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source of funding such as commercial banks, the local stock market and financial market. This option might be open only to large and well-established MFIs and may not be feasible for smallMFIs.

d) Internal and External Governance Issues:

Research in Bangladesh and other places show that a crucial element for the success of a credit granting NGO-MFI is the quality of leadership and management. The governance of NGOs is increasingly being discussed nowadays. Research findings indicatethat governance and financial sustainability are closely interrelated. Weak governance and management characterize many microfinance NGOs in Bangladesh. It is commonplace to find friends, close relatives, retired bureaucrats, and such other persons in the governing bodies. They are mere onlookers and remain uninvolved with the board's business. The chief executivesare said to overpower the boards. If this is the situation, good governance will not occur by just inducting good people in the governing body. The essence of governance is to ensure an overallsystem of structuring accountability and transparency in an organization. The problems of governance are mostly due to the inadequacy of the existing laws and regulations and lack of reporting, supervision and monitoring. The MFIs are not to blame fully for this.

e) Sustainability of Microcredit Borrowers: An individual member may be considered as sustainable when he/she is capable of meeting the basic needs of his/her family without borrowing money/capital from the project or any other sources like banks etc. for consumption purposes. However, loans can be taken for Income Generating Activities (IGAs). Most people are of the opinion that a member's sustainability should be judged by two separate but inter-dependent criteria, viz, (i) social development and (ii) economic development. Controversies, however, exit as to which of the two criteria should go first.

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Some people argue that economic development is a pre-condition for social development while some others consider social development as a prerequisite for economic development.

Most people, however, are of the opinion that the two interactiveand therefore be pursued simultaneously.

f)Service Charge of NGO-MFIs:

The MFIs in Bangladesh usually charge flat rate of 12 to 15% per annum from the microcredit borrowers. The effective rate becomes about 20 to 28% at the borrowers‟ level. Recently, there has debate whether this rate is too high or not. The critics of service charges of MFIs compare, somewhat erroneously, with interest rates of the conventional formal banking system. Microcredit is “banking at the doorstep” of the poor borrowers. The monitoring and supervision are quite intensive and costly. Therefore, the comparison with formal banks is not proper. There are several other factors like risks associated with collateral free loan, provisioning for doubtful and bad loans, compulsion tobuild up MFI‟s equity and attaining financial sustainability alsoare determinants of service charge of microcredit programs, Bangladesh microcredit sector has relatively lower rate of service charge compared to many other countries. However, social obligations, political realities and credit at a competitive ratemay require consideration of reducing the rate by MFIs. But that should not be done by resorting to capping the rate. The actions to increase efficiency in the credit operation of MFIs, information flow at grassroots level regarding charges of variousMFIs, increasing the loan size for the borrowers and healthy competition among MFIs may lead to competitive rates acceptable to all concerned.

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Chapter: FOUR

FINDINGS, RECOMMENDATIONS & CONCLUTION

Findings and analyzing :

1) Microfinance is the term for financing service typically targeted at the poor who do nat have access to mainstream bankingservices and relates to the supply of small loans Microcredit is “Sucking blood from the poor in the name of poverty alleviation”.

2) Microcredit return rate is so high.

3) Microcredit causes some deaths in the world.

4) the microcredit includes problems that emerged in rural area are two-fold. First, microcredit per se is actually an “ anti-development” intervention. For one thing, it exists on paper to support the smallest income-generating activities, but in practice is increasingly all about supporting consumption spending. In this context, the micro credit movement has created an incredibly risky and expensive way to support the immediate consumption needs of the very poorest.

5) Microcredit has very little positive impact on local community. Centrally, microcredit possessed a very simple low- capitalized composed no-growth activities in large informal economy.

Recommendations:

Bangladesh has experienced a tremendous growth of microcredit organizations (MCOs) during the last two decades creating positive impacts on poverty alleviation. However, a closer look

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at the contribution of microcredit on the alleviation of poverty and the various programme approaches indicate that-

1) To make better contribution a flexibility in the credit programme needs to be introduced.

2) To exhibit a stronger impact on poverty reduction, microcredit should perhaps go beyond the provision of financial services.

3) To effectively cover the poor households, special programmesincorporating an element of support to provide food security, help in capacity building and creation of an assetbase need to be undertaken.

4) To maximize impact and for Reaching the Poor: Microcredit Experience in Bangladesh

greater sustainability of programmes.

5)the maximalist approach may be followed by adding appropriate skill training, necessary input and marketing services and also social development programmes along with the credit programme.

6)the microcredit institution should ensure that the loans are given for useful purpose which would earn a living for the household and not for uneconomic purpose.

BRAC has already followed this approach. An element of external support would be necessary for the social development programmes and for providing initial food security to the poor households while financial service programmes will have to be self-sustaining.

Thus, to effectively cover different groups of the poor a flexible microcredit policy needs to be evolved. Credit ceiling may be extended for those who have proven ability to absorb higher amount of credit. To cover the most disadvantaged poor households, food security is to be ensured through a support programme. Skill training and other asset building programmes are

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to be incorporated and alternative sources of income created for them before they are involved in the normal microcredit programme.

The microcredit sector has become a job of professionalism and now it is the appropriate time for microcredit non-government organizations (MC-NGOs) to be prepared for handling the mechanismcompletely. The expansion process should be maintained in accordance with the quality of services, funding situation and other capacities. Indeed, potential microcredit client is the basic pillar of successful operation of the programme.

Conclusion :

Before seventies Bangladesh was suffering from the curse of poverty. People were not conscious about the education and health. After the liberation war when the microcredit was introduced by some non-government organizations (NGOs) then the poverty level was reduced successfully. The Grameen Bank was in the leading role. Following the path of Grameen Bank some of the NGOs started to provide microcredit. Microcredit offers the opportunity to generate selfemployment, which then can be the most reliable vehicle for the poor to get out of the poverty. Credit offers poor persons the opportunity to convert their energy and creativity into income generating activities, and thuspull themselves out of poverty. In Bangladesh, the programmes areable to bring favorable changes in the living standard of the borrowing households through employment generation, increased income, consumption and fulfillment of the basic needs. Microcredit is still fighting against poverty. Though there is nosingle intervention against poverty.

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