PAPER TO BE PRESENTED AT THE ASIAN REGIONAL CONFERENCE
jointly organized by INASIA and CDF
on
“The Potential and Limitations of Economic Initiatives in Grassroots Development – Current Issues and Asian Experiences” from 27th - 30th November 2000

at the

BRAC Centre for Development Management (BCDM), Rajendrapur, Bangladesh.

Paper 1

Microfinance NGOs in Bangladesh

Growth, impact and challenges

Country: Bangladesh

NGO: BRAC

Author of Workshop Paper:

Fazle Hasan Abed, Founder Executive Director, BRAC

Person Presenting the Paper at the Workshop:

Fazle Hasan Abed, Founder Executive Director, BRAC

I. MICROFINANCE

Microfinance, also known as microcredit, has emerged as a movement in Bangladesh and in the larger part of the world. There has been unprecedented growth of Microfinance NGOs in this country over the past two and a half decades. Bangladesh can be considered birth place of the current concept of Microfinance. This country provides models of recognised global significance in several aspects of Microfinance, viz., scale of operation, modes and practices of Microfinance, wider financial services, and poverty alleviation. The experience of Bangladesh is increasingly being replicated in many developing countries. The sector is now in transition in terms of process and operational strategies. At the same time, it is encountering some challenges which need to be addressed. This paper discusses growth of the sector, its impact and some upcoming issues including the challenges. The discussion is focused on the Microfinance NGOs which are the major actors in this field. The experiences of BRAC are reflected in the discussion.

Microfinance -- main features

Microfinance, in simple terms, can be described as small loans offered to poor households to foster self-employment and income generations. The loans largely go to rural landless, disadvantaged women and marginal farmers who depend largely on selling their labour. The terminology of Microcredit has undergone a change in recent time. Practitioners in many countries call it microfinance for its wider dimension. microfinance generally involves the following features:

  • Small loans, for both working capital and assets
  • Collateral free, substituted by group guarantees or compensatory savings
  • Access to repeat and larger loans
  • Intensive supervision and close monitoring
  • Secure savings products
  • Loan period generally for one year, may go up to 3 years
  • Options available for weekly/monthly installment payment
  • Can combine social development with financial intermediation.

Around 60 million people in Bangladesh, nearly half of the country’s population, live below the poverty line. But the poor did not practically have any access to institutional credit, primarily because they are not considered credit worthy. So they could not borrow from the banks or other financial institutions. The informal money market including the traditional moneylenders provide loans but charge exorbitant rate of interest. microfinance thus found a space to operate for the poor.

Growth of microfinance sector

Microfinance has attained rapid growth in Bangladesh. It has emerged as a potent instrument of poverty alleviation. Both private and public sector organisations are involved in microfinance. The constituents of the sector include Grameen Bank, NGOs, Bangladesh Rural Development Board (BRDB) which is a public sector organisation, nationalised commercial banks and some other government programmes. The Grameen Bank and NGOs are however, the leading actors in this field. Total participants in the microfinance programmes in Bangladesh stand above 13 million (Rahman: May 2000). Around 9 million of them are enrolled in NGO programmes. There are around 15,000 NGOs registered in Bangladesh. Of these, nearly 1000 NGOs are dealing with microfinance. In 1999, NGOs alone disbursed around US $ 400 million as credit. This speaks of the significant role the microfinance NGOs are playing in Bangladesh. Table 1 presents the size of active participants, cumulative disbursement and savings in the major microfinance operators in Bangladesh.

Table 1: Microfinance in Bangladesh up to December 1999

Orgaisation category / Number of participants (million) / Net savings (Taka/million) / Cumulative disbursement (Taka/million)
NGOs (533) / 9.44 / 6,921 / 92,436
Grameen Bank / 3.36 / 9,679 / 123,035
BRDB (Public sector organisation) / 1.65 / NA / 15,855
Total / 13.35 / 16,600
($ 330 million) / 231,326
($ 4.627 million)

Source: CDF Statistics, Vol. 9: 2000NA= Not available

Microfinance has evolved into an important sector of development. There are variations and clusters within the sector. For example, there are (a) wholesalers like Palli Karma-Shahayak Foundation (PKSF) that conduits loans to borrowers through NGOs; (b) large NGOs like BRAC, ASA, Proshika, etc, which moved from credit retailing to wholesaling as well; (c) Grameen Trust, a subsidiary of Grameen Bank (GB) that has lent money to NGOs in 20 countries of the world to replicate the GB model; (d) the government which loans through its channels especially to Bangladesh Rural Development Board (BRDB) and (e) nationalised commercial banks. There are differences regarding interest rates and conditionalities among the actors. Changes are taking place in the process and operational strategies of the actors which have been elaborated in the paper.

Growth of microfinance NGOs has led to the establishment of two new institutions in Bangladesh. One is Palli Karma-Shahayak Foundation (PKSF) set up by the government as a private foundation to provide credit fund to NGOs. The other is Credit and Development Forum (CDF) which is a networking NGO. CDF provides need-based training and customised service to its member NGOs. By providing credit fund, data base and training support, the two institutions are extending very useful support to NGO microfinance programmes.

BRAC in microfinance

BRAC is the largest national NGO in Bangladesh. It is also the largest development organisation in the private sector in this country. A brief sketch of BRAC’s microfinance activities is added here as its experiences have been used in this paper. In terms of membership enrollment (3.6 million), BRAC can be regarded as the largest microfinance organisation in Bangladesh. The organisation has also been operating large programmes in health, education and some other activities along with microfinance. BRAC programmes are targeted to the poor and focused on women. A total of 400 upazilas or sub-districts out of 464 of the country, are covered by BRAC programmes.

BRAC’s microfinance activities are operated through its Rural Development Programme or RDP. The nucleus of RDP is the village organisation (VO). A VO comprises 40-45 rural poor as members. As of June 2000, RDP had 3.6 million active VO members. Around 97% of the members are women. The members have accumulated Tk. 3,480 million (US $ 70 million). A total of Tk. 47,340 million (US $ 1050) has been disbursed to the borrowers as loan. RDP comprises two broad type of activities - economic development and social development. RDP lays importance on enterprise development of the borrowers which is supported by credit, training, input and extension support and often marketing assistance. The social development activities comprise elements of essential health care and awareness development on social issues including legal rights. Table 2 presents the package of BRAC’s microfinance interventions. The services are provided through each RDP Area Office which comprises around 6000 VO members.

Table 2: Services provided by a typical RDP Area Office

a)Savings and Credit
  • Compulsory savings
  • Income generation and housing loans
  • Life insurance

b)Sector Programmes
  • Poultry & livestock
  • Fisheries
  • Sericulture & silk development
  • Social forestry
  • Agriculture extension

c)Social Development
  • Essential health care
  • Education
  • Environment awareness
  • Formation of federation of VO members
  • Group theatre
  • Gram Shabha
  • Human rights and legal services

Source: BRAC Annual Report 1998

II. IMPACT OF MICROFINANCE

Microfinance has generated considerable hope and expectations among the academics, policy makers of the government, NGO leaders and other development practitioners in Bangladesh. It has created positive impacts on two vital areas of national development, viz., alleviation of poverty and women’s empowerment. Microfinance programmes in Bangladesh are targeted to the poor who make up nearly half of the total population. Focus on women is another important characteristic of these programmes. Women constitute around 90 percent of the total participants enrolled in microfinance programmes. So the success of microfinance intermediation can be ascertained by two significant indicators -- alleviation of poverty and empowerment of women.

Impact on alleviating poverty

It is widely recognised that microfinance has proved to be a useful instrument of fighting poverty in Bangladesh. A huge body of evidences based on empirical studies has grown over the years on the effects of microfinance. Experience and evidences indicate that microfinance has created quite a positive impact on the economic condition of the borrowers and status of women in their households and local community. The Bangladesh Institute of Development Studies (BIDS) has been tracking poverty in Bangladesh for over last one decade. The BIDS survelliance reveals that poverty has been declining by 1 percent annually. The number of people living below the poverty line has now come down to 47 from the previous level of 80 in the early 1980s. While microfinance is not the only factor that has contributed to this achievement, it is recognised to have played a major role.

A World Bank study has produced evidences of wide-ranging impacts of microfinance on the condition of the borrowers (Khandker, 1999: 37-62). The study examined programmes of BRAC, Grameen Bank and Bangladesh Rural Development Board (BRDB), a public sector organisation. The findings revealed that per capita expenditure has increased due to microfinance among the borrowers of all these programmes. Household’s net worth has increased too. A BRAC research examined the impact of poverty in wider dimension. The results showed that 52% of the BRAC member households were below the poverty line while a higher number (69%) of the comparison households was lying below the line. The overall findings showed that among the BRAC members there has been gradual improvements in the indicators such as wealth, revenue earning assets, value of house structures, the level of cash earned, per capita expenditure on food and total household expenditure (Husain, et al., 1998: p xxiii-iv).

Empirical studies on microfinance programmes of two other large NGOs, viz., Proshika and ASA, produced similar positive impact. The impact assessment of Proshika conducted in 1998-99 found positive results of its programmes in terms of increased income, savings, school enrollment rate, reduction in infant mortality and improvement in gender relations (Proshika : 1999). The impact assessment of ASA’s programme on its participants also showed positive results indicating an annual growth of 5-7% compared to the control group, increase in food consumption, improvement in health and child education, and higher increase in assets (Bruntrup, et al., 1997).

Can microfinance eradicate poverty ?

Despite these hard evidences some observers have raised questions about the efficacy of microfinance in alleviating poverty. Their question is: If microfinance was so good, how come it had not eradicated poverty (Chowdhury: March 2000). It is a fact that poverty still prevails in the rural areas of Bangladesh, and all participants of microfinance programmes could not cross the line of poverty. One has to keep in mind that poverty is a complex phenomenon which can not be tackled by a single hyper-needle intervention. The task demands multi-sectoral approach and a comprehensive strategy. Microfinance can surely be a part of the board strategy, but it can not be the only strategy. There have been undue expectations about microfinance because it has wrongly been presented as a panacea for all economic ills. The fact is that microfinance has met a very important need, and it has been able to alleviate poverty only up to a certain level. What is needed now is shifting the overall sectoral strategy to a growth driven approach. To achieve it, performance of the MFIs has to be enhanced, and innovations for creative management, enterprise development, and savings generation for capitalisation have to be a necessary part of action progrmames.

Impact on women’s empowerment

Removing gender inequity and empowering of the women has been a cherished goal of the NGOs and many other development organisations in Bangladesh. Microfinance has definitely created an impact on the women borrowers. A good number of studies have examined the extent to which microfinance has contributed to women’s empowerment. Results of one study suggest that microfinance’s largest impact has been on the set of indicators relating to female control over assets and knowledge of social issues (Zaman, 1999: 1-13). Loans given to women create better effect than those given to men. Another study specifically indicates that “for every 100 taka lent to a woman, household consumption increases by 18 taka; interestingly the figure is 11 taka if the same amount was lent to a man” (Zaman, 1998:3). Analysists came to the conclusion that “a small amount of money works as a miracle in a cash-hungry society and signficantly raises the woman’s power in the family” (Zaman, 1998; Hashemi et al., 1996 -- as cited by Chowdhury and Bhuiya, 1999:22). An impact assessment of BRAC’s microfinance programme indicated that the “value of impact of credit is larger for the female category than it is for the males”. It was also found that women’s access to credit improves the households’ well-being as their earning is used mainly to meet the household needs (Husain, et al., 1998: iii).

Another study conducted at BRAC specifically examined the impact of microfinance on poor women in respect of their mobility and social awareness. The findings revealed that mobility of these women outside their home has increased. They also gained some control on using their own income. In many cases the women participated in decision making on household issues. They were also found to be critically aware on issues relating to dowry, family and inheritance laws, family planning, and education of their children (Zaman, 1999:1).

Who uses loans - women or men ?

Some observers have raised questions as to who actually uses the loans issued to the women borrowers. It has been asserted “that Microcredit programmes have worked further to incapacitate and subordinate women” (Obayedullah, 7 August 2000). It went further to state that “Women borrowers, in most cases, are used as a facade by men for extracting loan money” (ibid). These are two extreme view points. Women are highly disadvantaged in our male dominated society. They have long been living in extreme poverty, massive health problems, ignorance and illiteracy. Bringing about basic changes in their situation will depend on multi-sectoral interventions. As microfinance alone can not eradicate poverty it can not also be considered “a magic wand for empowering women or strengthening their position within a family or society” (ibid). It happens at times that loan taken by a woman borrower is used by her husband or her son living in the same family.

Our impact assessment study has indicated that 45% of the women are themselves involved in income generating activities. A majority of them either depend on their male household members for utiilization of their loan money or even hand over the loan to them for investment. (Husain, et. al., 1998:177-78). The study further showed that even in cases where the women do not utilize their loans by themsevles, they enjoy a greater role in familial affairs as a provider of working capital and thus have been able to improve their status within in household (ibid). Also their husbands often consult them about how to spend the income accrued from their income generating activities (ibid, p. 116). Under the condition prevailing in rural Bangladesh there are both economic and cultural reasons for handing over loan money by women members to their male counterparts. With substantial unemployment and under employment of male household members prevailing among the rural poor, male employment is given precedence over employment of women. These are some of the reasons why loan money is often handed over to male members.

What is important here is to examine the type of control a woman has in investing the loan money and using the profit earned. A woman is the part of her family. With microfinance, not only a woman borrower but the whole family can be benefited if she has control over decision making in certain areas of family affairs and in spending the returns.

Has microfinance reached the ultra poor ?

It is a lesson learnt through experience that, all the poor do not benefit from microfinance programmes. A question is very often raised : “If the Microcredit programmes have not reached the poorest of the poor, so how far can it be effective for poverty alleviation?” Some elaborations may be necessary to address the question. One has to take into account that there is signficant differentiation within the ranks of the poor. The poor can be classified as moderate poor,ultra poor, and vulnerable poor according to per capita calorie intake. Households below the 1800-calorie line are generally defined as ultra poor. It is observed that a larger portion of the ultra poor has not been included in the microfinance programmes. Hulme and Mosley (1996) estimated for Bangladesh that poorest 20% of the population were excluded from most microfinance programmes. Some studies have examined why this has happened. Experience tells us that the problem of ‘self exclusion’ is widely prevalent and that the ritual of membership such as rigid attendance in meeting and obligatory savings enhanced the ‘fears and timidities’ of the extreme poor. The poor themselves do not feel they can productively utilise the money to generate incomes to pay back loans. They therefore self-select themselves out of credit programmes (BRAC:2000). Successful microfinance operations require strict screening to ensure that money borrowed can be repaid. NGO staff and even the group leaders are extremely careful to screen out potential risks. Poor recoveries will reflect on overall group performance and the performance of the NGO staff. So, households having some assets or some steady incomes are more encouraged to join. This is the shared experience of all who are dealing with microfinance operations.