Thoughts on Economics 93
Thoughts on Economics
Vol. 19, No. 04
Impact of Micro-Investment Program under Rural Development Scheme of Islami Bank
Bangladesh Limited for Poverty Alleviation
in Mymensingh District
Tasnimun Jinan[(]
Abstract: The main purpose of this paper is to assess the impact of micro credit program under Rural Development Scheme (RDS) of Islamic Bank Bangladesh Limited (IBBL) on the basis of using data collected from 25 respondents of each of group of investors,( i.e. agriculture group and business group) of the five selected villages in Sadar Upazila of Mymensingh district. The findings of the present study is that recovery rate of the current credit was 100 percent. But the clients suggest that the monitoring mechanism should be improved so that clients do not utilize their invested money to any unproductive activities.
Introduction
In recent years, micro credit, in its wider dimension known as microfinance, has become a much favored intervention for poverty alleviation in the least developed countries and the developing countries as well. There is scarcely a poor country and development oriented donor agency (multilateral, bilateral and private) that are not involved in promotion (in one form or other) of a microfinance program. Much achievements are claimed about the impact of microfinance programs, and an outside observer can not but wonder at the range of diversity of the benefits claimed. Although Bangladesh has huge potentials for development, it is, for various socio-economic reasons, one of the poorest countries in the world. About half of its population living below the poverty line comprises 80 percent of the rural population. The burden of poverty falls disproportionately on women, who constitute almost half of the total population. Therefore, poverty alleviation and creation of employment opportunities specially for rural women are prioritized in development agenda of the government of Bangladesh. The Government has adopted a broad-based approach to poverty alleviation by putting emphasis on macroeconomic stability, economic liberalization, giving support to the concerned government agencies and non-government organizations (NGOs) and so on. Substantial progress has been made in implementing the micro credit program (MCP). The scope of its efficient expansion is enormous.
This rapid expansion of microfinance program drew attention of all important quarters including policymakers, academicians, researchers and other development practitioners–who have since long trying to grapple with the unfolding stream of issues and trying to shape the course of the social and economic dynamics initiated due to introduction of micro credit. With a view to meeting the fund requirement of the development partners, non-government organizations-micro finance institutions (NGO-MFIs), for re-lending those funds in appropriate use at grass root level, the Palli Karma-Sahayak Foundation came into being in late 1990. Over the years, its share in revolving loan fund of the MFIs increased from 9 percent in 1996 to 24 percent in 2002. In recent years MFIs have moved from the margins of the financial system towards the mainstream. The 1997 Micro credit Summit held in Washington D.C., launched a global movement to reach 100 million of the world's poorest families with credit for self-employment and other financial and business services by the year 2005. Much still to be done, however, to integrate micro financial systems with the orthodox financial institutions, notably commercial banks, to recognize its full potential. Like other financial intermediaries, Islamic banks make profits by putting the savings of the investors at the services of the borrowers. Instead of charging fixed rate to the borrowers, they share in profits and losses of the borrowers’ business transactions, and divide their share of the profit with investors who have deposited funds in the bank. Rate of return, calculated ex post, are variable, depending on the complex of business transactions rather than on a predetermined fixed rate that would be tantamount to interest.
However, for more than half a century, the debate of Muslim jurists concentrated only on the prohibition of interest and the permissibility of profit via trade, which is allowed according to the Quran and the Sunnah. The interest-free banking has lately come to existence.
The Present study has been undertaken to examine the impact of the Rural Development Scheme (RDS) micro finance investment on the life style of the beneficiaries living at Sadar Upazila of Mymensingh District in Bangladesh. Thus, it has become an important research issue to explore the RDS of IBBL and see how it effects on alleviation of poverty in rural area.
Micro-Credit through Islami Bank Bangladesh Limited (IBBL)
Islami Bank Bangladesh Limited (IBBL) started its functioning on 12th August 1983. The IBBL is the first interest free bank in the South Asia. Now it has 200 branches (IBBL, 2008). It ranked the highest in foreign transactions and achieved the highest grade (A+) in CAMEL (C= Capital, A=Asset, M=Management, E= Efficiency and L= Liquidity) rating. The functions of the Islami Bank Bangladesh Limited are as under: (a) to maintain all types of deposit accounts; (b) to make investment; (c ) to conduct foreign exchange business; (d) to extend other banking services and (e) to conduct social welfare activities through Islami Bank Foundation and so on.
Islami Bank Bangladesh Limited (IBBL) envisages an economic system based on equity and justice. Taking into consideration that the majority of the population below poverty line lives in rural Bangladesh, the Bank has devised a “Rural Development Scheme” (RDS) with a view to creating employment opportunity for them and reduce their poverty through income generation activities. The IBBL through its RDS project has been implementing integrated programs for the landless poor, wage labours and marginal farmers aimed at meeting their basic needs and promoting their comprehensive development. In order to consolidate their economic base, invested money should be used in income generating activities. The RDS has been working for the realization of that objectiveto create income generating activities and productive self-employment opportunities through extension of investment for the development of rural area and thereby contribute to the alleviation of rural poverty. Investment is allowed for the purpose of production of crops, off-farm income activities like service, trading, processing and manufacturing, shop keeping, peddling and rural transport like rickshaw, rickshaw-van, cart, irrigation equipment, hand tube-well, housing materials etc., Al together about 343 types of non-agricultural economic activities have so far been covered.
Investment financing under RDS program of IBBL is generally collateral-free. But fish culture in ponds and the purchase of agricultural and irrigation implements require large amount of collateral in the form of an equitable mortgage. In this process investment is provided to individual who formed a group as prescribed by the RDS Program. Each member of the group is required to provide a personal guarantee for his group. Investment financing starts after a three-month observation of the group members in terms of regularity in their attendance in weekly group meetings, centre meetings, and the deposit of their personal savings. Two members from each group selected by the group members are considered for investment financing. The rest of the group members become eligible for financing after the numbers who have already received loan have duly paid their 2 or 3 installments. The loan is approved by the investment committee, headed by the respective branch manager of the Bank. The investment committee meets once in a month regularly to perform its duties.
The following Islamic modes of investment are applied for investment financing of the group members:
a. Bai-Muajjal
Under this mode bank sells goods to the client under deferred payment basis. The payment is made in lump sum or in fixed installments within a predetermined future date.
b. Hire-Purchase Shirkatul Melk (HPSM)
Under this mode bank may supply implements/equipments on rental basis. The ownership of the equipment remains with the Bank but the client is authorized to posses the equipment for certain period.
c. Mudaraba TR
Under this mode bank may supply capital to the mudarib (agent) for conducting business, purchase of inputs, commodities etc. to be repaid on future date.
d. Musharaka
Under this mode the bank extends investment on profit and loss sharing basis. The capital sharing ratio will be maximum 80:20 between Bank and the client. The profit is to be negotiated and will be determined so as to ensure minimum 12% rate of return.
e. Bai-Salam
Under this mode bank executes advance purchase contract with the client and make payment against purchase of the product by the client.
f. Murabaha TR
Under this sale contract bank purchases a certain commodity for the client as requested and specified by him and deliver the same to the client on payment at a pre-determined price.
The broad areas of investments along with their respective limits and duration being extended less the bank under its rural development scheme are mentioned below:
Table 1: Investment Avenues, Higher Limits and Duration
Investment Avenues / Higher Limit / Duration / RemarksCrop production / Tk. 10,000/- / Highest 1 (one) year / Crops of 21 varieties
Fish cultivation in ponds / Tk. 25,000/- / Highest 3 (three) years
Irrigation / Tk. 5,000/- / Highest 1 (one) year / According to need
Agriculture and irrigation implements / Tk. 25,000/- / Highest 3 (three) years / 10% borrowers equity
All non-agricultural sectors / Tk. 10,000/- / Highest 1 (one) year / Payable in weekly installment
Rickshaw, van and rural transports / Tk. 5,000/- / Highest 2 (Two) years / Payable in weekly installment
Hand Tube well / Tk. 3,000/- / Highest 3(Three) years
House-building materials / Tk. 15,000/- / Highest 3(Three) years
Source: IBBL, Annual Report, 2006.
The broad head of non-agricultural activities where bank extends investment under its rural development scheme are tabulated below:
Table 2: Categories and the number of activities financed under RDS
Broad-Head(non-agriculture) / Activities financed under RDS
1.Manufacturing and processing (126) / Bamboo works, cane works, pottery, muri making, snacks making, tailoring, sugarcane crushing, mending works, tin production, rickshaw making and mending, sweeping materials, sweet meat, furniture making, medicine production, umbrella mending, cake preparation, plastic works, net making, thread purchase, drum purchase, house mending, wool works, wheel mending, box mending, nut processing, kantha making, rickshaw-hood making, iron materials making, cap making, thread works, pickle preparation, printing works, tin purchase, radio mending, misri making, sawing, laundry works, procurement of machinery, candle making, sanitary works, welding, embroidery, dry sweats making, etc.
2.Service activities:(33) / Rickshaw, barber shop, hiring of irri pump, sale of news papers, curt, bullock curt, mike hiring, feri boat, livestock treatment, horse curt, buffalo curt, dentist, boating, decorator service, baby taxi, construction works, sewing machine, rice machine, etc.
3.Trading (82) / Different kinds.
Broad-Head
(non-agriculture) / Activities financed under RDS
4.Shops (74) / Different kinds
5. Hacking (5) / Bamboo basket, old cloths, peanuts grocery
6. Nursery:
(10) / Vegetables, water melon cultivation, ginger cultivation, brinjal cultivation, turmeric cultivation, bamboo production, papaya production, chilli production and onion production
7. Livestock raising 13) / Milking cow, bullocks, cow fattening, poultry raising, sheep raising, duck raising, buffalo rearing, bees raising, pigeon raising etc
Source: IBBL, Annual Report, 2006.
Research Design and Methodology
The data for the study were collected both from primary and secondary sources. The primary data have been collected through a carefully designed questionnaire. Direct interviews of the targeted beneficiaries were made by the researcher herself through administering carefully assigned and pre-tested interview schedules. Attempt was also made to collect data through informal discussion with the group members of RDS. The data collected from secondary sources include the publications of the Bangladesh Bureau of Statistics (BBS,2007), Five Year Plan documents of the Bangladesh Planning Commission, papers and leaflets of IBBL, Census Reports, Labor Force Survey, research reports of the Bangladesh Institute of Development Studies (BIDS,1995) and different national/International journals.
Keeping in view the objectives of the study as well as time and fund constraints only five villages namely Sutiakhali, Vabokhali, Boira, Digarkanda and Choto Bazar under Sadar Upazila of Mymensingh district were selected for the study. Subsequently a list of current beneficiaries who have been receiving investment for more than three years under RDS of the IBBL branch office located at Mymensingh town were collected. From the list of beneficiaries selected randomly for the study were based on a minimum 3 years experience of investment in the field of (i) Agriculture and (ii) Business. The total number of beneficiaries selected from each field was 25. Data collection was started in February/2008 and completed within 50 days. To find out the impact of RDS investment for poverty alleviation in rural area following indicators were selected and accordingly data were collected. Data used in the study belonged to the period from 1 July 2006 to 31 June 2007. After the completion of data collection, the data were then edited, coded and finally tabulated according to the objectives set for the study. Mostly tabular analysis was done by using techniques of average, percentages, etc. To attain some of the results, necessary statistical techniques were also applied.
Results and Discussion
1. Average amount of credit
Average amount of investment credit received by the respondents from agricultural field was Tk. 13, 920 and it was Tk.14, 360 for the respondents representing the business field during study period. Table-3 reveals this fact. The table also shows that in the field of agriculture, minimum proportion (4 percent) of households belonged to maximum size of investment. It is also true for business filed as well. Group wise analysis shows that majority of the respondents in both the fields were found to be within least investment size being almost equal proportion (36 percent and 37 percent) of total households respectively. Habib (2003) and Badiuzzaman (2006) reported that highest proportion of the respondents gets the small amount (below 8000) of investment.
Table 3: Distribution of the respondents according to the size of
average amount of investment received in the year 2006
Category of Loan / Agriculture / Business / All typesRespondents / Average
Amount
of Investment Credit of Households / Respondents / Average
Amount
of Investment Credit of Households / Respondents / Average
Amount
of Investment Credit Received
Number of Households / Percentage / Number of Households / Percentage / Number of Households / Percentage
Less than of Tk 15000/- / 18 / 36 / 11111/- / 19 / 38 / 10368/- / 37 / 74 / 10730/-
Tk 15000/- to 20000/- / 5 / 10 / 18800/- / 3 / 6 / 17333/- / 8 / 16 / 18250/-
Above Tk 20000/- / 2 / 4 / 27000/- / 3 / 6 / 36667/- / 5 / 10 / 32800/-
Total / 25 / 50 / 13920/- / 25 / 50 / 14360/- / 50 / 100 / 14020/-
Source: Field survey, 2008