Microcredit – the truth?

It is confusing to hear totally opposed accounts about microcredit – most recently from Devinder Sharma and Prakash Bakshi on one hand and on the other, Mohammed Yunus and Mahabub Hossain.  All have the ring of truth

Interest rates, margins, administrative charges 

Devinder quotes Prakash Bakshi, Executive Director of NABARD, the Government of India’s development bank, which offers credit for the promotion and development of agriculture and integrated rural development: “in a static village economy . . . two-thirds of the villagers directly live on non-cash-crop agriculture, and another 20% are small-time artisans. The cycle of economic activities for these people range from about six months to one year. None of them generate income to meet weekly repayments, and none of these activities generate a rate of return to afford interest rates of 20-40%.” 

That sounds authentic – but microfinance institutions claim to charge 12-15 percent (flat) interest. 

Despite these claims Bangladesh’s Microcredit Regulatory Authority asserts that charges are “at least double or more of this reported figure depending on the number of installments, grace period, other terms and conditions such as compulsory savings, upfront cut, processing fees, etc.” 

NABARD’s website informs readers that charges vary from 5% to 25% . Large farmers, firms, corporate borrowers including state-owned corporations, forest development corporations provide ‘margin money’ up to 25% of the investment cost.  Grameen does not cater for large borrowers, but can be seen as competing with NABARD for business in the lower income bracket. 

Earlier this year, Muhammad Yunus wisely called on the microcredit regulator to set standardised interest rates for microfinance institutions to clear suspicion and establish transparency. “It’s a sensitive point in Bangladesh and everywhere else. I think it will be a great service by the Microcredit Regulatory Authority if they can fix the interest rate,” he said at the closing of an international conference on microcredit organised by MRA at Sonargaon Hotel. 

A positive point is that, as savers in ’richer’ countries now get very low interest from their accounts, the Bank’s poor members in Bangladesh enjoy 12% on theirs. 

Has micro-credit, ‘helped millions of people lift themselves out of poverty’? 

A 2005 paper gave an overview of reports on the impact of microcredit on the poor in Bangladesh. Dr Hossain cited evidence from borrowers’ accounts of their “before-after” situation. He concluded that both per capita income and household income were positively associated with the amount of credit obtained from Grameen Bank. His later survey found that 91% of Grameen Bank members improved their economic conditions after joining the Bank.

Later research concluded that microcredit institutions can have a positive impact on combating poverty. Khandker and Chowdbury examined the impact of Grameen Bank and BRAC. They found that a greater number of loans meant a lower incidence of poverty for all participants. In the Grameen Bank villages, for instance, 76% of participants who have taken no loans or only one loan are below the poverty line, compared with only 57% percent of those who have taken five or more loans.

A later study by Khandker and Chowdbury showed that the poverty rate members fell by around 15% for the moderate poor and by 25% for the ultrapoor when borrowers had a loan for up to three years. Detractors say that the ultrapoor do not get loans from these institutions . . .

So the conclusion is 

“The result is multiple borrowings, multiple defaults and, in the end, agrarian distress, notwithstanding the so-called prompt repayments received by the MFIs” – Prakash Pakshi.

 or 

“91% of Grameen Bank members improved their economic conditions after joining the Bank” – Mahabub Hossain

The economists quoted here all have a vested interest: either they have some connection with the government, independent microcredit institutions or the World Bank. 

The truth could be established by an open-minded investigator holding many unsupervised meetings with micro-credit borrowers whom s/he has selected – and returning to them after a few years.

COMMENT

Devinder Sharma has just sent the good news that the AP govt has cracked down on MFIs. It has decided to reduce the interest rate to 3 per cent as he had suggested in his earlier blog.

 

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