E-Kantipur

Recently a group of journalists from Asia, who were participants in Reuters’ Rural Poverty Reporting training in Dhaka, Bangladesh, was taken to rural areas to observe some micro credit projects targeted to lift women and poor people living in poverty.

In Daukandi of Comila district, about 45 km away from Dhaka, we were chatted with people engaged in income generating activities through micro finance. Thanks to Micro Financial Institutions (MFIs), many women have had assistance in lifting themselves out of poverty. Fatima Begum, 44, is one of them. She now owns two beautiful houses, three ponds and one Bigha of land. “Our economic condition was pitiful before starting this business”, Fatima said shyly, “Our condition is much better now because of this business.” Fatima started her fishery business with the loan provided by Community based Flood Plain Fisheries Development Program (FPFDP) in 1993.

She took some plots of land on lease from the farmers who couldn’t produce due to flood and carried out the fishery business instead. As of now, she has taken BDT 50,000 (approx. Rs 55,000) loan from the micro credit group to expand her business.  Fatima’s earning has also helped to lessen the burden for her husband, who was the only one breadwinner in the family before she started business. Her average income from this business stands around BDT 300,000 (approx. Rs 330,000) in a year, is expecting to earn around Tk 500,000 (approx. Rs 550,000) by selling fishes this year.

The Center for Community Development and Assistant (CCDA) is conducting this programme in 1,343 villages of five districts. According to M A Samad, the Executive Director of CCDA, poor people have been provided microcredit under six categories: Rural Microcredit, Microenterprises Loan, Seasonal Loan, Ultra Poor Loan, Microfinance and; Technical Support and Agriculture Sector Microcredit. The figure of members’ savings and loan disbursement are BDT 183 million (approx. Rs 200 million) and BDT 5,648 million (approx. Rs 6,200 million) respectively where as the loan recovery rate stands at 99.6 percent according to CCDA. It represents one of the MFIs models in Bangladesh. The interest rate for borrowers has been fixed to 23.5 percent per annum. 

These particular Grameen Bikas (rural development) models are successful in Nepal too. At a time when commercial banks and finance companies are still urban-centric, micro credit institutions have played a key role in poverty reduction in rural areas. The prominent models of microfinance in Nepal include Cooperatives, Small Farmers Cooperatives Limited, Grameen Bank, and Community Based Organisations, or Self-Help Groups model. In addition, Production Credit for Rural Women and Village Banks are also considered separate programmes/models of microfinance in Nepal. Programmes like Decentralized Local Governance Support Program, Poverty Alleviation Fund and some other rural development programmes have also included microfinance as a component following the SHG model. There are some 21 Micro Finance Banks, 15 Saving and Credit Cooperatives Ltd (banking activities) and 45 NGOs (financial intermediaries) in operation as of Mid January 2011, to serve the poor through microfinance. The top 20 MFIs in Nepal actually have the majority of the market share covering more than 90 percent of total borrowers.

Like other parts in the World, the interest rates charged by the MFIs are subject of great debate in South Asia too. The interest rates on the microfinance loans and deposits are expected to be higher than the rates charged by the commercial banks. Officials of MFIs defend it saying that the loan sizes are small and average operating costs for disbursement and recovery loans of such small sizes usually entails higher costs. Moreover, the interest charged by the MFIs allows them to cover cost and build equity due to efficiency gained over time and economies scale.

According to Micro Finance in SAARC Countries, an overview report, 2010 by Institute of Microfinance, Bangladesh has engaged in a debate whether such high interest rates should be controlled by a central authority or not. Government has tentatively fixed a flat rate of 15 percent and effective interest rate of 30 percent as ceilings. However, there is a general perception that MFIs charge “excessive” interest on loans. But Muhammad Yunus, the economist who pioneered the practice in Bangladesh, suggests that interest rates should be 10 to 15 percent above the cost of raising the money, with anything beyond that being a “red zone” of loan sharking. Yet by that measure, 75 percent of microfinance institutions would fall in Yunus’ ‘’red zone” (Micro Finance Information Exchange.) Grameen Bank, which was established by Yunus has been charging at 10 percent, the lowest in the industry.

In general, the MFIs in Nepal are free to charge any rate of interest on loans to their clients. Interest rate is deregulated by the Nepal Rashtra Bank (NRB). Some Financial Intermediary NGOs (FI-NGOs) are charging as low as 18 percent per annum, while others are charging interest between 20 to 25 percent per annum. The rate of interest charged by the Nepali MFIs is lower compared to the rates charged by the MFIs in India, Bangladesh, the Philippines and Indonesia. However, policymakers concern over high interest rates mean microcredit efforts are not reaching as many people as they could.  Lower microcredit interest rates will help increase the depth and breadth of availability of affordable finance for poor households.

Then again, the question of sustainability remains. MFIs needs to endeavour at providing universal financial services, flexibility in loan repayment, and better management of cash-flow problems and risks. Healthy competition is necessary for smooth and sound development of micro finance services. It is also felt that because of lack of supportive environment and less coordination between government agencies and micro finance banks/institutions, number of instances where duplications in the working area and of clients have been noticed.

Though microfinance movement in South Asia has succeeded to bring changes in poor’s life, many unprivileged and poor people are still excluded from the coverage. Recent research shows that MFIs have taken rather small proportions (15 percent) of the microfinance businesses of households and the shares of high cost informal sectors are still substantial. The proportion of the poor households in SAARC region covered so far ranges from 4 percent (Afghanistan) to 45 percent (Bangladesh). Other countries fall in between 10 percent (Pakistan) to 15 percent (India and Nepal). There is thus a substantial shortfall in the availability of microcredit in the region when compared to demands.

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