MICRO CREDIT - Organisations get Money from Abroad in the Name of Poverty Alleviation

helpThe Finance and Planning Minister has recently lashed out against a section of micro-credit organisations. He dubbed them 'peddler of poverty'. His arguments, as they appear in newspaper reports, rest on a number of pillars. First, these organisations get money from abroad in the name of poverty alleviation 'but we don't want to be peddler of poverty'

The micro-credit organisations have remained busy in arranging seminars and symposiums rather than doing something realistic for reducing country's poverty

Such organisations sometimes hire people from Harvard or other foreign institutions to deliver lecture on poverty alleviation; implying thereby that efforts at poverty alleviation have to be homegrown rather than transplanted from outside.

The organisations involved in micro-credit charge high interest rates. This means that the poor borrower tend to get trapped in the vicious cycle of poverty.

The arguments articulated by the Finance and Planning Minister may appear, at first sight, to be rather sweeping. Borrowing from external sources by the micro-credit organisations need to be viewed in the context of the dependence on external aid by the government itself.

To pursue this line of reasoning further, the government has been borrowing and continues to borrow funds from the World Bank at 0.75 percent service charge and onlends to Palli Karma Sahayak Foundation (PKSF) at one percent interest rate. PKSF further onlends to non-government organisations involved in micro-credit at rates varying between 3 percent and 4.5 percent. What interest rates do the NGOs charge then from the ultimate borrowers? It is in this area that the scathing remarks from the Finance and Planning Minister appear to have substance and merit serious consideration for corrective actions

Micro-credit and NGOs

Most of the non-government organisations that disburse micro-credit are pressuring the borrowers to pay back their loans, instead of relief distribution to the flood-affected people. If compared with the total number of the NGOs, enlisted with different government bodies, a very small number of them are conducting relief operation in the flood-affected areas.

New Age has learnt that the number of the local and the national level NGOs are continuing to press, either directly or indirectly, the flood-hit micro-credit borrowers to pay back their loans. Rahima Begum, a flood victim of Kadamtala in the city, said she had paid her BRAC loan instalment during the flood as she felt an indirect pressure to repay loan. "If I fail, I will have to lose my eligibility for receiving any loan in future," she said. Flood victims Renu Begum of Mugda and Nazma Begum of Madinabagh Lane said although they tried their best to remain regular in paying instalments of the ASA, they failed for two weeks. "The field officer did not put pressure on me but I will pay two instalments together this week as my failure to repay loans will be considered as non-cooperation," said Renu Begum, who took shelter at Haider Ali High School at East Manda.

Meanwhile, the Bangladesh Sangbad Sangstha, a state-owned news agency, reported that the loan officers of the NGOs, including the Bangladesh Rural Development Board, have been moving door to door of the marooned borrowers by boats to realise the instalments that have put extra burden on the flood victims.

Besides, a number of the NGO field workers, preferring not to be named, said their salaries had been held up for failure to realise the instalments of micro-credit. (New Age, August 15, 2004).

Stated and real interest rates

Some studies have pointed out the difference between stated and real interest rate charged to the clients by some NGOs as follows:

  • The researcher has identified three reasons for the above state of affairs. First, some NGOs calculate interest on the initial balance of principal amount and not on declining balance of principal amount
  • Second, some NGOs borrow from savings of own members and recycle it by lending at higher interest rates while interest to members is paid at bank rate. There is thus a margin which goes to NGOs.
  • Third, at the time of disbursement, some NGOs withhold part of the principal amount. However, interest is charged on the full amount. In this process, the burden of loan on the poor increases as indicated in the above table. The table also shows that some NGOs such as CARITAS follow the standard banking practice of calculating interest on declining balance. The client's savings are completely liquid.

    With regard to the impact of micro-credit on poverty alleviation, there are studies (DFID, UK, 2000) that have led to the findings more or less supportive of what the Finance and Planning Minister has said. Researchers, therefore, argue that reducing interest rates may contribute to the achievement of broader goals of poverty alleviation

    Development of regulatory framework

    The above scenario underscores the need to establish an appropriate regulatory framework that will lay down the standard operating procedures (SOP) for the NGOs involved in micro-credit. Without such a framework, the micro-credit may degenerate into traditional money lending system operated by the Mahajans. Even for the Mahajans there used to be laws that sought to protect poor borrowers from excessive rates of interest.

    The first of these legislations is titled Usurious Loans Act, 1918 followed by Bengal Money Lenders Act, 1933. These two Acts authorised the courts of law to prevent charging of excessive interest. It was laid down that if the interest charge exceeded the rate of 15 percent per annum in case of secured loan, or 25 percent per annum in case of unsecured loan, the court could presume the rates charged were excessive and the transaction was harsh and unconscionable and was substantially unfair.

    The courts had further power to limit interest recoverable in certain cases. It could also prevent the money lenders from recovering by suit interest in kind at rate exceeding 10 percent per annum in respect of any loan made after the announcement of the Bengal Money Lenders Act, 1933.

    The issue of a regulatory framework has been debated in the past few years. A stakeholders' workshop of May 6, 2000 strongly recommended the need for regulating the NGOs in micro-credit industry. The regulatory mechanism as envisaged in the recommendation was to be an independent body with representatives from the Bangladesh Bank, PKSF, the Securities and Exchange Commission and industry experts. On June 18, 2000 the Ministry of Finance issued a notification affirming that the task of formulating regulatory framework and recommendations for institutional arrangement to ensure compliance standards would be completed by June 17, 2003. It is said that the final regulatory and supervisory framework for micro-finance sector and the implementation arrangements should be satisfactory to the World Bank (World Bank Report No. 21400-BD). This condition is because of funding Second Poverty Alleviation Micro Finance Project (Micro Finance II) by the World Bank. It is not, however, known whether the regulatory framework has since been finalised.

    The World Bank view

    In the appraisal report of the project, the World Bank emphasises the need for (a) sustainability and commercialisation of micro-credit organisations and (b) variable lending terms for NGOs. It views two issues to be inter-related. The NGOs involved in micro-credit are categorised into (i) those that lack the institutional capacity needed to deal with a large loan portfolio and (ii) those that have the institutional capacity. The latter category consists of big NGOs like BRAC, Proshika and ASA. It further views reduction in intermediation costs as critical to the sustainability of such NGOs, in particular of the former category.

    On the interest rate issue, it recommends adoption of an interest rate of 4.5 percent for small and medium size NGOs and 7 percent for the big ones. This applies to the lending from PKSF to the NGOs. This prescription on interest rates appear to be valid at first sight.

    In not too distant past, the World Bank was criticised through the publication of a book called 'Lords of Poverty'. Its staff were criticised for recommending measures for poverty reduction in the developing countries which did not deliver the desired outcome.

    The interest rates recommended for different categories of NGOs may lead towards sustainability but what about the poor who would be at the receiving end? The three issues that add up to the burden of micro-credit borrowers stated earlier appear to have been lost sight of.

    Ethics and development

    It is necessary to further examine the prescription given by the 'Lords of Poverty'. How the issue of sustainability of poverty reduction will be achieved remains unclear. In this context, researchers have drawn attention to the second generation problems of micro-credit. It is just not a question of providing micro credit to millions of poor households. It is basically a question of helping them to capture increased livelihood opportunities that go beyond their existing quality of life.

    The project appraisal report indicates that large NGOs involved in micro-credit account for four-fifth of the micro-credit market and therefore it argues for increase in on-lending rates to encourage them (NGOs) to move towards integration with the formal financial market. What has been left unsaid is that increase in on-lending rate may well lead towards an increase in interest rate now being charged from the poor borrowers. Movement towards market may well involve movement away from equity and considerations of equity is part of the ethics of development as recently was articulated by Amartya Sen at the International Congress on "The Ethical Dimensions of Development:

    The New Ethical Challenges of State, Business and Civil Society". In his words

    "The new challenges of the contemporary world not only demand that we re-examine old issue (for example the role of the market) in new light, but also that we address new ethical issues that have been brought to prominence by the interactive world in which we live (including the demands of un-segmented global ethics). Even though these concerns raise difficult ethical as well as economic issues, we cannot really escape these questions in the contemporary world. Let nothing defeat us in this modest recognition."
    AMM Shawkat Ali, Daily Star, January 23, 2004.

    Microcredit, Poverty, and the Merchant of Venice Posted on 18 May 2008

    Without resorting to any research jargon let me start by saying that on a number of occasions I had the opportunity to talk to ‘microcredit’ borrowers. From them, I particularly wanted to know more about microcredit and its effects on their lives. Some of the stories they told, were both enlightening and disturbing. Strangely, these stories reminded me of Shylock, the vicious money lender in Shakespeare’s Merchant of Venice. This post is generally about Microcredit and its uncritical acceptance.

    No discussion on microcredit can proceed without reference to Dr Muhammad Yunus and his Grameen Bank. In my opinion, neither of them ever faced the necessary level of scrutiny as the nature of their activities would warrant. Rigorous scrutiny is essential given that Grameen Bank’s activities - which is largely corporate and commercial in nature - involve:
    (a) operations in the poverty reduction sector which concerns crucial policy choices of public nature; and

    (b) transactions with the borrowers (i.e., largely around and below the poverty line) whose bargaining powers are alarmingly inadequate compared to Grameen’s corporate strength. In the absence of an appropriate regulatory body or a strong consumer group balancing these uneven positions, the issue of appropriate scrutiny becomes even more pertinent.

    Regrettably, just because Dr Yunus happens to be our one and only Nobel laureate - there seemed to exist an unwritten policy in the Bangladesh media to remain uncritical of Yunus and his organisation no matter what.

    This is something that can only be compared to a Tagorian (Rabindrik) ‘pledge of perpetual forgiveness’ in a je tare dekhibare pay osheem khomay kind of way. Hopefully, that time has now passed. In my opinion, with his newly gained social capital (thanks to the Nobel Committee in Sweden), Yunus’s capacity to harm the country and its poor has probably increased manifold. Now-a-days, almost every week there are revealing items in the news on micro-credit which even the Yunus-friendly media cannot ignore any longer. These are the stories of suffering farmers, of the bankrupt, of the people who committed suicide under Grameen Bank’s pressures.

    A number of studies have been conducted to critically examine the impacts of microcredit. Evidences are there for everyone to see. The problem is, in our desperate need for a ‘poster boy’ we have chosen to look away. Well-researched but largely overlooked criticisms exist, such as this one:

    The public transcripts represent microcredit not only as an innovative approach that empowers the poor - and poor women in particular - but also as an alternative to neoliberal policy prescriptions. It is often thought of as a ‘local’, bottom-up approach that results in self-sufficiency, rather than dependency. Thus, microcredit has been, and continues to be, a panacea for poverty reduction. The ‘hidden transcripts’ of microcredit and poverty reduction

    However, against the public transcripts of its ‘virtuous’ outcomes are rich ‘hidden transcripts’ regarding the poverty impact of microcredit. These hidden transcripts comprise the less publicly known facts about the adverse poverty impacts that also result as a consequence of implementation of microcredit programmes. The hidden transcripts substantially challenge the salience of microcredit as an effective approach to poverty reduction globally. For many of its targeted recipients, microcredit is, in practice, reinforcing poverty and survival insecurities rather than ameliorating these conditions or resulting in self-reliance through self-employment as the public transcripts maintain.

    Heloise Weber, ‘Global Governance and Poverty Reduction: The Case of Micro Credit’ in Rorden Wilkinson, Steve Hughes (eds), Global Governance: Critical Perspectives (Routledge, London 2002), pp.133-51 at 135. But as said, in the middle of all these Macbethan “sound and fury” associated with Microcredit etc, sane voices like the one above are failing to make their mark in the mainstream. It is as if we have found a new narcotic-induced dream, no matter how flawed, and we do not want to see it shattered. It seems like - we would rather believe in a sweet lie than face a bitter truth.

    For some years now, Microcredit has been slowly gaining ground in the development debates as a possible poverty reduction tool. And then came this whole ‘hoopla’ with the Nobel Prize. With that a new band of opportunists mushroomed in all corners of the civil society — desperate to get some piece of action, to cash in while there is still time — by teaming up with Yunus (or his affiliates) in various dubious social-business schemes. In the midst of all these uproars, one may even feel that Microcredit and Social-Business have become a new religion with demigods and prophets in every part of the global civil society.

    I do understand the reason behind capitalist West’s huge enthusiasm in Yunus. Because, the conventional banking system was a system which could only exploit the rich. Traditionally, banks were the institutions from which one could only ‘borrow umbrellas on sunny days on condition that they must be returned when it rains.’ So the conventional banks’ exploitative dragnet only caught the rich of the society, never the poor. Yunus, incidentally, showed the capitalist banking system a way - that even the have-nots can be exploited through a banking system. He showed them – money can be made even from the destitute, using their entrepreneurship, exploiting their dreams – while at the same time making sure that their real condition never improves, at least not above the limit Grameen executives set for them. No wonder that the West became too anxious to award him the Nobel prize, perhaps to add an aura of nobility to this new brand of exploitation, deceptive but pretty effective. We know that Grameen’s interest rates are higher than all other commercial banks.

    What a formula ! Make billions (exploiting the poor) and at the same time have plenty of cheer leaders in the global civil society cheering you on as one of the good guys. Wow ! disturbingly diabolical but quite impressive nevertheless!

    It is just my opinion — sometimes I cannot help but think that “Microcredit” and “Social Business” are two of the greatest frauds of our time.

    The Case of Micro Credit, H. Weber

    Last Modified: July 2, 2008

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