Azimul Hoque, TwoCircles.net,
Since the Bangladeshi economist, Mohammad Yusuf received the Novel peace prize, the micro-credit or broadly the microfinance has been practiced by many development thinkers to suggest it as the most handy tool for eradicating poverty. But it is yet to be evaluating the sustainability of the impact of such types of credit delivery system.
Before going through the details of our discussion, let us once again have an overview of the concept of microfinance in current methodology. Microfinance starts with the assumption that there is need for financial services of very small amounts with an appropriate delivery method that would work efficiently and immediately. The basic delivery method of micro credit is through groups in which there may be a variety of mechanism like Self Help Groups (SHGs), Joint Liability Groups (JLGs), etc. Since it is guided by the philosophy that would be bridge up the gap between the small needs of the poor people with the financial service provider, the loan size is small in amount. It should be mentioned that the credit delivery under the system is only through the groups, not individually at all. And the experience shows that the women are the target group of the system.
Here we should be clear about the two terms ‘microfinance’ and ‘micro credit’. The former is a broader concept than the later while the later is only a component of the former. Microfinance constituted by Savings, Credit, Insurance and Investment. Thus the micro credit is a part of whole concept of microfinance. However the micro credit has been often practiced as microfinance since this is the prime tank of the whole process. Every one emphasizes on how to full fill his/her credit needs first so that he/she can invest it for a productive activity to earn surplus so that he can save that surplus and also to think for insurance to reach his unexpected needs in future.
Thus, we can summarize the concept of MF as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban and urban areas for enabling them to raise their income levels and improving living standards”. Now we are in a position to list bellow some features of MF which is very precise in present scenario. Thus MF:
•Tries to full fill the small needs of the poor
•Very small in size approximately Rs. 3000-5000/- per family/member
•Not given to individual directly, rather through groups
•Target groups are women (more than 90%)
•Very short term loans, weekly collection for repayment, hence the repayment is high at approximately 95%
•Though basic vision is to invest the loan, the loan is mainly utilized for consumption needs (obviously investment will not viable to get the take off speed for growth of a business)
Some hidden agenda:
Now let us come to some of the hidden matters that would be focused in the agenda of microfinance. Is micro-credit the answer to rural poverty in India? The vicious circle of poverty is that low investment>low income>low profit> low savings> low investment> low income ….. The main cause of low investment is the lack of handholding which may be bridged up by the credit facilities. But it can be easily seen that the amount of micro credit is so little that investment is not profitable by that small amount. Unless loans are converted into investments in on-farm productive activities, rural poverty will not go away. Micro-credit improves cash flow but doesn’t create wealth (Dr Sudhirendar Sharma – a Delhi based scholar). Others contend that micro-credit is merely a drop in the bucket, yet it has become a fad at the expense of other development projects.
Moreover the rate of interest is so high compared to the prevailing bank rate of interest. In case of the higher rate of interest one can find it complexity whether the MF is a relief against the exploitation of the poor or not. While interest rates have come down, the banks continue to charge high rates of interest (around 11%) on borrowings by the groups, who in turn levy a higher rate of interest (between 24 to 36%) to make profit. Shockingly, the poor are exploiting by charging high rate of interests. Ironically, the so-called exploitative moneylender has been replaced with an army of moneylenders. With interest rates exceeding the repayment capacity of the poor, a debt-trap has been laid. There are some horror stories of women in Bangladesh being jailed for non-repayment. In the context of improving the living standard Dr. Sudhirender adds his experience as: “I’ve been to some of the first villages covered by the Grameen loans in Bangladesh where there doesn’t seem to be any perceptible change in the lifestyle and livelihoods of the rural poor. The oft-repeated stories that micro-credit helps a rural woman buy a buffalo, a poor woman now owns a telephone kiosk cannot be replicated in meaningful numbers. Conversely, at the cost of the poor a large number of NGOs have benefited; banks have found a convenient route to increase lending; and corporations have got a growing consumer market to target.”
Another thing to be noted that the loans are for a very short period of time and collection is also weekly. If they invest in activities like animal husbandry, farming activities or village industry, definitely a minimum time period should be given to get return and to repay back the loan with interest from their earning. The only viable activity for weekly repayment will be the small business which is only just a process of cash flow and earn extra money. This activity may be suitable for the semi urban areas yet for only a portion of businessmen.
In microfinance, the interest rate is so high of course with high rate of recovery. Hence the MNCs, NGOs are finding the activity very profitable and they have started to rush to the poor countries to do business realizing the high demand for small credit there. Since 2005, being identifying as the international year of microfinance, in India microfinance has started as a movement by NABARD’s SHG Bank Linkage Program. Since then various MFIs, NGOs have been working in this line as intermediary. In south India the movement has got pace with some active NGOs such as BASIX, Pradhan, Sa-Dhan, etc. In north east also RGVN (NE) MFI Ltd., Bandhan, are the leading players in microfinance. However within the areas the organizations, they have been able to widen their networking, but hardly able to change the living standard of their clients. It may be such that with a Rs. 3000/-, a 4/5 member family may be busy in earning and repaying the loans but cannot manage their basic needs so that they can be well above BPL. So the recommendable loan size may be at least Rs. 10000/- so that one can start an activity to feed up his/ her family after repaying the loan with sustainability.
MF can do nothing with the educated unemployed:
Another point of implication is that the main problem here is with the educated unemployment which is not tried to tackle by the present concept of microfinance. For entrepreneurial development, many organizations, institutions have been trying to train up the educated unemployed, but for undertaking such entrepreneurial activities, credit facilities are feeling to be must which is not met by the government or financial institutions or even voluntary organizations. It is better to give the credit facilities to the trained unemployed rather than house wives. Of course this credit to the educated unemployed should be larger in size than the prevailing loan size of the microfinance. The concept of group formation and then facilitate with the loan also may not accessible in terms of educated youths. They want individual loans to start up entrepreneurial activity. But the paradox is seen here that the MFIs can not give larger amount to an individual unless he has a good credit history or a guarantor. Collection of repayment from the educated youth loanee is not easy as in case of a women group.
Simple cash flow or easy credit are the much-talked-about short-term gains, but in the long run, we will witness a cumulative debt trap, and the adverse consequences of moving away from primary production activities to supporting market interests. These long-term negative impacts outweigh the short-term positives.
It is to be admitted that credit facilities are necessary to overcome the poverty and unemployment. But this credit should be delivered in such a way that a productive activity can be undertaken. For quick recovery the readymade activity such as small business is not a type of productive activity. It is just a flow of cash. With this flow without adding to the consumable goods in the society, the income level may increase leading to an inflationary pressure on the economy. So credit should be given for productive activity, not for business only. Poverty is burning question but the unemployment is more burning in present context of India. Credit should be for investment, not to meet the consumption needs of the poor if a reasonable footprint is to be expected.
(Azimul Hoque is a Research Officer, PIU at the Directorate of Town & Country Planning, Assam and can be reached at: [email protected])