Assignment On Contribution of Micro-credit on Overall Economy

Submitted to: Thamina Khanam Lecturer, Department of Management Studies University of Dhaka.

Submitted by: Name Md. Didarul Islam Sobal Faruqe Hossin Md. Ismail Hossain Jahirul Islam Md. Mahmudul Hasan Chowdhury S. M. Rayhan Siddique Roll No. 10 28 47 78 81 93

Department of Management Studies University of Dhaka.

Date of Submission: 27th March, 2011. Introduction:

Microcredit is a small size of loans that is given to the poor fort self-employment. Today Bangladesh is called the land of microcredit revolution. The poverty of the world can be rooted out through effective microcredit programme that was originated in a poor country like Bangladesh. As the microcredit movement matures, we get a clearer idea of both its strengths and limitations. To move forward, we need to be more effective and design flexible financial products and take any other measures needed to spread the poverty alleviation, so that a significant decline in poverty takes place. Taking the Grameen Bank of Bangladesh as a core example, this study specifically explores the significance of changing the focus of the Grameen Bank from a credit centered organization into a client-led, flexible financial service organization. This example investigate the way in which Grameen Bank micro finance programme has ensured the access to the rural poor women to institution source of finance, heretofore excluded from financial markets.

Definition of Microcredit:
Conceptually, microcredit can be described as collateral free small loan offered to the poor to create self-employment in income generating activities based on group lending methodology. Microcredit can be broadly defined as a programme that provides credit for self-employment and other financial and business services including savings and technical assistance to the poor people. Microcredit is something that works for the people and the whole organization is dedicated for their welfare. Prof. Dr. Muhammad Yunus

Features of Microcredit:
In the microcredit system, service providers go the doorsteps of the poor based on the principle that the people should not go the bank rather than bank should go to the people. The other important features o microcredits are: a) Microcredit is given with minimum paperwork. b) Workers have to make regular visits to the borrowers premises to offer advices and supervision. c) Microcredit is collateral free. d) Small size of loans. e) All loans are to be paid back in installment on weekly or bi-weekly basis. f) Microcredit is demand driven. g) 95 percent borrowers are poor women. h) Recovery rate is above 90 percent.

History of Microcredit:
The microcredit is not a new thing in this country. The birth and evolution of microcredit have been enumerated below: Traditional Money Lenders:

At early stage, people would borrow from conventional money lenders. Then the minnows of the Zemindars used to lend money to the subjects only to grasp their lands. Then the kabuliwalas were more interested in getting the capital. The Agriculture Debtors Act (ADA) and the Money Lenders Act (MLA) in 1937 and 1938 respectively imposed restrictions on the activities of rural money lenders. More importantly, Sher-e Bangla A.K. Fazlul Hoq rescued the poor farmers from the clutches of money lenders enacting Debt Settlement Board. Comilla Model: The Comilla Model was developed by the Bangladesh Academy for Rural Development (BARD) in 1960 under the guardianship of principal Akter Hamid Khan. This model was also based on group approach and provided micro credit to the co-operations. It was expanded throughout the country in 1970 as Integrated Rural Development Programme (IRDP). Under IRDP farmers were organized into two tier cooperative groups, credits and other development through these cooperative groups. Grameen Model: Prof. Dr. Mohammad Yunus conducted an experiment in 1976 distributing small loans in Zobra village of Chittagong. It was ecpanded into a project entitled Grameen Bank Prokalpa with the financial aid of Bangladesh Bank. After the success of this project, the Government declared Grameen Bank Ordinance 1983. Dr. Mohammad Yunus transformed the micro credit practice into systematic, institutionalized, rationalized and innovative which is known to the whole world as Grameen Model. Besides these, different approaches of microcredit have been developed by BRAC, ASA, PROSHIKA and other NGOs. Today Bangladesh is called the Laboratory of Microcredit and the land of Microcredit Revoluton.

Microcredit Campaign:
The first Microcredit Summit was held in Washington DC, USA in 1997. The, Microcredit Summit launched a global movement to reach 100 million of the worlds poorest families with credit for self-employment and other financial and business services by the year 2005. In that Summit prof. Yunussaid, We believe that poverty does not belong to a civilized human society. It belongs to museums. The Microcredit campign has successfully co-organised three regional meetings: in October 2000 in Harare of Zimbabwe, in February 2001 in New Delhi of India, in October 2001 in Puebla of Mexico and in February 2004 in Dhaka of Bangladesh.

Advantage of Micro-credit over Traditional Lenders:

There are three main advantages: 1. In contrast to informal commercial lenders, institutions providing microfinance have an incentive to attain wide client outreach. Such institutions price their loan products on commercial principles. They also provide incentives and training to staff in order to expand the institutions microfinance business and its profitability. 2. Banks and other formal sector institutions providing commercial microfinance can benefit from financial intermediation, and from economies of sale.

3. Financial institutions with well trained and motivated staff can attain information

about everything very easily.

4. Lowest interest: Grameen Bank takes interest only 20 percent for general loan, House

loan 8 percent and Educational loan only 5 percent.

Micocredit and Poverty Alleviation:

The Secretary General of the then UN Kofi Anan opines that eradicating poverty is perhaps the greatest global challenge. Out of 6 billion population in the world 2.8 billion live on less than two dollars income a day. Of the 1.2 billion people 50 million live in Asia and 300 million in Africa. Microcredit programmes in these regions show that microcredit is a strong poverty alleviating weapon. The major objective of microcredit is to create income among poor hoseholds and thereby to alleviate poverty. Micrtocredit leads to an improvement in income and the increase in income lifts the poor above the poverty line. More than 64 million of the worlds poorest people have taken part in the past seven years in microfinance projects with the purpose of coming out of the vicious circle of poverty.

Microcredit and Women Empowerment:

Microcredit has played a significant positive role in ecpowering rural women during the past two decades. The direct effect of microcredit programme on womens position in the community has been through the expansion of womens mobility in the public spheres like bank.Thana headuarters, hospitals etc. Besides these, the women credit borrowers can take part in the decision making process which is a strong indicator of empowerment. When women generate and control their own income, women gain a level of power; so they can make decisions independently and command more respect.

Micro Credit and Social Welfare:

Micro credit performs various kinds of social welfares which are ensured by various NGOs working in Bangladesh. Short cut social welfare activities of these organizations are mentioned here: 1. Grameen Bank: A member of booths were set up on the event venue. Where activities of Grameens various social business initiatives such as Grameen Danore, Grameen Veolia, Grameen BASF, Grameen Intel, Grameen UNIQLO, Grameen Yukigune, Grameen GC Eye Care Hospital and Grameen Shakti. 2. BRAC: Besides loan giving BRAC provide the following activities for the social welfare.

Sanitary Facilities. BRAC education. Training and Development. Nutritious food facilities. Nursery project. MELA programe.

3. Other NGOs:

Many other NGO firms are working in Bangladesh which are engaged in various social welfare activities beside the loan giving facilities. Association of Social Advancement (ASA), MLDAS, Proskika etc are among them. Other NGOs The main objectives of Government to patronize the microcredit sector were: (a) Reaching the unbanked poor with financial service; (b) Creating easy cash flow in the rural financial market; (c) Empowering the women.

Failure of the Government:

The failure of government involvement in the microcredit activities was due to: (a) Poor service delivery mechanism; (b) Lack of adequate monitoring; (c) Improper client selection and (d) Low recovery rate.

Government Vs Micro-credit:
Every year Government budgets for poverty alleviation. Since 1972 Government has been trying to alleviate poverty but unfortunately for some reasons it is not fruitful. Whereas, Micro-credit has done a great advancement in poverty alleviation. Micro-credit has been doing the following activities: 1. Entrepreneurship Development in rural area. 2. Providing loan facilities. 3. Education Enhancement. 4. Raising Health Knowledge among illiterate people. 5. Developing small and cottage industries ( which is contributing the national GDP) 6. Creating more Employment. 7. Enriching women empowerment. 8. Coming forward in case of natural disasters. 9. Helping the government in national advancement. 10. Improving infrastructure, communication and technological facilities etc.

So it is clear that government is passive in case of poverty alleviation but Micro-credit is very much active and doing these activities for poverty alleviation. We have to bear in mind that Micro-credit alone can not alleviate poverty but can do a great deal than anything else.

Microfinance in Bangladesh at a glance:

More than a thousand microfinance institutions are working in Bangladesh of which 503 institutions have been licenced by Microcredit Regulatory Authority. Microfinance institutions are offering various savings, credit and insurance services to their clients. Savings products include regular savings, voluntary savings and term savings, while the credit products include rural microcredit, urban microcredit, micro enterprise credit, hard core poor credit, seasonal credit etc. The number of beneficiates of the sector would be around 30 million and amount of savings and credit would be (including Grameen Bank) around US$ 1.67 billion and US$ 2.86 billion respectively. Average savings and credit per client is around US$ 22.46 and US$ 89 respectively. The amount of savings and credit of this sector are increasing by around 30% in every year. However, Grameen Bank and 3 large NGO MFIs hold around 80% of the total market share. The following tables and graphs will provide a vivid picture of microfinance activities of the NGO-MFIs in Bangladesh.

Typical Performance of the Sector

Indicators Number of Clients per Branch Number of Borrowers per Branch Amount of Loan Outstanding per Branch (Million Taka) Amount of Savings per Member (in Taka) Amount of Credit (Outstanding) per Borrower (In Taka) Borrower to Client Ratio Savings to Outstanding Ratio Service Charge (In Flat Method) Interest on Savings Cumulative Recovery Rate
Average/ Typical Range June 2006 Average/ Typical Range June 2007 Average/ Typical Range June 2008

1,883 1,413 6.20 1,207 4,378 0.75 0.37 12.5%-15% 5%-6% Above 90%

1,821 1,487 7.50 1,333 5,048 0.82 0.32 12.0%-15% 5% and Above Above 95%

1,842 1,496 8.40 1,448 5,613 0.81 0.32 12.0%-15% 5% and Above Above 97%

Conclusion:

Poverty alleviation is a gigantic task for any developing countries especially like Bangladesh. Many strategies or policies are needed for poverty alleviation. Micro-credit system is one of the strategies of this purpose. Everybody believes that micro-credit itself is able to alleviate poverty. But it is totally a wrong concept. However, micro-credit has made a great advancement of poverty than other measures. Whereas, Government dont succeed even budgeting for poverty alleviation. So it is clear that Micro-credit is the biggest contributor for poverty alleviation but not all the process.

The End