Questioning Bangladesh's Microcredit

Author(s): Rafiqul Islam Molla, M. Mahmudul Alam and Abu N.M. Wahid
Source: Challenge, Vol. 51, No. 6 (NOVEMBER-DECEMBER 2008), pp. 113-121
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InternationalDevelopment

Questioning
Bangladesh's
Microcredit
RafiqulIslam Molla, M. MahmudulAlam, and Abu N.M.Wahid

is widelyseenas a development
Microlending
thathas worked
fortheworld'spoor.But
program
therehas beeninadequatestudyoftheresults.The
a pilotstudyin Bangladesh,
authorsundertook
A high
aredeeplydisappointing.
and theirresults
not
ofloansaretakenforconsumption,
proportion
to the
and makelittlecontribution
investment,
creationofjobs.
MICROCREDIT(MC)

PROGRAMOF BANGLADESHS a Well-knOWIl SUC-

ofself-employment
andalleviationof
cessstoryforgeneration
ofthisMC modelarebeingimplemented
in
Variants
poverty.
Ithasbecomealmosta universal
countries.
morethansixtydifferent
antidoteforpoverty,
Muhamespeciallysince2006, whenProfessor
ofGrameenBank(GB),andthebankshared
madYunus,thefounder
theNobelPeacePrize.AlthoughGB is a pioneeroftheMC program

RAFIQUL ISLAM MOLLA is a specialistin economics,MultimediaUniversity,

Maleka,Malaysia.
M. MAHMUDUL ALAM is a customer
relationsmanagerat Grameenphone,
Dhaka, Bangladesh.
ABU N.M. WAHID is professor
Nashville,
ofeconomicsand finance,TennesseeState University,
TN.
vol.
51,no.6,November/December
2008,
Challenge,
pp.113-121.
M.E.
All
2008
Inc.
reserved.
Sharpe,
rights
+0.00.
ISSN
0577-5132/
2008
$9.50
D01:
10.2753/0577-5132510608

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2008

113

Molla,Alam,and Wahid

in Bangladesh,1
(NGOs) offer
organizations
manynongovernmental
in Bangladesh
forms
andnames.The
withdifferent
thesameprogram
ofMCs claimthattheoverwhelming
majorityof theborproviders
forproductive
rowersare usingtheloan fundsprofitably
purposes,
and
thus
theloansandinterest
regularly,
steadily
improving
repaying
Thefindings
ofthepresentstudyare
theirsocioeconomicconditions.
somewhatcontrary
to theclaimoftheMC programs.
fornonproducThisstudyfindsthatthebulkoftheMC is borrowed
use thecreditexclutivepurposes.Abouta quarteroftheborrowers
and debtrepayment.
Nearlyhalfofthemuse
sivelyforconsumption
Theother25 percent
isused
forinvestment
thecreditentirely
purposes.
andinvestment
forbothconsumption
purposes.Forall,thereturnon
Abouttwo-thirds
oftheborrowers
investment
isverymeager.
have,on
available
83 percentnetreturnon investment
average,an impressive
anddividendin additionto theprincipal.But
forpayment
ofinterest
is not
in thecaseoftheremaining
third,
averagereturnon investment
enoughevento covertheminimum,or tolerancelevelof,wagesfor
or makinganyprofit.
familylabor,letalonepayinganyinterest
ofeconomicsatChittagong
WhenYunuswasa professor
University
in Bangladeshin theearly1970s,he witnessedthemiserableplight
of theruralpoor of thecountrywithhis own eyes.On his wayto
theuniversity
campus,in the nearbyvillageofJobra,he regularly
watchedthevillagers,especiallythewomen,engagedin economic
and businessactivities.He foundthemhard-working,
yettheirconditionremainedunchangedforyears.He took an interestin their
wererunning
affairsand discoveredthatthosesmallentrepreneurs
at an
theirbusinesseswithfundsborrowedfromlocal moneylenders
sometimesover120 percent.That
highrateofinterestexorbitantly
was one of themainreasonsthattheyweretrappedin thevicious
debt,and low income.He approachedsome local
cycleof poverty,
at the marketrate
banksto getsmallloans fortheseentrepreneurs
Thebanksrefusedto deal withthem,as theirlackofcolofinterest.
lateralmadethemtoo risky.
at an affordTo makeloansavailableto thesemicro-entrepreneurs
YunusfoundedGB in 1976as a
able and reasonablerateof interest,

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QuestioningBangladesh's Microcredit

Bank
pilotprojectwithsomeborrowedcapitalfromtheAgricultural
ofBangladesh.However,
nearlysevenhundredNGOs ofvarioussizes
also provideMC to millionsofborrowers
there.Atpresent,about9
millionhouseholdsin Bangladeshbenefitfrommicrocredit
offered
byGB and otherNGOs.2

A Critique of the MicrocreditProgram,and Our

Pilot Project
Theinterest
ratebeingchargedbyGBandotherNGOs in Bangladesh
is veryhigh-as highas 25-65percent("Specialist"2004). Thus,the
comeunderharshcriticism
ofmicrocredit
fromeconomists,
providers
andpoliticians.In 2005,SaifurRahman,then
activists,
development
financeministerof Bangladesh,declaredthatif theNGOs lending
microcredit
continuedto chargeimpoverished
borrowers
suchabnorrates,thelot of thepoor could notbe improved
mallyhighinterest
even overcenturies.Accordingto Saifur,theMC providersreceive
thebulkoftheirfundsfromthegovernment
and international
agenciesat an interest
rateofonly4-5 percent,so theyshouldnotcharge
morethan8-9 percentinterest
("SaifurBlastsNGOs"
poorborrowers
deliv2005). The NGOs,however,
arguethatthecostofmicrocredit
a highinterestrate
eryand supervisionis veryhigh,and therefore
is requiredto coverthem.Theyalso claimthattheborrowers'
high
rateofgrowthatthisinterest
rateindicatesthatmicrocredit
is highly
andprofitable
fortheborrowers,
productive
makingthemcapableof
theloan and interest.
easilyrepaying
The ConsultativeGroupto Assistthe Poor (CGAP)observesthat
borrowershave only verylow-return
economicopimpoverished
so thereis no reasonto believethattheycan affordto
portunities,
rates(Todaroand Smith2006, 753).Anempiripaythehighinterest
cal study(Wahid1994)suggeststhatthemicrocredit
programsand
institutions
havein factgenerated
a positivebutmarginalchangein
theincomesofbeneficiaries.
Now thatGB and itsfounderhavebeen awardedtheNobel Peace
Prizeforpioneeringmicrocredit
as a tool forfighting
poverty,
many

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115

Molla,Alam,and Wahid

costandborrowers'
benefits
are
seriousempiricalstudiesofdelivery
of the microcredit
requiredto properlyevaluatethe effectiveness
In an attemptto reevaluto alleviatepoverty.
programas a strategy
we haveundertaken
thepresent
ate theclaimof theMC providers,
pilot studyin Dagon BhuyanUpazilla in the districtof Feni.This
pilotstudy,carriedout in 2005-6,selecteda sampleof twenty-five
borrowers
fromthreevillages.The convenienceof the researchers,
and thecoverageof borrowers
of
thecooperationof theborrowers,
sizesandeconomicactivities
different
guidedtheselectionofsample
suffersfromall the
The researchtherefore
villagesand borrowers.
limitations
of a pilotstudy-locationspecific
usual methodological
and too smalla samplesize-makingit unableto accommodatethe
thatprevailin thecountry.
greatvariations
and theeffectiveness
In analyzingthebenefits
to theborrowers
of
theNGOs resortto calculatingtheprofit
themicrocredit
programs,
and ignoringtheirimplicitcosts,
businessenterprises
ofborrowers'
thattheopportunity
costoflaboris zeroor nearzeroin
contending
nottenable.To insiston
is certainly
thesecountries.
Thisargument
itamountsto goingbackto theconceptofdistressed
sellingoflabor
as a
(muchlikeslavery)in theMiddleAges,makingit self-defeating
becauseof thecountry's
foralleviatingpoverty.
Moreover,
strategy
ofruralpoorhouseholds
manymembers
highrateofunemployment,
withoutanyproductive
duringa certain
employment
maybe virtually
partof theyear,thoughnotthewholeyear.Duringthesowingand
in
oflabor,resulting
seasons,therecan evenbe shortages
harvesting
we haveused theconcept
veryhighwages.In thisstudy,therefore,
to determine
ofeconomicprofitin benefitanalysisoftheborrowers
can afford
to payand
ratethattheborrowers
themaximuminterest
on entrepreneurial
to borrowmoneyforcarrying
stillbe motivated
thatis atleastequal to the
(profit
operationsthatearnnormalprofits
of
implicitcostsoflabor).Keepingin mindtheperiodicfluctuation
in ruralareas,
andwagesandothersocialcircumstances
employment
weuseda veryconservative
wagerateperhourofTaka(Tk) 5 formen
theimputedcostofthemicrocredit
andTk3forwomenin calculating
borrowers'
economicoperations.

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QuestioningBangladeshi'sMicrocredit

Use of the Borrowed Funds

features
ofmicrocredit
One ofthekeyandtraditional
is thatthesmall
borrowerstake out loans most oftenforconsumption(including
ofchildrenand socioreligiousrituals)and debtrepayment
marriage
In thepilotprojectsurvey,
thaninvestment.
we found
purposesrather
oftheborrowers
thatonly48 percent
(twelveoutoftwenty-five
sample
credit
fund
for
in
use
the
investment
borrowers)
entirely
productive
economicactivities.
Six ofthemdid notmakeanyinvestment
at all.
Thirteenused
Theyusedtheentireborrowedfundforconsumption.
the borrowedfundsforboth consumptionand investment.
Thus
nineteenof twenty-five
used the borrowedfundsforinvestment
Twelveofthoseinvestedtheirpast
purposeseitherfullyor partially.
savingsin additionto theborrowedcapitalat thebeginningof the
projectperiod.Sixteenaddedmorefundstotheborrowed
capitalfrom
theirownresourceslaterin theprojectperiodof2004-5.Amongthe
nineteenwhomadeinvestments,
theaveragesizeoftheirinvestments
fromborrowed
fundsis Tk4,806.Theaveragesizeoftheirowninvestmentbothinitiallyand laterduringtheprojectperiodwas Tk9,105.
is Tkl3,911.Average
Thus,thetotalaverageinvestment
grossprofitis
costoflaborforthesenineteenisTkl3,798.
Tk27,084.Average
implicit
Thusthenetprofit
availableforthepayment
ofinterest
and dividend
is Tkl3,286.Theaveragepictureappearsto be quiterosy.However,
if
we lookat theindividualsituation,out ofthesenineteenborrowers,
six endedup withnegativenetprofit.
Therefore
thebulkofthemicrocredit
loans are fornonproductive
ofrevenuegeneration
for
purposeswithoutanyscopeorexpectation
loan repayment;
theseare mostlyforsurvivaland meetingcontingencies.Economicdemand(economiccosts) fromtheseborrowers
does notmakeanysense.Ourstudyshowsthattheclaimthatmicrocreditis a "strictly
supervisedcredit"is no longervalid;oftencredit
moneygetsdivertedto nonproductive
purposes,leavingborrowers
in a distressed
situationwhenthetimecomesforrepayment.
In that
theloan is repeatedjustto enabletheborrower
to makethe
situation,
withtacitapprovalofthemicrocredit
weeklyinstallment
payments,
ratesto theoutsideworld.
dispenserto showhighrepayment

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117

Molta,Alam,and Wahid

Social Aspects of the Microcredit Program in

Bangladesh
Sellinglaborin theopen marketis not prestigiousin Bangladesh's
traditional
ruralculture.Therefore,
manypoor people,despitedesperateeconomicconditions,do not wantto workforothers.They
to workon theirownfarmsandbusinessesevenifthese
wouldprefer
venturesare muchlessrewarding.
Sometimestheyearnat or below
a subsistence
levelofincomefromself-employment.
Takingthisand
othersocial dynamicsintoaccount,we use thelowestwagesat Tk5
perhourformenand Tk3 forwomenin imputingthelowestwages
forfamilylaborused in theeconomicenterprise.
Use of Borrowed Funds and Cross Profit

Peroursurveyresults,
thenineteenenterprises'
to generproduction
is barelyenoughtopayfamily
atesurpluses
laborwagesatthenormal
rateperhour(TklOformenand Tk6 forwomen),and theyare left
withnothingat all forpaymentof anyinterest
or forcapital,much
iffamily
less a dividendforthehouseholdentrepreneurs.
However,
laboris paidwagesat onlya toleranceor below-subsistence
levelper
hour(Tk5 and Tk3),a networthor surplusof Tkl3,287is available
and dividends.The surplusamountsto about96
forpayinginterest
on capitalat a rate
percentof capitalinvested.Afterpayinginterest
as highas 25 percent(Tk3,478),an impressiveamountof surplus
TklO,433 is availableevenforpayingdividendsto households.Butif
we dispelthemagicoftheaverage,therealstoriescomeout.
ofninealso suggest
thatabout68 percent(thirteen
Survey
findings
on averageareproductive
teen)ofthosewhomadesomeinvestment
laborwagesat
a surplushighenoughtopayfamily
enoughto generate
thenormalrateandendup witha balance-thatis,networth-amounton capital
ingto 83 percentofthecapitalavailableforpayinginterest
forthehousehold.On theotherhand,32 percent(sixof
anddividends
a sufficient
nineteen)arenotabletogenerate
surplusevento fullypay
orbelow-subsistence
laborwagesata tolerance
level,muchless
family
Forthem,theaverageimputedtolerance
ordividends.
payanyinterest
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QuestioningBangladesh's Microcredit

leveloffamilylaborcostis Tkl7;380;whereasthesurplusavailableis
Tk9,313-justoverhalftheminimumlevelofwagesforfamilylabor.
if any interestis paid forthe creditcapital,it will be
Therefore,
at the expenseof sacrificing
the meagerwagesforfamilylabor.In
fact,thisresultis theharshrealityand thecoreoftheproblemfora
substantial
numberofmicroeconomic
enterprises
operatingin rural
institutional
areas.In theabsenceofa built-in
fordebtrelief/
provision
thislargegroupofmicrocredit
borrowers
is pushedinto
exemption,
anddebt,withno hopeofgainingfreedom
a viciouscycleofpoverty
fromthebondageofdebt.
Opportunities for Those Who Invest Their Entire Borrowed Funds

Borrowers
whoinvesttheirentireborrowed
fundsarerelatively
better
off.Theygenerally
borrowto add to theirown fundsforinvestment,
Theiraveragetotalinvestment
and theyarerelatively
largeinvestors.
(Tkl8,125)is nearlythreetimesthatofthosewhouse onlypartofthe
borrowed
fundsforinvestment,
buttheiraveragenetworth(Tkll,421)
is lessthanthatof thesmallerinvestors.
Thosewho relyheavilyon
are generally
borrowedfundsforinvestment
smallinvestors.
Where
borrowedfundsconstitute52-100percentof totalinvestment,
the
is Tk8,524,andwhereitis 16-22percent,
the
averagetotalinvestment
is Tk24,105.
averagetotalinvestment
itis notclearthatlargeinvestors
havea large
However,
necessarily
net worth,whichtendsto suggestthatmicrocredit
borrowersin
ruralareas are engagedin low-return
economicactivities.Thereis
notmuchscopein thetypesofeconomicopportunities
availableto
whichlendssupportto theCGAP;sobservation
that
higherinvestors,
themajority
ofthemicrocredit
borrowers
faceonlyverylow-return
economicopportunities.
Prospects of Productive Self-Employment from Microcredit

Scholarsandresearchers
andmicroeconomic
enagreethatmicrocredit
cannotbe reliedon as a growth
foreconomicdevelopterprises
strategy
ment.However,
ruraldevelopmentruralsmall-scale
and,forthatmatter,
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779

Molla,Alam,and Wahid

microcredit
facilities
arecomplementary
feaeconomicenterprises-and
formillionsofunskilled
turesofanydevelopment
Jobcreation
strategy.
isthebottomlineforanydevelopment
andsemiskilled
laborers
strategy
in anylabor-abundant
microcredit
Therefore,
developing
country.
any
on
for
has
to
be
assessed
based
its
program
potential job creation(that
andselfmicroeconomic
is,itsroleinpromoting
enterprises
productive
ofjob creation(self-employment)
Thissocialdimension
employment).
feature
ofa microcredit
is themostprominent
program.
in
cases
Thestudyalso foundthat 37 percentof
(sevenofnineteen),
borrowed
fundsconstitute
over50 percentoftheirtotalinvestments.
withan investment
of
Italso revealedthat,on average,
eachborrower
for431 man-daysof family
Tkl3,911is able to createopportunities
labor(minimumtotalwagesforfamilylabordividedbytheaverage
ofmaleandfemalewagesperhourdividedbyeighthoursofworkper
day:[13,798- (5 + 3) /2] - 8). Thismeansthateach Tkl,000 annual
forabout431-r13,911= 31 man-days
createsopportunities
investment
investment
ofaroundTkl2,000is required
offamily
labor.Therefore,
fora personfora year.
forcreatingself-employment
Forgroupsof largeand smallinvestors,
job creationperTkl,000
of familylabor.Thus,there
investedrangesfrom23 to 443man-days
withinlimits,creates
is no clearindicationthathigherinvestment,
fora higherrateof self-employmentagainsuggesting
opportunities
has limitedsocialand economicprospectsfor
thathigherinvestment
in ruralareas.
borrowers
economicactivities
opento themicrocredit
Conclusions
havebecomeintegral
andmicrocredit
partsofdevelopMicrolending
in almostall developingcountries.Accordingto the
mentstrategy
will enhance
of thisstudy,thelikelihoodthatmicrocredit
findings
andrealincomeofrural
andproductive
self-employment
meaningful
oflessthanTkl2,000
householdsis atbestmarginal.
Anyinvestment
full-time
to createone productive
is notsufficient
job fora year.The
studyrevealsthatif familylabor is paid the minimumtolerance
on averagemayhaveenoughsurplus
levelofwages,microenterprises

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120 Challenge/November-December

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QuestioningBangladesh'sMicrocredit

incometo paythecurrenthighratesof interest

chargedby GB and
ratescharged
thattheexorbitantly
NGOs.Thissuggests
highinterest
by the loan providersare, in fact,forcingtheworkersto sell their
laborat or belowa subsistence
wagelevel.
ofborrowers
fora significant
Moreimportant,
(32 perproportion
to pay even a below-subsistence
cent),grossprofitis not sufficient
levelof wagesforfamilylabor,muchless paymentof interestand
in Bangladeshmustfindmore
dividends.The microcredit
providers
waysto addressthisissue.Otherwise,
sociallyequitableandjustifiable
willeventually
fail.Mostofthemillions
theverybasisofmicrocredit
willremaintrappedbypovertyand debt.
ofborrowers
becausetheyclearly
ofthispilotstudyaredisturbing
Thefindings
contradict
the claims of the microcredit
providersin Bangladesh.
it mustbe takenintoaccountthatthesampleof thispilot
However,
projectis too small.We cannotdrawconclusionsaboutmillionsof
basedon a sampleas smallas onlytwenty-five.
borrowers
However,
the usual claimsof NGOs
we believethatit is worthreexamining
morecomprehensive
researchprojectswithlarger
by undertaking
samplesin variouspartsof Bangladesh.

Notes
as a variety
ofsmall-scale
1. OxfamInternational
definesmicrocredit
financial
loans
for
and
investment
services,
emergencies,
day-to-day
living,
including
savings,
in productive
activities.
GB clients.
2. Out ot 9 million,nearly6.7 millionareexclusively
3. [16,959(5 + 3) /2] + 8 - 12,016= 44; [17,825(5 + 3) /2] - 8 + 24,105= 23; and
[7,525(5 + 3) /2] + 8 + 8,524= 28.

For Further Reading

thePoor/'2005.Independent
11.
"Saifur
BlastsNGOsforFleecing
(Dhaka),November
Abu
Barakat's
View
About
Microcredit
That
Are
Run
"SpecialistPrograms
by
NGOs."2004. ThirdSector(Dhaka) (March):24.
9thed. London:
Todaro,MichaelP.,and S.C. Smith.2006. Economic
Development.
PearsonandAddisonWesley.
Alleviationin Bangladesh:
Wahid,AbuN.M. 1994."GrameenBankand Poverty
Evidence
and
Limitations/'
American
and SociolJournal
Theory,
ofEconomics
no.
1.
ogy53,

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121