Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp.

227-241, 2008

A Reflection on Economics of Microcredit Borrowing in Rural

Bangladesh

Dr. Rafiqul Islam Molla

Specialist in Economics
Faculty of Business and Law
Multimeida University
Melaka Campus, Melaka, Malaysia
E-mail: rimolla@gmail.com

Md. Mahmudul Alam

Deputy Manager
Customer Relationship Management (CRM)
Grameenphone Ltd.
Dhaka, Bangladesh
Email: rony000@gmail.com

Citation Reference:

Molla, R. I., and Alam, M.M. 2008. A Reflection on Economics of

Microcredit Borrowing in Rural Bangladesh, Journal of Business
and Behavioral Science, Vol. 18(1), pp.227-241. (ISSN 1946-8113;
Publisher- The American Society of Business and Behavioral
Sciences, USA)

This is a pre-publication copy.

The published article is copyrighted by the publisher of the journal.

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Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

A REFLECTION ON ECONOMICS OF MICROCREDIT

BORROWING IN RURAL BANGLADESH

Rafiqul Islam Molla

Multimedia University, Malacca, Malaysia
Md. Mahmudul Alam
Grameenphone, Dhaka, Bangladesh

ABSTRACT: There is no room for denying the critical importance of

microcredit for economic emancipation of rural poor in Bangladesh or any such
other country. In analyzing the effectiveness of microcredit program the
microcredit providers (NGOs) use accounting profit of the borrowers enterprises
ignoring implicit costs on the plea that the opportunity cost of labor is near zero
in those countries. This plea is certainly not tenable. In this research we use the
principle of economic profit taking into account the implicit cost of family labor.
From the results of this pilot study we get the reflection that a bulk of the
microcredit is borrowed for non productive purposes. As high as 24% of
borrowers used the credit exclusively for consumption and debt repayment
purposes, and therefore demand for payment of interest from them is nonsensical.
Only 48 % of the borrowers used the credits entirely for investment purposes.
However, they are faced with very low-return investment opportunities in rural
areas. About 68% of them on average had an impressive 83% net return on
investment available for payment of interest and dividend. But in case of as high
as 32% of them average return on investment was not enough even to cover the
most minimum or tolerance level of wages for family labors. In their cases any
payment of interest for capital has to be at the expense of the sacrifice of this
subsistence level wages of the family labors. They are trapped in a vicious circle
of loans. In the absence of a built in mechanism for debt relief they have no
scope to be freed from this bondage of debt. An Islamic microcredit model based
on Mudarabah principle (whereby the lender and borrower share the business
surplus/profit on an agreed ratio, but in case of loss the lender alone bears the
loss) may be a better alternative for them. There are indications that it requires an
investment of around Tk 12,000 for creating job opportunity for one rural labor
for the whole year.

Keywords and terms: Grameen Bank, microcredit, microenterprise, imputed

labor cost, implicit cost, Mudarabah, investment opportunity, subsistence level of
wages, distressed selling of labor.

INTRODUCTION

Oxfam International describes microcredit as very small scale financial services,

including savings, loans for emergencies, day-to-day living, and investment in
productive activities. Credit is usually provided to groups of individuals or

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Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

village organizations that use joint-liability (peer pressure) to enforce loan

repayment. Bangladesh is called the land of microcredit with a high growth rate
of microcredit borrowers. In June 2002 borrowers from nearly 700 microcredit
lending NGOs were over 9 million (Credit and Development Forum, 2002)
Grameen Bank is the prime mover and the biggest microcredit lender in
Bangladesh. It is the founder of the Grameen microcredit system that is being
practiced in Bangladesh and some other countries. Grameen Bank is a for-profit
bank specialized in providing collateral-free credit and other financial services to
the poor. It has been able to bring credit to the poor (mostly women) who are
often illiterate and do not know how to invest money for earning income. It
claims that it has created a methodology and an institution for effectively serving
the financial needs of the poor; the poor now has access to credit on reasonable
term enabling them to build economic enterprises based on their existing skills to
earn a better income (Yunus, 2003). However, the Grameen and microcredit
lending NGOs charge exorbitantly high interest rate ranging from 25-65% (Third
Sector, March 2004). As a result this has been highly criticized in the country by
many scholars, development practitioners, and politicians. The then Finance
Minister of Bangladesh lamented that if the microcredit lending NGOs continue
to charge such abnormally high interest from the poor borrowers the lots of the
poor cannot be improved even in centuries. According to him, as they get a large
bulk of the fund from the government at only 4-5 % interest rate, they should not
charge the poor borrowers more than 8-9% interest (The Independent, November
2005). NGOs, however, argue that microcredit delivery and supervision cost is
very high; and as such a high interest rate charge is required to cover the high
costs. They also claim that the high rate of growth of the borrowers at this high
rate of interest indicates that the microcredit is highly productive and profitable
for the borrowers making them capable of easily paying this high interest.

The Consultative Group to Assist the Poor (CGAP) observes that the
poor borrowers face only a very low-return economic opportunities, as a result
there is no reason to believe that they can afford to pay the high interest rates
(Todaro, 2006). An empirical study suggests that the microcredit programs and
institutions have in fact generated a positive but marginal change in the incomes
of beneficiaries. Now that the Grameen Bank and its founder Prof. M. Yunus got
Noble Prize for pioneering microcredit as a tool for fighting poverty, many
serious empirical studies are required in terms of delivery cost and borrowers
benefits for proper evaluation of the claimed effectiveness of microcredit
program as a strategy for poverty alleviation in developing countries. This pilot
study with a sample of 25 selected borrowers from 3 selected villages of sub-
district Dagon Bhuyan, district Feni, Bangladesh is a small attempt in that
direction. Working convenience of the researchers, cooperation of the borrowers,
and coverage of borrowers of different sizes and economic activities guided the
selection of sample villages and borrowers. It therefore suffers from all the usual
methodological limitations of a pilot study - location specific and too small

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Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

sample size making it unable to accommodate more variations that prevail in the
country. It was carried out in 2005/2006.

In analyzing the benefits of the borrowers and effectiveness of the

microcredit programs the NGOs take resort to calculating accounting profit of
borrowers business enterprises and ignore implicit costs under the plea that the
opportunity cost of labor is near zero in these countries. This plea is certainly not
tenable. And if insisted, it will amount to going back to the concept of distressed
selling of labor (much like slavery) in the medieval age making it self defeating
as a strategy for poverty alleviation. Moreover, under the circumstances of high
rate of unemployment in the country many members of the rural poor households
may have to remain virtually without any productive employment during a
certain part of the year, but, of course, not the whole year. During the sowing and
harvesting seasons there can be even shortages of labor and very high wages. In
this study, therefore, we have used the concept of economic profit in benefit
analysis of the borrowers to determine the maximum interest rate that the
borrowers can afford to pay and still remain motivated to borrowing for carrying
on with the economic operations earning normal profits (which is equal to at least
the implicit costs). Keeping in mind the periodic fluctuation of employment and
wages and other social circumstances in rural areas, a very low wage rate of Tk 5
for male and Tk 3 for female per hour has been used in calculating the imputed
cost of economic operations of the microcredit borrowers.

BORROWERS USE OF THE MICROCREDIT

One of the key and traditional features of microcredit is that the small borrowers
usually borrow not necessarily for investment purposes but most often for
consumption (including marriage of children and rituals) and debt repayment
purposes. This study confirms this with the findings that only 48% of the
borrowers (12 out of 25 sample borrowers) use the credit fund entirely for
investment purposes in productive economic activities (Table 1). Of the
remaining, 24 % borrow exclusively for consumption and debt repayment
purposes and 28 % borrow for both consumption and investment purposes.
Therefore bulks of the microcredit borrowings are for non productive purposes
without any scope and expectation of revenue generation for repayment; these
are mostly for survival and meeting contingencies. Economic demand (economic
costs) from these borrowers are only nonsensical. It shows that the claim that
microcredit is a 'strictly supervised credit', is no longer valid; often credit money
gets diverted to non-productive purposes leading borrowers in utterly distressed
situation when the time comes for repayment. In that situation, loan is repeated to
keep the weekly installments going with tacit approval of the microcredit
dispenser to keep their repayment rates high to the outside world.

Table 1: Microcredit Borrowers' Economic Activities, Investments, and Net

Worth, 2004-2005

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 Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

Net Worth or Surplus Before Paying Minimum Cost for Family Labor and Interest (Taka)

Imputed Minimum Cost of Family Labor: Male - 5/ ph (40 Per Day), Female - 3/ ph (24
Total Investment Used as Operating Cost, but Without Paying Wages for Family Labor

Net Worth or Surplus Available for Payment of Interest and Dividend (Taka)
Borrowed Fund Used for consumption or Debt Repayment (Taka)

Total Own Fund Investment for Full Year Equivalent (Taka)

Additional Own Fund Invested During the Year (Taka) *
Own Fund Invested at the Beginning of the Year (Taka)

Total Investment for Full Year Equivalent (Taka)

Total Worth or Assets at End of the Year (Taka)

Borrowed Fund Invested (Taka)
Serial No. of Samples

Economic Operations

and Interest (Taka)

Per Day) (Taka)

Agricultu
re & 0 9,500 10,000 1,800 10,900 20,400 21,300 46,050 24,750 26,162 -1,412
1 grocery
Rearing
0 8,550 6,710 0 6,710 15,260 15,260 20,750 5,490 9,072 -3,582
3 of cows
Grameen
0 4,750 5,250 9,600 10,050 14,800 19,600 43,850 10,700 29,512 -18,812
5 Phone
Agric &
cow 0 3,800 12,000 6,320 15,160 18,960 22,120 21,800 -320 8,812 -9,132
6 rearing
Ricshaw
0 4,750 1,250 2,600 2,550 7,300 8,600 33,200 24,600 10,712 13,888
7 pulling
Rearing
0 4,750 22,000 4,010 24,005 28,755 30,760 41,000 10,240 10,162 78
8 of bulls
Grocery
1 & tea 0 4,750 15,000 3,600 16,800 21,550 23,350 38,950 15,600 29,512 -13,912
1 stall
1 Grocery
0 4,750 10,000 2,640 11,320 16,070 17,390 46,250 28,860 22,212 6,648
3 shop
1 Nursery
0 4,750 5,000 36,917 23,459 28,209 46,667 130,000 83,333 18,562 64,771
4 of trees
1 Pharmac
0 6,650 2,000 7,200 5,600 12,250 15,850 62,400 46,550 16,737 29,813
5 y
1 Fruit
0 3,800 15,000 8,500 19,250 23,050 27,300 105,050 77,750 22,212 55,538
7 trading
1 Cloth
0 5,700 4,000 2,400 5,200 10,900 12,100 34,700 22,600 9,437 13,163
8 trading
Sub 66,500 151,004 217,504 213,104 137,049

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 Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

Total:
Average: 5,542 12,584 18,125 17,759 11,421
Agricultu
430 6,220 0 0 0 6,220 6,220 9,000 2,780 1,512 1,268
2 re
Agricultu
3,860 1,840 0 0 0 1,840 1,840 1,500 -340 1,207 -1,547
4 re
Vegetabl
1,750 3,000 0 9,620 4,810 7,810 12,620 39,000 26,380 13,087 13,293
9 e trading
1 Betel leaf
2,250 2,500 0 10,980 5,490 7,990 13,480 51,200 37,720 9,437 28,283
0 trading
Betel leaf
1 & nut 1,250 3,500 0 10,660 5,330 8,830 14,160 65,100 50,940 9,672 41,268
2 trading
1 Vegetabl
2,000 2,750 0 10,920 5,460 8,210 13,670 28,050 14,380 8,632 5,748
6 e trading
1 Coconut
2,600 5,000 0 1,800 900 5,900 6,800 39,400 32,600 5,512 27,088
9 trading
Sub
14,140 24,810 21,990 46,800 49,059 115,401
Total:
Average: 3,544 3,141 6,686 7,008 16,486
2
3,800
0
2
4,750
1
2
4,750
2
2
5,700
3
2
7,600
4
2
7,600
5
Total: 34,200 91,310 172,994 264,304 329,087 514,610 262,163 252,450
Average
4,806 9,105 13,911 27,085 13,798 13,287
of 19:

Structure of borrowers investment: In rare cases borrowers depend entirely on

the borrowed fund for investment in productive economic activities. Usually they
borrow only to supplement their own fund for investment. On an average
borrowed fund constitute only 35 % (Tk 4,806) and own fund constitute 65% (Tk
9,105) of the total investment (equivalent) of each borrower during the year
(Table 1). Those who depend mostly on borrowed funds are the small investors
each with a total investment of Tk 6,686 of which borrowed fund constitute 53%.

SOCIO-ECONOMIC DIMENSIONS OF MICROCREDIT

BORROWERS INVESTMENT

In the traditional nature of rural society selling labor in the market is not a
socially appreciable thing. As a result many insolvent and needy members of the
society prefer, instead, working at their own enterprises even if these are least
rewarding or at times earning is even below subsistence level. Taking this and
other social dynamics into consideration we use the least wages @ Tk 5 per hour
for man and Tk 3 for woman in imputing the least wages for family labor used in
the economic enterprise.

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Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

Productivity of micro economic enterprises in economic term of net worth:

Analysis in Table 1 shows that on an average the 19 enterprises are productive to
generate surpluses barely enough to pay family labor wages at normal rate (Tk 10
per hour for male and Tk 6 for female) and left with nothing at all for payment of
any interest for capital, not to speak of dividend for the household entrepreneurs.
However, if family labor is paid wages only at a tolerance or below subsistence
level (Tk 5 per hour for male and Tk 3 for female) a net worth or surplus of Tk
13,287 is available for paying interest and dividend. The surplus amounts to
about 96% of capital invested. After paying interest for capital @ as high as 25 %
(Tk. 3,478), an impressive amount of surplus Tk 10,433 is available even for
paying dividend to households. But if we dispel the magic of average the real
stories come out.

Table 1a: Microcredit Borrowers' Economic Activities, Investments, and Net Worth,
2004-2005
Total Investment for Full Year Equivalent (Taka)

Imputed Minimum Cost of Family Labor: Male -

Total Worth or Assets at End of the Year (Taka)

5/ ph (40 Per Day), Female - 3/ ph (24 Per Day)

Net Worth or Surplus Available for Payment of

Net Worth or Surplus Before Paying Minimum
Total Investment Used as Operating Cost, but
Without Paying Wages for Family Labor and

Cost for Family Labor and Interest (Taka)

Interest and Dividend (Taka)

Serial No. of Samples

Economic Operations

Interest (Taka)

(Taka)

Ricshaw
7,300 8,600 33,200 24,600 10,712 13,888
7 pulling
Rearing of
28,755 30,760 41,000 10,240 10,162 78
8 bulls
Grocery
16,070 17,390 46,250 28,860 22,212 6,648
13 shop
Nursery of
28,209 46,667 130,000 83,333 18,562 64,771
14 trees
15 Pharmacy 12,250 15,850 62,400 46,550 16,737 29,813

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Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

Fruit
23,050 27,300 105,050 77,750 22,212 55,538
17 trading
Cloth
10,900 12,100 34,700 22,600 9,437 13,163
18 trading
2 Agriculture 6,220 6,220 9,000 2,780 1,512 1,268
Vegetable
7,810 12,620 39,000 26,380 13,087 13,293
9 trading
Betel leaf
7,990 13,480 51,200 37,720 9,437 28,283
10 trading
Betel leaf
& nut 8,830 14,160 65,100 50,940 9,672 41,268
12 trading
Vegetable
8,210 13,670 28,050 14,380 8,632 5,748
16 trading
Coconut
5,900 6,800 39,400 32,600 5,512 27,088
19 trading
Sub Total: 1,71,494 2,25,617 4,58,733 1,57,886 3,00,847
Average: 13,192 17,355 35,287 12,145 23,142
Agriculture
20,400 21,300 46,050 24,750 26,162 -1,412
1 & grocery
Rearing of
15,260 15,260 20,750 5,490 9,072 -3,582
3 cows
Grameen
14,800 19,600 43,850 10,700 29,512 -18,812
5 Phone
Agric &
cow 18,960 22,120 21,800 -320 8,812 -9,132
6 rearing
Grocery &
21,550 23,350 38,950 15,600 29,512 -13,912
11 tea stall
4 Agriculture 1,840 1,840 1,500 -340 1,207 -1,547
Sub Total: 92,810 1,03,470 55,880 1,04,277 -48,397
Average: 15,468 17,245 9,313 17,380 -8,066
Source: Table 1

Table 1a shows that about 68% (13 out of 19) of them on average are
productive and able to generate surplus high enough even to pay family labor
wages at normal rate and leave with a balance i.e. net worth amounting to 83% of
the capital available for paying interest for capital and dividend for the
household. On the other hand 32 % (6 out of 19) of them are not able to
generate surplus sufficient enough even to fully pay family labor wages at a
tolerance or below subsistence level, talk less of paying any interest or dividend.
For them the average imputed tolerance level of family labor cost is Tk. 17,380
where as the surplus available is Tk 9,313 i.e. only just over half the most

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Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

minimum level of wages for family labor (Table 1a). Therefore on top of it, if
any interest is paid for the credit / capital it will be at the expense of sacrifice of
this meager wages of the family labor. In fact this is the harsh reality and the core
of the problems for a substantial number of micro economic enterprises operating
in rural areas. In the absence of a built-in institutional provision for debt
relief/exemption this large group of microcredit borrowers is pushed to a vicious
circle of debt with no scope for gaining freedom from the bondage of debt.

Scope for higher investment in economic opportunities available for the

borrowers: Borrowers who used their entire borrowed fund for investment are
relatively better-off households. They generally borrow to add to their own
fund for investment. They are relatively larger investors. Their average total
investment (Tk 18,125) is nearly 3 times larger than that of those who use only
part of the borrowed fund for investment (Table 2). But their average net worth
(Tk 11,421) is less than that of the smaller investors. Borrowers who rely heavily
on borrowed fund for investment are generally small investors. This is revealed
from analyses in Table 3. Where borrowed fund constituted 52-100 % of total
investment the average total investment is Tk. 8,524, and where it is 16-22 % the
average total investment is Tk. 24,105. However, it is not clear that large
investors have necessarily large net worth. This tends to suggest that microcredit
borrowers in rural areas are engaged in low-return economic activities; higher
investment does not have much scope in the types of economic opportunities
available to them. It, therefore, lends support to the observation of the
Consultative Group to Assist the Poor (CGAP) that bulk of the microcredit
borrowers face only a very low-return economic opportunities.

Productivity of microcredit in social term of creating scopes for self-

employment: Scholars and researches are in agreement that microcredit and
micro economic enterprises cannot be taken as a growth strategy for economic
development. However, rural development and for that matter rural small scale
economic enterprises, and microcredit facilities are complementary features of
any development strategy. Job creation for teeming millions of unskilled and
semiskilled laborers is the bottom line for any development strategy in any labor
abundant developing country. Therefore any microcredit program has to be
assessed based on its productivity in job creation (its role in promoting
productive micro economic enterprises / self-employment). This social
dimension of job creation (self-employment) is the most emphatic feature of
microcredit program. Table 3 shows that in 37 % cases (7 out of 19) borrowed
funds constitute over 50 % of their total investments. From the table it is also
revealed that on average each borrower, with an investment of Tk 13,911, is able
to create opportunities for 431 man-days of family labor ( minimum total wages
for family labor divided by average of male and female wages per hour divided
by 8 hours of work per a day i.e., [13798 (5 + 3) / 2] 8). It means, for each
one thousand taka annual investment there is a creation of opportunities for about

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Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

431 13,911 = 31 man-days of family labor. Therefore, it requires investment of

around Tk 12,000 for creating self-employment for a person for a year.

Table 2: Microcredit borrowers use of borrowed funds and net worth

Uses of Serial Economic Borrowed Total Net Worth

Borrowe No. of Operations Fund Investment or Surplus
d Fund Samples Invested for Full Available
(Taka) Year for
Equivalent Payment
(Taka) of Interest
and
Dividend
(Taka)
Agriculture &
9,500 20,400 -1,412
1 grocery
3 Rearing of cows 8,550 15,260 -3,582
5 Grameen Phone 4,750 14,800 -18,812
Entirely for Investment Purposes

Agric & cow

3,800 18,960 -9,132
6 rearing
7 Ricshaw pulling 4,750 7,300 13,888
8 Rearing of bulls 4,750 28,755 78
Grocery & tea
4,750 21,550 -13,912
11 stall
13 Grocery shop 4,750 16,070 6,648
14 Nursery of trees 4,750 28,209 64,771
15 Medicine store 6,650 12,250 29,813
17 Fruit trading 3,800 23,050 55,538
18 Cloth shop 5,700 10,900 13,163
Total: 217,504 137,049
Average: 18,125 11,421
6,220 6,220
and Partially for Investment

2 Agriculture 1,268
Partially for Consumption

4 Agriculture 1,840 1,840 -1,547

Vegetable
3,000 7,810
9 trading 13,293
Betel leaf
2,500 7,990
10 trading 28,283
Betel leaf & nut
3,500 8,830 41,268
12 trading
16 Vegetable shop 2,750 8,210 5,748
19 Coconut trading 5,000 5,900 27,088
Total 115,401
46,800

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Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

Average 6,686 16,486

20
Consumption 21
and/or Debt
Entirely for

Repayment
22
23
24
25
Source: Reproduced from Table 1.

Table 3: Microcredit borrowers borrowed fund investment as percentage of

total investment, and net worth.

Borrowed Serial Economic Total Total Net Worth

Fund No. of Operations Investment Family or Surplus
Investment Samples (for full Labor Costs Available
as year (@ Tk 5 per for Payment
Percentage equivalent) hour for of Interest
of Total (Taka) mail, Tk 3 and
Investment per hour) Dividend
% (Taka) (Taka)
100 2 Agriculture 6,220 1,512 1,268
100 4 Agriculture 1,840 1,207 (-) 1,547
85 19 Coconut
5,900 5,512 27,088
trading
65 7 Ricshaw
7,300 10,712 13,888
pulling
56 3 Rearing of
15,260 9,072 (-) 3,582
cows
54 15 Medicine
12,250 16,737 29,813
shop
52 18 Cloth
10,900 9,437 13,163
trading
Total: 59,670 52,677 80,091
Average: 8,524 7,525 11,442
47 1 Agric &
20,400 26,162 (-) 1,412
grocery
40 12 Betel leaf &
8,830 9,672 41,268
nut trading
38 9 Vegetable
7,810 13,087 13,293
trading
33 16 Vegetable
8,210 8,632 5,748
trading

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Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

32 5 Grameen
14,800 29,512 (-) 18,812
phone
31 10 Betel leaf
7,990 9,437 28,283
trading
30 13 Grocery
16,070 22,212 6,648
shop
Total: 84,110 118,714 75,016
Average: 12,016 16,959 10,717
22 11 Grocery and
21,550 29,512 (-) 13,912
tea stall
20 6 Agric &
18,960 8,812 (-) 9,132
cow rearing
17 8 Rearing of
28,755 10,162 78
bulls
17 14 Nursery of
28,209 18,562 64,771
trees
16 17 Fruits
23,050 22,212 55,538
trading
Total: 120,524 89,260 77,343
Average: 24,105 17,852 19,469
Grand
2,64,304 2,62,163
Total
Average 13,911 13,798
Source: Reproduced from Table 1.

For groups of large and small investors, job creation per thousand taka invested
ranges from 23 to 44 a man-days of family labor. Therefore there is no clear
indication that higher investment, within limits, creates opportunities for higher
number of self-employments. This again suggests that higher investment has
limited social and economic scopes in economic activities open to the
microcredit borrowers in rural areas.

CONCLUSIONS

Rural development is a complementary feature of any development

strategy of any developing country. Microcredit and micro economic enterprises
are essential features of any integrated rural development program. Findings of
this study lend support to the view that microcredit has limited scope both in
terms of creating productive self-employment and economic returns. It requires
an investment of Tk 12,000 for creating job opportunity for one rural labor for
the whole year. There are indications that if family labor is paid a most nominal

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Journal of Business and Behavioral Sciences (ISSN 1946-8113), Vol. 18(1), pp. 227-241, 2008

or tolerance level of wages @ Tk 5 per hour for male and Tk 3 for female the
micro enterprises on average may have surpluses enough to pay the current high
rate of interests charged by the NGOs. This will however mean that the credit
suppliers gain at the expense of distressed selling of family labor (at less than
subsistence level of wages). Yet the most concerned feature of microcredit
borrowing is that for a substantially large number, as high as over 32%, of the
borrowers the net worth or surplus is not enough even to fully pay the most
nominal or tolerance level (below subsistence level) of wages for family labor,
talk less of payment of interest and dividend. The prevalent microcredit
management in Bangladesh does not have any institutional provision for
equitably and justifiably dealing with such cases. As a result these borrowers are
trapped in a vicious circle of debt. Therefore a built-in provision for debt relief /
exemption is essential in the microcredit management model in Bangladesh to
enable those borrowers gain freedom from bondage of debt. A microcredit model
modified by Islamic Mudarabah principalb - whereby the microcredit lender (the
capital supplier) and the borrower (the household / entrepreneur) share the
business profit / surplus on an agreed ratio, but in case of any loss the lender
alone bears it and the borrower loses only rewards for his labor - is perhaps a
likely more suitable alternative for economic emancipation of the rural poor and
needy families.

Although we may feel inclined to generally agree with the findings but
these are to be taken at best as indicative and tentative bearing in mind that the
study suffers from the usual limitations of scope of a pilot study. A detailed study
will be necessary to confirm the findings and draw more dependable and reliable
conclusions.

REFERENCES

Credit and Development Forum (2002). Microfinance Statistics, Vol.14, June.

Khan, M. F. (1988), Production Organization and Employment Strategy in an

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Notes:
a
[16,959 (5 + 3) / 2] 8 12.016 = 44; 17,825 (5 + 3) / 2] 8 24.105 =
23 ; and 7525 (5 + 3) / 2] 8 8.524 = 28
b
Under the Mudarabah principle a productive activity is organized by combining
ones non-human resources with someone elses human resources. The profits of
such an activity are shared by the rab-ul-mal (who supplies non-human
resources) and the mudarib (who supplies human resources) on a mutually
agreed ratio. The financial losses of such an activity, however, are born entirely
by the rab-ul-mal. Shariah does not allow mudarib to bear any part of financial
loss unless he deliberately and willfully causes or contributes to such a loss. He
is also not allowed to claim any wages; share in the profit is the only reward for
his efforts. Similarly shariah does not allow financial resources (capital) to
claim any fixed reward determined in advance in respect of outcome of the
activity (Khan, 1988).

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