CHITTAGONG INDEPENDENT UNIVERSITY

TERM PAPER ON
Impact of Micro-credit on Rural Livelihood in Bangladesh

SUBMITTED TO:

Dr. Syed Manzur Quader

CIU Business School

SUBMITTED BY:
Md. Minhaz Uddin

ID: 19151003

Course Title: Macroeconomics

Code: MBA 530

DATE OF SUBMISSION:

25 November, 2020

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 Impact of Micro-credit on

Rural Livelihood in Bangladesh

2
Contents
Chapter 1....................................................................................................................................3

Introduction................................................................................................................................3

Chapter 2....................................................................................................................................6

Users and Suppliers of Microcredit............................................................................................6

Chapter 3..................................................................................................................................12

Impact of Microcredit in Bangladesh.......................................................................................12

Chapter 4..................................................................................................................................18

Challenges of Microcredit Programs........................................................................................18

Chapter 5..................................................................................................................................20

Recommendation and Conclusion............................................................................................20

References................................................................................................................................23

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 Chapter 1

Introduction

4
What is Microcredit

Microcredit is a form of banking service that is offered to jobless or individuals with low-
earnings or groups who would otherwise possess no other ways of acquiring financial
services. The primary aim of microcredit is to provide individuals with low earning a chance
to become self- sufficient by offering a way of taking loans[ CITATION Joa13 \l 1033 ].

Modern Microcredit

Grameen Bank, founded by Nobel laureate Muhammad Yunus is usualy regarded as the first
modern microcredit organization. The beginnings of microcredit in its recent practical
manifestation can be tied to several institutions established in Bangladesh, especially the
Grameen Bank. The Grameen Bank was establed in 1983. Yunus started the venture in a little
town called Jobra, using his own money to distribute small loans at low- interest rates to the
rural poor. Other organizations such as BRAC in 1972 and ASA in 1978 followed the
example of Grameen Bank. Microcredit spread to Latin America with the organization of
PRODEM in Bolivia in 1986[ CITATION Phi16 \l 1033 ]; a bank that afterwards converted
into the for-profit BancoSol. Microcredit quickly established itself as a common instrument
for economic development, with hundreds of organizations appearing throughout the third
world. Though the Grameen Bank was established originally as a non-profit institution reliant
upon government funding, soon it became a corporate entity and was renamed Grameen II in
2002. Muhammad Yunus was rewarded the Nobel Peace Prize in 2006 for his contribution in
supplying microcredit services to the rural poor people in Bangladesh.

Economic principles of microcredit

Microcredit is ideally founded on a distinctive array of principles that are differentiated from
trends in the broader credit market. Microcredit establishments were originally built as
substitutes to the "loan-sharks" notorious for taking advantage of clients. Indeed, many micro
lenders started as non-profit institutions and functioned with government subsidies or private
supports. However by the 1980s, the "financial systems methodology," influenced by neo-
liberalism and proliferated by the Harvard Institute for International Development, became
the leading ideology amongst microcredit institutes[ CITATION Ant13 \l 1033 ]. Ironically, a

5
lot of microcredit institutes now function as sovereign banks. This has led to their charging
higher interest rates on loans and setting more importance on savings plans.

Group Lending:

Though lending to groups has long been a significant part of microcredit, Microcredit
originally started with the principle of lending to individuals. Grameen Bank and other early
microcredit organizations originally concentrated on lending to single individuals. Yunus
believed in the idea that each individual had the potential to turn into an entrepreneur. The
utilization of group- lending was induced by economics of scale. The costs related with
observing loans and implementing repayment are considerably lower when loans are
distributed to groups rather than individuals.

Lending To Women:

Lending to women has become an essential principle in microcredit, with NGOs and banks
such as BancoSol, WWB, and Pro Mujer catering to women exclusively. Though Grameen
Bank originally attempted to give loans to both men and women at equivalent rates, women
currently make up ninety- five percent of the bank’s customers[ CITATION Ami19 \l 1033 ].
Exclusive lending to women started in the 1980s when Grameen Bank discovered that
women have greater repayment rates, and are likely to take smaller loans than men.
Subsequently, a lot of microcredit organizations have applied the objective of empowering
women to defend their unbalanced loans to women.

6
 Chapter 2

Users and Suppliers of Microcredit

7
Suppliers of Microcredit

The major microcredit service providers in Bangladesh are generally classified into four main
groups: Commercial banks, NGOs, specialized institutions with microcredit programs and
administrative ministries. Although at present thousand of NGOs around the country
providing micro credits, a lot of them are somewhat small in number of borrowers or loan
portfolio and the bulk of micro credit customers are being served by four massive Microcredit
organizations, namely Grameen Bank, BRAC, ASA and Govt. agencies & BRDB. According
to The World Bank, in 2015, these four combined organizations accounted for 86% of all
practicing borrowers and more than 90% of all outstanding loans in the Bangladesh
Microcredit sector.

Grameen Bank:

The Grameen Bank was formed in 1983 under a special law with the early support from the
Bangladesh Bank. It is the only micro finance institution (MFI) that has been rewarded a
license to function as a special bank for microcredit.

95% of Grameen Bank’s total equity is owned its poor borrowers. The government owns the
remaining 5% equity. According to the MIX Market, a leading microfinance platform, as of
December 2018, Grameen Bank was the second biggest MFI in Bangladesh with an
outstanding loan portfolio of 642 million dollars and 6.2 million practicing borrowers, of
which almost all of them (97%) are women. Grameen Bank receives no donor funds or loans
from domestic or foreign sources, and funds its loan programs only through its clients
deposits, which amount to 42% of its outstanding loans[ CITATION RDi07 \l 1033 ]. It has
2560 branches in almost 85000 villages, operates with a 98% loan recovery rate. In 2006
Grameen Bank and its founder, Dr Mohammed Yunus, were rewarded the Nobel Peace Prize
for their works to yield economic and social development in Bangladesh.

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 Fig1: Dr.Muhammad Yunus
Founder of Grameen Bank
BRAC

BRAC was established as a relief organization in 1972 after the liberation of Bangladesh. It
originally aided refugees returning from India and soon widened its concentration to long
term sustainable poverty decline[ CITATION Alm15 \l 1033 ]. Its holistic method to poverty
mitigation and empowerment of the poor involves an array of core programs in economic
and social development, education, health, legal services and human rights. BRAC had 6.3
million active borrowers and an outstanding loan portfolio of 648 million Dollars in 2008. It
was listed as the largest MFI at the Mix Market both in terms of loan portfolio size and
number of borrowers.

ASA

ASA was established in 1978 and given official registration from the government in 1979.
Its main objective was to aid the poor to organize & empower themselves. During this time,
the members of ASA carried out a string of social initiatives to battle against social
injustices, obtain their lawful access to public and institutional resources, obtain just wages,

9
and penetrate into the domestic power structures. In the mid-80’s, ASA recognized that in
order to be able to help the poor more successfully, it would have to enter into the business
of microcredit. By 1992 it concentrated only on microfinance. ASA is registered as a non-
profit social-welfare institution.

Govt. agencies & BRDB

Bangladesh Rural Development Board (BRDB) is the largest microcredit supplier of the
government. It operates in rural zones and offers microcredit services typically to
cooperatives with financial and technical support of the Government of Bangladesh. Since
they don‘t have to fulfill the total costs of their operations, the interest rates charged by the
BRDB are comparatively lower than other NGO Micro-finance organizations[ CITATION
Sha16 \l 1033 ].

Micro financing Instutions

Othe Gra
rs meen
18% bank
35%
GOB
9%

NGO
-MFI
38%

Figure 2: The micro financing percentage (institution wise)

In the Figure we can see that 35% micro loans are provided by Grameen Bank and rest from
others institutions. Grameen bank has more than 9.2 million members. Here government
oriented bank provides only 9% loans. NGOs supplies almost 38% of microcredit.
Clients of Microcredit

Normal microcredit customers are poor and low-income individuals that do not have access
to other form of financial organizations. Microcredit clients are often self-employed,
household-based entrepreneurs. Their diverse “microenterprises” involve small retail shops,

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street vending and service provision. Micro entrepreneurs typically have small income-
generating activities. Most microcredit customers fall below the poverty line. Women clients
often account for the majority of borrowers.

How do Borrowers Use Microcredit Loans:

In rural areas, lot microcredit borrowers have informal income-generating businesses

typically known as microenterprises. However, microloans may not basically be employed to
establish or support microenterprises. Scattered research states that just half or less of
microcredit are employed for business activities[ CITATION Jen19 \l 1033 ]. The remnants
supports a broad set of family cash needs such as medical costs, education fees, or lifecycle
events such as weddings and funerals.

No Purpose of microcredit taken by poor househelds % of total loan

.
1 Agriculture 15.20
2 Cattle and poultry rearing 20.87
3 Fishing 2.20
4 Nursey .19
5 Tubewell installment .29
6 Irrigation .19
7 Business of raw materials .80
8 House repairing and building 4.29
9 Rickshaw/ van 3.23
10 Street vendor 1.40
11 Processing activities 2.03
12 Land leasing 2.03
13 Marriage .17
14 Food and other consumer goods .08
15 Petty trade 36.69
16 Small and medium business 5.49
17 others 4.85

Total 100

How does microcredit help the poor:

Microcredit can offer a range of facilities that poor families in rural areas highly appreciate
including long-term boosts in income and consumption. A harsh attribute of poverty is that
income is time and again erratic and unreliable. Access to microcredit facilitates the poor to
regular cash flows. Shocks like natural disasters, sickness of a wage earner or theft can be
easily managed through credit. The poor families can employ the credit to build assets such
as buying land, which in turn will give them future security. Women members in microcredit
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programs often become self-empowered. Thus microcredit usually improves the life of
borrowers.

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 Chapter 3

Impact of Microcredit in Bangladesh

13
Economic Impact of Microcredit

Income

A 1998 survey discovered that the average annual income of participants in microcredit
program to be higher than that of the non-participants. Self-businesses had more than 50%
contribution to total income for the participants as compared to 43 percent in the case non-
participants. Contrast to non-participants, the participant households was better able to deal
with natural disasters, sustain their earnings and attain higher buying power and consumption
level.

Wage

Wage income accounted for about 23 percent of total annual income for the poor households.
Microcredit aided participant households to bring in about 8 percent higher earnings than that
of the non-participants[ CITATION Mun20 \l 1033 ].

Employment

It was found that, the participant households were in better position to guarantee more
employment on their own farms. In non-agricultural sector, access to microcredit programs
has facilitated the participant households to earn higher wage and superior self-employment

Social and other development impacts of Microcredit

Sanitation and Drinking water

The BIDS study finds small positive influence of participation on waste disposal and use of
sanitary toilets among the poor households with no clear evidence of program impact on
hand- washing. The use of pure drinking water from hand tube well was found universal.

Literacy and school enrollment of children

The BIDS study also found that program participation increases the chance of both boys and
girls to be enrolled in schools.

Empowering women

Microcredit programs' primary target is women. There are strong evidence that, microcredit
programs play an important part in women's empowerment. One regular finding is the higher
self-esteem and higher self-confidence of women in rural areas. Microcredit is leads to
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women's increased participation in decision making in family planning, send out daughters to
school, children's marriage, purchasing and selling of properties etc

Present Condition of Microcredit:

Overview of the Micro credit in the economy of our country:

The government of Bangladesh has developed a extensive microcredit policy by placing

particular significance for building micro finance as a driving force for sustainable and
balanced industrial growth in the country. According to the national data of 2017-2018, there
are some 8 million of public and private sector organizations of a variety of sizes in
Bangladesh with some 24 million staff employed in them. The urban Bangladesh accounts
for some 60% of units and 76% of employment in the private-sector enterprises. Rural
Bangladesh accounts for the rest. 93% of all micro-credit units in Bangladesh have between
50 and 150 employees. However, micro credit contributes to only 54% of the total
employment of the enterprise sector..

Figure 3: Growth of Microfinance organizations by year

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Brief Macro-economic Review:

Fig 4: GDP Chart of Bangladesh from 2000-2018

Bangladesh is primarily supported by the growth of manufacturing, construction and service

sector and has attained a GDP growth of 8.20% in 2018-19, as against the 7.90% in FY 2017-
18, and 7.30% in 2016-17. Per capita GDP currently exceeded $1200. This growth has been
more stable too; Bangladesh is one of the few nations that experienced positive per capita
growth in each year since the 1990s. This superior performance has been supported by rising
rural agricultural and non-agricultural output and a speedy growth in export of readymade
garments (RMG). Consistent economic growth has facilitated Bangladesh to lessen the
poverty rate by about 1(one) percentage point per year since 1990. Poverty dropped from
50% in 2000 to 21.8% in 2018. The rate of gross investment in GDP in 2017-18 is 31.75%.
The relative contribution of private sector in gross investment, which has been growing
regularly, is 23.40% in 2018-19. Service sector grew at an average rate of 4.9%, which is
lower than that of industries (manufacturing) sector. The export of RMG both knitwear and
woven had an admirable form of growth, which earns over 82% export earnings.

Current Status of micro-credit in Bangladesh:

Many non-government s are engaged in micro-finance business but they do not fall under the
same regulatory authority. Therefore, there is no single source of information about them.
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However, Credit and Development Forum (CDF) an NGO that gather information about MF
NGOs  disclosed that about 90% of the microcredit borrowers in Bangladesh are from rural
zones and only 10% are from urban area. These MF-NGOs disbursed taka 164.26 billion with
outstanding loan amount of taka 25.88 billion. The outstanding amount of micro-finance
under government program is taka 7.46 billion, the outstanding balance of Grameen Bank is
taka 12.73 billion and that of other banks is taka 7.55 billion. Grameen Bank, BRAC, ASA
and Proshika are top four MFIs in terms of loan disbursement, outstanding loan and saving
mobilization (figure). It was found that the top 4 organizations including Grameen Bank
served more than 70% of the market in Bangladesh.

Microfinance Industry Snapshot

Grameen Bank Brac ASA Proshika Other MFIs

Growth of Microcredit:

From 2000 to 2018 there was a substantial growth in Microcredit in Bangladesh both in terms
of number of borrowers and loan disbursements. Until 2000, only about microcredit of taka
231.33 billion had been disbursed to only 13.35 million members. And as of 2018, taka
318.38 billion has been disbursed to 40.8 million people as loan through.

17
 Nu
m
be
ro
fB

100
200
300

0
or
ro
we
rs
(in
Bi
llio
n)

Sa
vin
gs
(In

2000
Cu Bi
llio
m ns
ul
ati )
ve
Lo
2018
an
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ur
sm
en
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Growth of Microcredit

In
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)

18
 Chapter 4

Challenges of Microcredit Programs

19
Problems of microcredit programs:

Microfinance is the provision of financial services (Loans, savings, insurance) to people on a

small scale, such as businesses with low or moderate incomes. Despite good intentions,
microfinance still has several hurdles to cross over:

1. Multiple borrowing or overlapping: Overlapping or multiple borrowing by an individual

borrower or household is considered as an alarming issue or problem, according to the
respondents.

2. Misuse of credit by borrowers: As in most of the cases MFIs do not review what is the
borrower doing with the money borrowed. Misuse or unproductive use of credit is a usual
practice.

3. Lack of innovation: From almost the beginning till today almost every MFIs follow Grameen
Model of micro financing.

4. Severe lack of training and education: The research and training capability of MRA is poor.
MFIs are facing many emerging issues to meet the present and future challenges.

5. Reaching economically backward region: MFIs/ NGOs could not effectively reach the
people of economically backward regions of the country. As a result, MFIs showed poor
performance in economically backward areas.

6. Targeting women as borrower and its Social Dilemma: Most of the microfinance
borrowers are women. In usual practices rural community does not appreciate women to go in
public and participate in financial activities. Inappropriate targeting of poor households is a
major problem to the microfinance providers.

7. Higher interest rate: High cost involved in small loan transactions for Microcredit providers.
Higher interest rate is a financial disadvantage of microfinance. Due to higher interest rate
charges, Grameen Bank has been criticized, as the interest rate is roughly 32.5% (Field survey),
while the interest of conventional banking is 10-15% in Bangladesh.

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 Chapter 5

Recommendation and Conclusion

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Recommendation:

Microfinance institutions have been viewed as an important tool in poverty alleviation. It is an

important sector which would improve the living conditions of the poor and lead to the
development of the country. Some of the policies are hinted below:

1. To enhance the outreach in remote area and provide fast services to existing customers.
2. Loans should be given more amounts in first time and loans installments should be paid
less
amount.
3. Microcredit Institutions should enhanced supply of more funds to serve graduated clients
and unbanked poor people to meet various needs.
4. Rate of interest should be decreased. The interest rate is high as compared to that of
commercial banks. NGOs charge such interest rate to cover operational cost with a view
to achieving sustainability and attracting huge commercial funds into microfinance
industry by improving the technology model used by microfinance institutions.
5. The microfinance institutions should ensure that the loans are given for useful purpose
which would earn a living for the household and not for uneconomic purpose.
6. Multiple borrowing or overlapping should be restricted by the borrowers. Central data
base will remove the overlapping problems.
7. Research and training program should be extended. To meet the present and the future
challenges it is necessary to strengthen research and training capability of NGOs.

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Conclusion

Microcredit has been performing a significant part for a long time to resolve not only the
economic issues of Bangladesh but also the unemployment issues of this nation by providing
work for enormous number of individuals. The report entails studies conducted on programs of
major institutions in the country over more than twenty years using both quantitative as well as
qualitative techniques on influences of microcredit for the poor and extremely poor. In all cases,
the discoveries show that microcredit boost employment and earnings of families that results in
superior quality of life as specified by improved housing, increased food security, sanitation,
education health and development of assets in many distinct structures.

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References
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Asia. 1st ed. Springer.

Anthony J. Bebbington, S.H.D.C.M., 2013. Can NGOs Make a Difference?: The Challenge of
Development Alternatives. 1st ed. Zed Books Ltd.

Barai, M.K., 2020. Bangladesh's Economic and Social Progress: From a Basket Case to a
Development Model. 1st ed. Springer Nature.

Jennifer L. Solotaroff, A.K.T.L.S.A.F.J., 2019. Voices to Choices: Bangladesh's Journey in

Women's Economic Empowerment. 1st ed. World Bank Publications.

Joanna Ledgerwood, J.E.C.N., 2013. The New Microfinance Handbook: A Financial Market
System Perspective. 2nd ed. World Bank Publications.

Mader, P., 2016. The Political Economy of Microfinance: Financializing Poverty. 1st ed.
Springer.

R Dieckmann, B.S.M.E., 2007. Microfinance: An emerging investment opportunity. Deutsche

Bank Research.

Rahman, A., 2019. Women And Microcredit In Rural Bangladesh: An Anthropological Study Of
Grameen Bank Lending. 1st ed. Taylor & Francis.

Shahidur R. Khandker, M.A.B.K.H.A.S., 2016. Beyond Ending Poverty: The Dynamics of

Microfinance in Bangladesh. 1st ed. World Bank Publications.

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