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Can microcredit worsen poverty? Cases

of exacerbated poverty in Bangladesh
ATM Jahiruddin , Patricia Short , Wolfram Dressler & M. Adil Khan
Published online: 30 Nov 2011.
To cite this article: ATM Jahiruddin , Patricia Short , Wolfram Dressler & M. Adil Khan (2011) Can
microcredit worsen poverty? Cases of exacerbated poverty in Bangladesh, Development in Practice,
21:8, 1109-1121, DOI: 10.1080/09614524.2011.607155
To link to this article: http://dx.doi.org/10.1080/09614524.2011.607155
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Development in Practice, Volume 21, Number 8, November 2011
Can microcredit worsen poverty?

Cases of exacerbated poverty in
Bangladesh
ATM Jahiruddin, Patricia Short,

Downloaded by [New York University] at 04:28 21 June 2015
Wolfram Dressler, and M. Adil Khan
Worldwide, microcredit has been recognised as a successful innovation in poverty alleviation.

However, some claim that microcredit exacerbates poverty in developing countries. This study
examines cases in Bangladesh where microcredit has actually worsened poverty among bor-
rowers and investigates the underlying reasons for this adverse trend. Our results show that
microcredit can exacerbate poverty in four interrelated circumstances. We argue that house-
holds living in extreme conditions of poverty who possess minimal or no surplus financial
capacity to cope with contingencies are prone to adverse effects of microcredit, and suggest
ways to avoid microcredit borrowers falling victims to such unintended consequences.
Le microcrédit peut-il aggraver la pauvreté ? Quelques cas de pauvreté exacerbée au Bangla-

desh
De par le monde, le microcrédit a été reconnu comme une innovation efficace en vue de réduire
la pauvreté. Cependant, certains affirment que le microcrédit exacerbe la pauvreté dans les
pays en développement. Cette étude traite de cas observés au Bangladesh où le microcrédit
a de fait aggravé la pauvreté parmi les emprunteurs et se penche sur les raisons sous-jacentes
de cette tendance négative. Nos résultats montrent que le microcrédit peut exacerber la pauv-
reté dans quatre situations interconnectées. Nous soutenons que les ménages qui vivent dans
des conditions extrêmes de pauvreté et qui possèdent une capacité financière minime ou inex-
istante pour faire face aux imprévus sont sujets aux effets négatifs du microcrédit et nous sug-
gérons des manières d’éviter que les récipiendaires de microcrédit deviennent les victimes de
conséquences non voulues de ce type.
O microcrédito pode agravar a pobreza? Casos de pobreza exacerbada em Bangladesh

No mundo todo, o microcrédito tem sido reconhecido como uma inovação bem-sucedida na
redução da pobreza. Porém, alguns afirmam que o microcrédito agrava a pobreza em paı́ses
em desenvolvimento. Este estudo examina casos em Bangladesh em que o microcrédito na
verdade tem agravado a pobreza entre tomadores de empréstimo e investiga as razões subja-
centes para esta tendência adversa. Nossos resultados mostram que o microcrédito pode
agravar a pobreza em quatro circunstâncias inter-relacionadas. Argumentamos que as famı́lias
que vivem em condições extremas de pobreza e que possuem mı́nima ou nenhuma capacidade
ISSN 0961-4524 Print/ISSN 1364-9213 Online 081109-13 # 2011 Taylor & Francis 1109
Routledge Publishing http://dx.doi.org/10.1080/09614524.2011.607155
ATM Jahiruddin, Patricia Short, Wolfram Dressler, and M. Adil Khan
financeira excedente para lidar com contingências são suscetı́veis aos efeitos adversos do
microcrédito e sugerimos maneiras de se evitar que os tomadores de microcrédito tornem-se
vı́timas de tais consequências não pretendidas.
¿Pueden los microcréditos incrementar la pobreza? Casos donde aumentó la pobreza en

Bangladesh
Los microcréditos han sido ampliamente reconocidos como una iniciativa eficaz para disminuir
la pobreza. Sin embargo, hay quienes afirman que los microcréditos incrementan la pobreza
que ya existe en los paı́ses en desarrollo. Este ensayo analiza diversos casos en Bangladesh,
donde se ha comprobado que los microcréditos agudizaron la pobreza de los prestatarios, e
investiga las principales causas de esta tendencia negativa. Los autores señalan que los micro-
créditos pueden incrementar la pobreza en cuatro circunstancias que se relacionan entre sı́.
Sostienen también que las familias que viven en condiciones de pobreza extrema y cuentan
con una mı́nima reserva financiera para imprevistos, o con ninguna, tienden a sufrir los
efectos adversos de los microcréditos. El ensayo sugiere maneras de evitar que los prestatarios
se expongan a estas consecuencias no previstas de los microcréditos.
KEY WORDS : Gender and diversity; Labour and livelihoods; South Asia
Introduction
In recent times, microcredit has become an integral part of poverty alleviation in many devel-
oping countries and is gaining momentum in the development discourse. In general, microcredit
is a specialised, group-based financial service (collateral free loans where conventional
collateral is replaced by group guarantee and peer monitoring) that targets the poor and the
marginalised, those who cannot gain access to loans from conventional banking services.
Since its inception about three decades ago in Bangladesh (Gauri and Galef 2005), microcredit
has moved to the centre stage of most poverty alleviation initiatives. The intrinsic appeal of
credit as livelihood leverage, particularly for women, has ensured the rapid spread of microcre-
diting systems through both grassroots and dominant financial institutions in many developing
countries (Hossain 2003; Corsi et al. 2006). The perceived regional success of microcredit has
led to its scaling up to the international level, with the United Nations declaring that it would
use microcredit as a major strategy for achieving its millennium development goal (Elahi and
Danopoulos 2004; Younus 2005).
Despite its successes and global recognition as an effective tool for poverty alleviation
(Hashemi et al. 1996; Younus 2005; Hulme and Moore 2006), many scholars are also sceptical
about microcredit’s universal effectiveness (Wood 1997; Weber 2002). The increased targeting
of women also has been criticised as exploitative (Lantican et al. 1996). and with an increasing
trend of commercialisation of microcredit, and resulting preoccupation with regular debt repay-
ment and profitability of microcredit projects, many also accuse microcredit practitioners of
leaving out the poorest of the poor as non-prospective customers (Greeley 1997; Datta 2004;
Hulme and Mosely 1996; Copestake 2007).
In the context of these debates and recognising that microcredit has experienced both
successes as well as failures, this paper investigates circumstances in which microcredit fails
to achieve its main objective, poverty alleviation. More specifically, we seek to identify the
reasons that some microcredit borrowers remain or become vulnerable to income-related
poverty, even after obtaining microcredit. We focus on the household and local economic
1110 Development in Practice, Volume 21, Number 8, November 2011

circumstances of women microcredit borrowers of Grameen and BRAC in Khulna regional

division of Bangladesh.1 Notwithstanding the potentially broad range of social and political
impacts of microcredit for women borrowers, we focus upon the financial and economic
impacts, and question whether, subsequent to obtaining microcredit, their material circum-
stances improved or deteriorated.
Methods
This paper reports the outcomes of one component of a broader scale, political-economic study
of women in small business enterprises in Bangladesh. The data reported here have been
derived from both structured questionnaires (administered to a sample of 320 female microcre-
dit borrowers of BRAC and Grameen Bank in the rural areas of Khulna division in south-
western Bangladesh) and open-ended, in-depth interviews with 18 women selected for
follow-up because they had reported that their financial circumstances had worsened after bor-
rowing microcredit. Multistage sampling was used to recruit survey respondents. Khulna div-
ision is divided into ten districts (smaller geographic administrative units under divisions)
out of which four (Khulna, Satkhira, Bagerhat and Jessore) were chosen randomly as sites of
data collection. From each of these districts, two Upazilas (sub-districts) were again selected
randomly and then from each Upazila, 40 women microcredit borrowers, 20 from BRAC
and 20 from Grameen Bank, were selected from different villages in the selected Upazilas,
using a snowball or referral sampling technique. The structured survey included 320 respon-
dents across 35 villages of 8 different Upazilas in Khulna Division.
To assess the overall performance of microcredit-funded ventures among the women sur-
veyed, specific measures of business profitability and poverty alleviation were developed
based upon reported income from business activity before and after borrowing funds through
microcredit. Such measures have been used as the basis of the classification of respondents
into the ‘income and poverty’ categories reported in Table 2. Levels of poverty specified in
Table 2 – absolute or extreme, moderate, transitory, and low, and the income cut-offs
applied are derived from schema used by the Bangladesh Bureau of Statistics, Household
Income and Expenditure Survey, 2005 (see Rahman et al. 2008: 29– 41; World Bank et al.
2009). These categories are by no means absolute and must be seen as heuristics that aid the
interpretation of data.
Overall, 75.66% of the women borrowers interviewed reported improvement in their
financial position after obtaining microcredit. However, 24.34% (78 out of 320) reported
no improvement, and a small number, 18 respondents (5.63% of those surveyed) reported
that their economic circumstances had worsened since taking microcredit loans. These 18
women were interviewed in depth in order to investigate their usage of microcredit loans, the
socioeconomic circumstances in which they borrowed, their relations with the microcredit
lenders, and the nature of their family and household dynamics.
Microcredit programmes and Bangladesh

The essence of microcredit is to help people break out of the multiple socio-political and
economic dimensions of poverty by providing them with financial resources (which would
not be generated from their own income and savings) to enable them to invest in income-
generating strategies. Though conceived as a gender independent programme, over the
past two decades, microcredit institutions worldwide have attracted, and indeed have
focused particularly on women. Such a focus is based upon observations that patriarchy
often remains deeply entrenched in poor, rural societies, and hence, among the poor,
Development in Practice, Volume 21, Number 8, November 2011 1111

women are believed to be even more vulnerable, deprived and powerless. Moreover, research
has suggested that loans to women tend to more often benefit the whole family than do
loans to men, that women who have control and responsibility over loans experience a
rise in their socioeconomic status, and that microcredit can offer women financial resources
that generate an enabling environment to unite and support one another in different
livelihood initiatives (Hashemi et al. 1996; Hunt and Kasynathan 2001; Younus 2005;
Hulme and Moore 2006).
Microcredit programmes, therefore, have targeted women with the objective of assisting
them to break out of the multiple socio-political and economic dimensions of poverty by
delivering financial resources to enable them to invest in income-generating activities under
different conditions (collateral-free loans) and social arrangements (collective or group guaran-
tees) to those operating in core, financial markets.
Microcredit in Bangladesh
Microcredit evolved and is practised most intensively in Bangladesh – one of the most densely
populated countries in the world with about 140 million people in 147,570 square kilometres
(Bangladesh Ministry of Establishment 2010). Bangladesh is a classified as a developing
country with a GDP of US$67.78 billion recorded in the 2006– 07 fiscal year and 40% of the
population living below the poverty line (Bangladesh Ministry of Finance 2008). At present,
NGOs and their microcredit programmes are recognised as an integral part of the development
effort of Bangladesh, where the provision of microloans to both rural and urban households is
said to bridge the country’s spatial development divide (see Khandker and Chowdhury 1996).
Microcredit represents a US$2.1 billion industry in the country, with BRAC and Grameen Bank
being the two largest lenders jointly covering 59% of the total microcredit borrowers in the
country (Khandker and Chowdhury 1996; Zaman 2005).
Microcredit in Bangladesh grew extensively and quickly owing to the ease of accessibility to
investible resources and the close match of its features to the situation of women in the rural
areas of Bangladesh, and with roughly 75% of the population residing there (Khandker and
Chowdhury 1996). Adult literacy among women in Bangladesh as a whole is 40.8% compared
with 53.9% among men. At the same time, other factors like religious seclusion, cultural norms,
personal insecurity in contexts of public disorder, and/or their experiences of family and social
violence (Batliwala 1994; Maddox 2005) restrict women’s access to resources and decision
making. Table 1 shows the position of women compared with men in Bangladesh, on
various measures, and indicates marked disadvantage for women in access to key resources,
by comparison with men.
Such disadvantage, along with women’s greater commitment to family responsibilities than
men’s, makes it harder for women to find jobs in the formal sector. The extent and the impacts
Table 1: Percentage distribution of males and females in various sectors in Bangladesh
Sectors of comparison Male Female

Employment in government jobs (2002) 90.3 9.7
Employment in agriculture (2002) 75 25
Employment in non-agriculture jobs in private sectors (2002) 78.43 21.57
Representation in higher education (colleges and universities, 2001) 68.95 31.05
Source: Bangladesh Bureau of Statistics, (2009).

Table 2: Income, poverty, and proportion of microcredit in total business investment (N ¼ 281)
Proportion of microcredit in total business

investment
15% – 26% – 41% – 61% – 75% –
Income/poverty category 15% 25% 40% 60% 75% 90% .90%
No income/loss (n ¼ 12) 0 0 0 1 0 2 9
0.00% 0.00% 0.00% 8.33% 0.00% 16.67% 75.00%
Income below ‘absolute poverty’ line 1 5 11 14 19 27 34
(, taka 2646 per month) (n ¼ 111) 0.90% 4.50% 9.91% 12.61% 17.12% 24.32% 30.63%
Income below ‘moderate poverty’ 0 1 2 4 3 5 3
line (taka 2646 to taka 3050 per 0.00% 5.56% 11.11% 22.22% 16.67% 27.78% 16.67%
month) (n ¼ 18)
Income below ‘transitory poverty’ 0 0 0 2 0 1 1
line (taka 3050 to taka 3365 per 0.00% 0.00% 0.00% 50.00% 0.00% 25.00% 25.00%
month) (n ¼ 4)
Income above poverty line (. taka 1 17 10 32 23 23 30
3365 per month) (n ¼ 136) 0.74% 12.50% 7.35% 23.53% 16.91% 16.91% 22.06%
of structural gender inequalities are greater in rural than in urban areas (see Afrin et al. 2010)
Consequently, women in the rural areas who are looking for surplus earnings have turned
increasingly to microcredit to access (without collateral) funds for income generating activities
that allow greater flexibility for women also to fulfil their household responsibilities (Tzannatos
1999).
Grameen Bank and BRAC initiatives

Both Grameen Bank and BRAC aim to target the poorest of the poor, especially poor women in
rural Bangladesh (Khandker and Chowdhury 1996; Zaman 2005).
Grameen Bank is the largest microcredit organisation in the country with 6.91 million bor-
rowers and US$468.25 million of outstanding loans. BRAC (Bangladesh Rural Advancement
Committee), the first NGO of Bangladesh, began its microcredit operations in the mid-1980s
and these now include a total of 5.31 million borrowers, mostly located in the rural areas of
the country. The total amount of microcredit disbursed by BRAC in 2006 was US$ 626.70
million and total amount of loan outstanding in the same year was US$358.16 million with a
reported repayment rate of 99.52% (BRAC 2006).
Grameen Bank follows a ‘minimalist’ or ‘credit only’ approach to delivering microcredit. By
contrast, BRAC has adopted a ‘credit plus’ model (BRAC 2006), a holistic approach to poverty
alleviation where credit is accompanied by various other supports such as training, raw
materials and consultancy in operations and sales. Regardless of the differences in their
approaches, both the programmes are widely acknowledged to have been successful over the
years in contributing to social change, and empowering women by strengthening their level
of economic engagement.
Yet in the broader context of microfinance programmes, as noted above, microcredit has been
blamed for worsening poverty and also for contributing to women’s disempowerment in the
developing countries. As postulated by Mayoux (1999: 958): ‘for many women, impact on

both economic and social empowerment appears to be marginal, and some women may be
disempowered.’
Whilst acknowledging the evidence of the role of microcredit in alleviating poverty in devel-
oping countries like Bangladesh, this study takes Mayoux’s critique as a point of departure and
focuses on women microcredit borrowers in Khulna division for whom microcredit has exacer-
bated poverty. In documenting these cases, our aim is to better understand the social and econ-
omic circumstances in which microcredit has not necessarily produced the desired or, indeed,
intended outcomes for individuals and households.
Microcredit in Khulna division

Both Grameen Bank and BRAC have been running microcredit programmes in Khulna division
at the Upazila level since the 1980s. Khulna division exemplifies how the rapid growth of
microcredit supports the female rural poor in Bangladesh. Over the past half century, jute
mills, jute trading and traditional agricultural activities, all of which are predominantly under-
taken by male workers, have been the main sources of employment in the region. Though there
has been a major shift in the occupational structure in the rural areas in this region owing to the
downturn in the jute industry and growth of shrimp farming, male dominance in the formal
sector persists, rendering the (informal) work of women near invisible. Moreover, due to
social norms, religious expectations, household responsibilities, low literacy rate and lack of
technical skills, women’s participation in some informal occupations (for example, rickshaw
and rickshaw van operator, construction worker, electrician, electronic technician, plumber,
mechanic) is restricted. Therefore, as elsewhere in Bangladesh, women in the rural areas of
Khulna are generally employed in home-based activities and remain impoverished because
of a lack of resources, education and mobility, and have come, increasingly, to rely upon micro-
credit to engage in income generation.
Results and discussion

The extent of rural women’s reliance upon microcredit is evident in Table 2, which estimates
the proportion of microcredit in the total investment for different categories of borrowers,
classified in terms of their poverty level. Among the survey respondents2, borrowers who
reported no income3 from their business investment and worsening poverty (debt greater
than income) after borrowing microcredit loans also reported being highly dependent on micro-
credit. Nearly all (11 of 12 borrowers for whom detailed income data were available) indicated
that three quarters or more of their business investment had been derived from microcredit. This
pattern of heavy reliance upon microcredit is also evident among borrowers who have gleaned a
very low level of income (below the absolute poverty line) from their businesses as microcredit
loans constituted more than 60% of the total original investment for nearly three quarters of
them. These statistics reveal the ironic fact that among the poor, those who must rely mostly,
if not solely, on microcredit because they lack their own resource base are more vulnerable
to loss or business failure. When they do not succeed in generating income from their business
venture, they not only lose the entire loan amount, but also may have to pay more in interest (for
additional loans) which exacerbates their financial burden and may lead borrowers to complete
destitution.
Relatively less poor borrowers appear more likely to have a resource base that enables them
to rely less on microcredit loans for investment. Moreover, it would appear that relatively
solvent borrowers are likely to be in a position to use modest reserves of capital as a safety
net if they become victims of situations such as discussed above. The ‘poorest of the poor’

clearly are more susceptible to circumstances where microcredit does not lead to income gen-
eration but the reverse.
In the present study, survey data and in-depth interviews with women whose circumstances
had worsened following their borrowing microcredit loans, revealed four key sets of circum-
stances in which poverty was exacerbated among the most vulnerable female borrowers:
1) long periods between start-up and revenue generation from the investment
2) financial setbacks or losses incurred during the initial stages of business
3) use of the loan money to meet unforeseen contingencies/emergencies; and
4) use of loan money for day-to-day consumption or one-off, ‘luxury’ expenditure
Immediate repayment of loan and delayed return from business

Microcredit loans are required to be repaid in small but frequent instalments. BRAC and
Grameen Bank borrowers need to repay their loans in 46 and 48 instalments in a year respect-
ively, which means that the first instalment must be paid a little more than one week after the
loan is executed. This feature has turned out to be a severe problem for those who invest in
businesses where income generation from the investment takes a relatively longer time.
The survey data presented in Table 3 shows the very narrow range of sectors where micro-
credit loans are invested.
Among these sectors only grocery shops (14.1%) and vehicle-renting businesses (12.18%)
generate quick returns to enable the borrowers to repay their initial instalmentinstalments
directly from the business earnings. On the other hand, borrowers who invest in livestock
and fisheries (21.15%) must wait for relatively long periods (at least three months) before
getting any return from their investment. Similarly, investments in some manufacturing
activities require relatively long initial set-up periods. Owing to factors such as limited
skills in business management, low levels of education, limited access and orientation to
groups and institutions beyond the household (including markets), and a preference for
indoor rather than outdoor enterprises among Muslim women, the microcredit investments
of women borrowers in Bangladesh are usually very limited in terms of both the amounts
of money borrowed and the range of investment sectors (Berger 1989; Goetz and Gupta
1996). Respondent A of Benapole Port Upazila in Jessore District gave this account of her
situation:4
Table 3: Major sectors of investment of microcredit funds
Sectors Frequency Percentage

Agriculture and livestock (poultry, cattle, fisheries) farming 85 27.24%
Trading agricultural products (paddy, rice, fish, vegetables, fruits, leather) 66 21.15%
Grocery shops 44 14.10%
Rented vehicle (Rickshaw, cycle van, motor bike) 38 12.18%
Variety store (clothing, cosmetics, music instruments etc) 26 8.33%
Small manufacturing and services (handicraft, confectionaries, restaurants,
tea stalls, hair salon etc.) 25 8.01%
Others 28 8.97%
Source: Field survey 2008 (312 out of 320 respondents answered this question).

I took a loan of 10,000 taka from BRAC for fish farming. I didn’t have any concrete
idea about the potential cost. NGO staff also were not interested in discussion on
this point; they just encouraged me to borrow from them. When digging the pond
was completed, I found that I ran out of money with lots of things yet to be completed.
Fortunately my husband had some savings and also I got some assistance from my
family to complete the rest of the work, and buy fish fries. Ultimately, I was able to
harvest and sell those fish after five months. Had my family not stood by me, I
would not have been able to recover and would really be in deep trouble . . . had to
repay all the loans along with huge interest, even though I hadn’t receive anything
from my investment.
Many borrowers, especially the extreme poor and moderate poor, do not have sufficient
savings to begin loan repayments during the period between taking the loan and generating
income from the business. Such borrowers reported being forced to sell what little property
they had, without any opportunity to buy it back later with income from their businesses.
Other borrowers reported ‘cross borrowing’ from a second or third NGO in this situation and
then spending all (or more than) the income from their business in repaying loan instalments
and interest, leaving them more impoverished than when they took out their initial loan.
Initial loss in business

Microcredit was also found to further aggravate the poverty of borrowers when they suffer
losses in the initial stage of their businesses for various reasons such as lack of efficiency,
low demand for their product, loss of assets, lack of management and technological skills.
Respondent B of Kaligonj Upazila in Satkhira District described her experience after facing
losses in the initial stage of business where she invested her loan. She notes:
I borrowed 5,000 taka from BRAC about two years ago. I used it to buy a paddy and
produce ‘muri’ [puffed rice, a popular snack food] with that money. I could improve
my living a bit with my income after paying the instalments. Everything was fine for
three-four months until a rich businessman set up a factory for muri production. His
product was machine made, whereas mine was traditionally handmade; he could
produce huge amounts quickly at low cost which was not possible for me. It didn’t take
long for the grocery stores where I used to supply muri to become his customers. I soon
found that I didn’t have any customers to sell my product to in my locality . . . I found
no other way than to close down my business. My condition is miserable . . . no income
but I have to pay money to BRAC every week. Only god knows what will happen . . .
Respondent C of Kaligonj Upozila in Jessore District also suffered loss in the initial stage of her
business. She declares:
We are a very poor family with two kids . . . my husband is a daily labourer and I used to
work as a housemaid. I borrowed 3,000 taka from Grameen Bank and bought 10 ducklings.
I thought I would be able to earn some additional money by selling eggs and ducks, but all
the ducklings died of virus after a few months. I am totally helpless now. We could hardly
live hand to mouth on our little income, before taking microcredit, and now even that will
be at stake . . . paying loan instalments from our income is totally impossible. I don’t know
what to do, how to survive under continuous pressure from NGO staff. I don’t blame them,
nothing wrong with them wanting the money back . . . I only have my fate to blame. May be
we will have to sell our little hut and small piece of land which is our only shelter . . . where
would I stand with my two young children after that? I can’t think of anything . . .

These two cases present different reasons but the same consequence for borrowers who
incurred loss in the initial stage of the ventures established with the help of microcredit
loans. Commitments to pre-assessment and regular monitoring are made on paper but in prac-
tice microcredit loans are rendered without any assessment of the business environment which
could assist in preventing vulnerable borrowers from investing in relatively high-risk projects.
Other similar cases were found where microcredit borrowers faced loss in the initial stages of
their business and did not have back-up financial resources to re-invest and turn their businesses
around. As a result, they, too, were forced to sell whatever little they had before borrowing to
service their debt/s.
Spending loan money in emergencies

Apart from the factors mentioned above, microcredit loans are also used by borrowers to
address foreseeable and unforeseen emergency events among which medical treatment of
family members and a daughter’s marriage were most common. The story of respondent D
of Kaligonj Upazila in Satkhira District illustrates these circumstances:

My husband is an agricultural labourer and I work in the households. We were just surviv-
ing with our income and I didn’t have any plan to borrow from NGOs. When my elder
daughter’s marriage was settled, the groom asked for a huge amount of dowry. It would
be a social disgrace for us if the wedding were not take place after it had been finalised;
no one would marry a girl after such an incident. I had to borrow 10,000 taka from
BRAC for paying dowry . . . I don’t know how I will repay this loan. I’ve already sold a
tree and NGO staff took away our cow after I missed a few consecutive instalments.
They are now threatening legal action against me. I am already completely destitute,
now I will probably have to go to jail.
The story of Respondent E of Fakirhat Upazila in Bagerhat District is somewhat different.
Unlike Respondent D, she took on the microcredit loan for investing in a productive purpose,
but also was forced to spend otherwise. She points out:
I borrowed 5,000 taka from Grameen Bank three years ago for setting up a small poultry
business. Suddenly my husband fell ill and needed surgery and I spent all my loan money. I
know I was not doing a wise thing but I didn’t have any alternative. I couldn’t watch my
husband die when I had money with me. I later borrowed from another NGO (BRAC) to
repay the loan of Grameen Bank but it was then my turn to repay the loan of the second
NGO. With the accumulation of interest, the loan amount is now something I can’t
manage. To make things worse, my husband can’t work as much as he could before.
NGO staff are coming every day and abusing us. Many times I thought of fleeing from
the village, but where should I go? At least I have a place to live here. I have to live
under the open sky in any other place . . .
Apart from daughters’ weddings and medical treatment for family members, repayment of
loans from local money lenders was found to be another reason that microcredit borrowers, in
spite of being fully aware of the potential consequences, were unable to avoid spending their
loans for purposes other than business investments. For these borrowers, already marginalised
financially, the belief that microcredit offered a way to cope with the burden of emergency
expenses, led them into increasing debt.

Using up loans for household expenditure

Another situation where microcredit loans eventually become a burden is when borrowers, in
circumstances of extreme poverty, spent all or a major portion of the loan on routine household
expenditure and household ‘luxuries’. Microcredit borrowers, due to their poverty, experience
deprivation of most of the necessities of daily life. Many of them, after receiving an amount of
cash they have never previously held, may spend a large portion of funds indiscriminately to
obtain everyday necessities or small luxuries. The situation of Respondent F of Khanjahan
Ali Upozila in Khulna District illustrates how this might happen:
I borrowed 3,000 taka from Grameen Bank, I thought I would give that money to my
husband for selling fruit or snacks in the bus stand nearby. It was the beginning of
Ramadan when I received the loan. It had been ages since we’d eaten good food. We
spent that money for food . . . did some shopping . . . also bought new dresses for my
kids for the Eid. Three thousand taka was an amount I’d hardly seen at one time and I
thought it was a lot to spend . . . at the end of the month I found that the amount remaining
was too little to make any meaningful investment. Now I understand how much trouble I’m
in. We are very poor and I borrowed money so that my husband can earn a little more.
We now have the same income as before but an extra burden of repaying instalments.
I used to be a housewife before, now I’ve taken a job as a housemaid to earn money to
repay the loan.
Though the reasons and intentions entailed in this kind of expenditure are different from the
emergency cases mentioned earlier, both sets of circumstances resulted in a heavier burden of
debt, more uncertainty, and greater destitution in some cases. These failures, especially the
latter, may not be directly attributed to any defect of microcredit. Nonetheless, the socioeco-
nomic circumstances in which microcredit has been delivered and the sole focus of the
lender on timely repayment, overlooking how loan monies are used by the borrowers have con-
tributed significantly to the consequences.
Does microcredit exacerbate poverty?

The extent to which microcredit has been embraced by the intellectual community and donor
agencies reflects, directly, its promotion as a means of emancipating the ‘poorest of the
poor’. However, as noted above, many studies question the effectiveness of microcredit in
improving the living conditions of the extreme poor. Building on the evidence of these
studies, we also question the extent to which microcredit, offered under current conditions
and institutional arrangements, can guarantee improvements, even in financial terms.
Importantly, this study found little evidence of claims by microcredit lenders about rendering
intensive supervision in order to ensure or support the proper use of loans provided. Microcredit
has become a relatively profitable industry in Bangladesh. The repayment rates on loans are
comparatively high and, being profitable, microfinance has become a priority for donor
agencies. These factors have led to a remarkable increase in the number of microcredit
lending organisations, most of which now view microfinance as a commercial operation
(Christen and Drake 2002; Copestake 2007). As a result, NGOs providing microcredit
engage in large-scale promotional campaigns (word of mouth in most cases) to increase the
number of customers (borrowers) over their competitors. Achieving high rates of repayment
and timely turnaround of funds have become the primary concerns of the lending agencies
rather than the effective or appropriate use of loans by borrowers. In this context, reckless
borrowing and misuse of microcredit loans by borrowers go unchecked, and even condoned.

Reportedly, this is done to increase the number of borrowers (a criterion of success for the
lenders) which often adversely affects the most vulnerable borrowers.
Conclusion
The findings of the study lead to the conclusion that microcredit can worsen poverty among a
section of borrowers under particular circumstances such as delayed returns from investment,
suffering loss in the initial stage of business, using up loans for emergency purposes, and
using up loans for household expenditure. Relatively less poor households with access to
some, albeit minimal backup resources, are likely to overcome these situations; the extreme
poor are often unable to do so. Microcredit borrowers who fall victim to any such situations
are not only affected negatively in terms of their access to and control over material resources
but also become more impoverished and vulnerable because of associated social and cultural
pressures.
As suggested by Batliwala (1994) and Mason and Smith (2003), among others, poverty is
related inextricably to disempowerment and vulnerability regardless of gender. Sociocultural
norms, religious seclusion, and lack of mobility, however, all serve to further disempower
poor rural women in Bangladesh. As mentioned, far from guaranteeing economic benefits,
access to microcredit has led a section of borrowers in certain socioeconomic conditions to
experience continuous pressures to repay loans, great uncertainty and apprehension about the
future, and the social humiliation of being labelled as a loan defaulter.
The extreme poor in most societies have often been deprived of the ‘benefits’ of market-
driven capitalist structures. Without a resources base, they are often excluded or are affected
negatively due to their inability (lack of access to resources) to engage in the market with
political and economic leverage. Microcredit was proposed as a welfare-oriented
financial programme to benefit the poor without their needing to engage directly in core
(profit-driven) markets. With the potential to obtain international donors’ funds, considered
as income for developing countries, the number of microcredit lenders has grown rapidly in
Bangladesh, and microcredit delivery has evolved into a highly ‘marketised’, competitive
industry.
Under such circumstances, although microcredit has been found, in this study, to be success-
ful in reducing the poverty level in a majority (65 – 70%) of cases, the ‘poorest of the poor’ have
been shown to be susceptible to adverse effects of microcredit as it intersects with pre-existing
conditions of poverty and vulnerability. Given the particular nature of the circumstances in
which these adverse impacts occur, some modifications to microcredit arrangements, at the
operational level, are likely to reduce the incidence of microcredit worsening poverty. Design-
ing loan repayment schedules based on variability of the time for projects to start generating
returns are likely to have some positive impacts for both lenders and borrowers. Ensuring
closer supervision and regular monitoring of the use of loans can also minimise the incidence
of loan monies being used in non-productive expenditure. Only the system of group-based
lending has been used so far to promote timely repayment of loans. The possibility of creating
a contingency fund that can be used as a safety net for the failed cases could also be explored.
In order to deliver clear benefits to the poorest of the poor, it is imperative that microcredit
lenders and their international funding agencies devise policies that ensure not only that the
operations of the microcredit lenders remain at some distance from the central structures and
relations of the market economy, but also that they focus principally upon guiding and empow-
ering borrowers to succeed in small business enterprises, the latter being a key component of
poverty alleviation, the stated goal of microcredit.

Notes
1. A major administrative unit based on geographic territory; Bangladesh is divided into six divisions.
2. Cases included in Table 2 (281) are only those cases (among the total number of 320 survey respon-
dents) for whom sufficient and detailed enough data were available to estimate the proportion of
business investment derived from microcredit.
3. Note that income refers here to the income generated from microcredit-funded projects, not the total
household income of the borrowers’ family. As noted above, income categories are derived from cat-
egories defined by the Bangladesh Bureau of Statistics, Household Income and Expenditure Survey
(HIES), 2005 (see Rahman et al. 2008: 29 –41; World Bank et al. 2009).
4. Throughout the paper this form of pseudonym is used to protect the anonymity of respondents, and
village locations are not identified. Interviews were conducted in December 2008 and January 2009.
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The authors
ATM Jahiruddin is a faculty member in Business Administration, Khulna University, Bangladesh.
Although he holds Bachelor and Masters degrees in Business Administration, his research interests
have shifted to the area of poverty and development. Currently he is in the final stage of a PhD programme
at The University of Queensland. ,jahir@uq.edu.au.
Patricia Short (corresponding author) is a sociologist. Her research interests include social inequality and
social risk in the fields of health and housing, welfare relations in informal economies, and family/house-
hold relations, with particular reference to the survival strategies of vulnerable householders and the
impacts of market-state-community relations upon household provisioning. ,t.short@uq.edu.au.
Wolfram Dressler is an anthropologist. His principal research interests are in political ecology, rural live-
lihoods, conservation, and development and neo-liberalism. His current research is focused on Palawan
Island in the Philippines, and he has published widely on the impacts of development on swidden agricul-
ture, and forest management. ,w.dressler@uq.edu.au.
M. Adil Khan holds an adjunct position at The University of Queensland. A development practitioner, and
former Chief of the Socio-Economic Governance and Management Branch of United Nations Department
of Economic and Social Affairs, New York, his recent work has focused upon civic engagement and
public governance, poverty studies, global level policy advocacy, and partnership building. ,
adil.khan@uq.edu.au.

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On: 21 June 2015, At: 04:28

Can microcredit worsen poverty? Cases

To link to this article: http://dx.doi.org/10.1080/09614524.2011.607155

PLEASE SCROLL DOWN FOR ARTICLE

Can microcredit worsen poverty?

ATM Jahiruddin, Patricia Short,

Wolfram Dressler, and M. Adil Khan

Worldwide, microcredit has been recognised as a successful innovation in poverty alleviation.

Le microcrédit peut-il aggraver la pauvreté ? Quelques cas de pauvreté exacerbée au Bangla-

O microcrédito pode agravar a pobreza? Casos de pobreza exacerbada em Bangladesh

¿Pueden los microcréditos incrementar la pobreza? Casos donde aumentó la pobreza en

se expongan a estas consecuencias no previstas de los microcréditos.

1110 Development in Practice, Volume 21, Number 8, November 2011

circumstances of women microcredit borrowers of Grameen and BRAC in Khulna regional

Microcredit programmes and Bangladesh

Development in Practice, Volume 21, Number 8, November 2011 1111

Table 1: Percentage distribution of males and females in various sectors in Bangladesh

Sectors of comparison Male Female

1112 Development in Practice, Volume 21, Number 8, November 2011

Proportion of microcredit in total business

Grameen Bank and BRAC initiatives

Development in Practice, Volume 21, Number 8, November 2011 1113

Microcredit in Khulna division

Results and discussion

1114 Development in Practice, Volume 21, Number 8, November 2011

Immediate repayment of loan and delayed return from business

Table 3: Major sectors of investment of microcredit funds

Sectors Frequency Percentage

Development in Practice, Volume 21, Number 8, November 2011 1115

Initial loss in business

1116 Development in Practice, Volume 21, Number 8, November 2011

Spending loan money in emergencies

of Kaligonj Upazila in Satkhira District illustrates these circumstances:

Development in Practice, Volume 21, Number 8, November 2011 1117

Using up loans for household expenditure

Does microcredit exacerbate poverty?

1118 Development in Practice, Volume 21, Number 8, November 2011

Development in Practice, Volume 21, Number 8, November 2011 1119

1120 Development in Practice, Volume 21, Number 8, November 2011

Development in Practice, Volume 21, Number 8, November 2011 1121

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