Micro credit
Micro credit is the extension of very small loans (micro loans) to those in poverty designed to spur entrepreneurship. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Micro credit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.
Micro credit is a financial innovation that is generally considered to have originated with the Grameen Bank in Bangladesh. In that country, it has successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty. Due to the success of micro credit, many in the traditional banking industry have begun to realize that these micro credit borrowers should more correctly be categorized as pre-bankable; thus, micro credit is increasingly gaining credibility in the mainstream finance industry, and many traditional large finance organizations are contemplating micro credit projects as a source of future growth, even though almost everyone in larger development organizations discounted the likelihood of success of micro credit when it was begun. The United Nations declared 2005 the International Year of Micro credit. Micro credit is based on a separate set of principles, which are distinguished from general financing or credit. Micro credit emphasizes building capacity of a micro-entrepreneur, employment generation, trust building, and help to the micro-entrepreneur on initiation and during difficult times. Micro credit is a tool for socioeconomic development.
Micro credit in Bangladesh
Bangladesh is no different from any third world county with the problems of endemic corruption, deepening poverty and exploding population, the country grows poorer with each passing year even as billions of dollars are pumped in aid which vanishes into thin air but there is an exception to this. These are small-scale credit programs that provide production credit and other services to rural poor. All three of these microcredit programs in Bangladesh work exclusively with the poor. Although sequence of delivery and the provision of inputs vary a little from program to program, all three programs essentially offer production credit to the landless rural poor (defined as those who own less than half an acre of land) formed into a group, using peer monitoring as a substitute for physical collateral. Loans are given to individual group members, but the whole group becomes ineligible for further loans if any member defaults. The groups meet weekly to make repayments on their loans as well as mandatory contributions to savings and insurance funds. In recent years, many government and nongovernmental organizations in low-income countries have introduced credit programs such as these, targeted to the poor Mohammad Yunus- a man, who has transformed the lives of thousands of impoverished people through Grameen Bank, has turned the tables upside down. Since its inception in 1973 through the present, the Grameen bank and its founder Mohammed Yunus have dominated the history of micro credit. In 1976, Dr. Yunus founded the Grameen (“village”) Bank project in Bangladesh for the purpose of offering micro credit to the poorest of the poor in rural area. In 1983 the project was transferred into a private independent bank by a government ordinance. Today the Grameen family comprises a global network of institutions and individuals that provides services to more than two million borrowers primarily women and promotes micro credit as a cost effective way to fight poverty and promote socio- economic development, thus ending the era of financial apartheid.
Micro credit program in Bangladesh is implemented by NGOs, Grameen Bank, different types of government-owned banks, private commercial banks, and specialized programs of some ministries of Bangladesh Government etc. Despite the fact that more than a thousand of institutions are operating micro credit program, but only 10 large Micro credit Institutions (MFIs) and Grameen Bank represent 87% of total savings of the sector (around BD taka 93 billion) and 81% of total outstanding loan of the sector (around BD taka 157.82 billion). Near about two hundred thousand people are employed in MFIs and Grameen Bank. Around 30 million poor people are directly benefited from micro credit programs. Through the financial services of micro credit, these poor people are engaging themselves in various income generating activities. At present, financial service of BD taka 160 billion (approx.) is being rendered among 30 million poor people which help them to be self-employed that accelerates overall economic development process of the country.
Micro credit Institutions has been providing various social and financial services to the poor to alleviate poverty from the society for the last three decades. However, they remained outside any central supervisory system. To bring micro credit sector under regulatory framework, the government of Bangladesh enacted "Micro credit Regulatory Authority Act, 2006”" on July 16, 2006 with effect from August 27, 2006. Micro credit Regulatory Authority (MRA) has been established under this Act which is empowered and responsible to monitor and supervise the micro credit activities of the MFIs. According to the Act, no MFI can operate micro credit program without obtaining license from MRA. Within the stipulated period, 4,236 Micro credit Institutions applied for license. Among them, 335 Micro credit Institutions have been licensed till September 2008. Applications of 438 institutions could not be considered. 2,599 small institutions are advised to fulfill minimum criteria of obtaining license (either minimum balance of outstanding loan at field level BD taka four million or minimum borrower 1,000) within June 2009. Rest of the applications is being processed.
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Positive impact of micro credit:
The idea that access to small loans can help poor families build businesses, increase their income, and escape poverty has blossomed into a global movement. Its appeal is manifold. It is at once radical in its suggestion that the poor are creditworthy and conservative in its insistence on individual responsibility. Independent studies show that micro credit has a host of positive impacts on the families that receive it. A recent shows World Bank study by Shahid khondkar (2003). Show that micro-credit programs operating in Bangladesh over a long period of time have produced a greater impact on extreme poverty than on moderate poverty.” The results of this study indicate that micro credit not only affects the welfare of participants and non-participants, but also the aggregate welfare at the village level. In fact even in disaster situations and post conflict areas, it has helped rebuild economic activities and livelihoods. Hence acting as the coping mechanisms of the poor. This was successfully demonstrated during the floods in Bangladesh in 1998.
A positive association between micro credit and household spending, for example, may merely indicate that richer families borrow more. With these studies in doubt, solid academic evidence that micro credit reduces poverty is even scarcer than previously understood. For non-experimental methods to retain a place in the program evaluator’s portfolio, the quality of the claimed natural experiments must be high and demonstrated.
Impact of Income and Consumption: There are different ways to measure the impact of micro credit on income and consumption. First there is the borrowers' recall of the "before-after" situation. Using this method in the early 1980s, Hossain concluded that both per capita income and household income were positively associated with the amount of credit obtained from Grameen Bank
Micro credit institutions can have a positive impact on combating poverty: Khandker takes the lead in this positive evaluation. Together with Chowdbury, he examines the impact of Grameen Bank and BRAC. They find for both institutions that a greater number of loans mean a lower incidence of poverty for all program participants. In the Grameen Bank villages, for instance, 76 percent of participants who have taken no loans or only one loan are below the poverty line, compared with only 57 percent of those who have taken five or more loans.
Based on his 1998 research, Khandker comes to the same conclusions. He estimates that for every 100 taka lent to a female member of BRAC, household consumption increases by 18 taka. For men, this figure is 11 taka. These results indicate that poverty decreases as the borrowed amount (possibly in different installments) increases. The study further shows that the poverty rate of BRAC members falls by around 15 percent for the moderate poor and by 25 percent for the ultra poor when borrowers have a loan for up to three years.
Rate of poverty reduction appears to decline with duration of membership: For instance, for households that have been members for more than five years, moderate poverty fell by 9 percent and ultra poverty by 18 percent. These figures are considerably lower than for households that had been members for three years or fewer. Moreover, since the "less than three years" category has a lower average cumulative loan size (3,348 taka) compared with the "five years plus" category (6,567 taka), these results suggest that the poverty reduction impact of credit declines with cumulative loan size for BRAC. Khandker and Chowdbury observe the same outcome for Grameen Bank. Thus, the reduction of the level of poverty is variable and declines with the passage of time.
#From the different point view micro credit plays a vital role in the socio economic development in Bangladesh .Since micro credit is related with the root level of an economy, so it is so important for the financial market of any country.
# Micro credit helps to remove the poverty. It always helps the poor and increases their income level. When the poor people get micro credit they can create the business opportunity which results the economic solvency of the poor.
# They can pay for their all basic needs. This is the first step to break the poverty cycle. Micro credit helps to take initiative for the parents to send their children to school. When they get money as credit they can spend money behind their basic needs.
#Micro-credit has implications for women’s economic and social empowerment, which intern has implications for their overall empowerment and improvement in their children's well-being.
#In order to work skillfully workers should be fit physically. The micro credit clients are more solvent than the non- micro credit client. The micro credit client can take nutritious foods and can go to doctor if they feel sick. Overall they can take proper health care. Some of the micro finance institutes also provide health education .The institutes give advice to the rural people to drink safe water, pre natal and post natal care, sanitation and housing. “In Bangladesh, a study of BRAC clients found that fewer members suffered from severe malnutrition than non-clients and that the extent of severe malnutrition declined the longer clients stayed with BRAC.
Problem of micro credit
Though micro credit is wellbeing for our whole society but it has some problems. We can organize the problem as follow:
1. The important problem of the micro credit is to turn the profit in to the loans. In this case the borrowers should bear the cost of the loan as well as the interest .Some time investment does not bear the profit then the borrower should reduced consumption and loan money from other source to pay the installment.
2. Another problem is that all most all the micro credit providing organizations give lone to the women with a less interest rate. For that reason the male relatives use the female borrowers in front to get the low interest bearing loan. These types of loan may or may not be useful to the family. Most often the women should bear the responsibilities.
3. Some of the micro finance providing organizations imposes high interest for the short-term loan. Since the poor people have no alternative they have to dependent on those organizations. Consequently they are not able to pay the high interest and supposed to be a loan defaulter. Unless increase their income they are permanently dependent on the micro credit.
STAPES TAKEN BY THE GOVERNMENT
All the issues mentioned above actually led the policy makers to think about the regulatory and supervisory aspect. "Channeling special fund for this sector through a single authority might help keeping records and monitoring the system well" was one of the important ideas behind establishing the apex body PKSF. It is a 'Company not for profit" registered under the Companies Act of 1913/ 1994, it has been established for helping the poor as well as to help building and strengthening the institutional capacity of the organizations for improving their efforts at providing access to resources for the poor. PKSF is helping in building capacity of its Partner Organizations (POs) who actually are occupying the major share of this market.
After 10 years of establishment of PKSF government created another Unit namely MRRU in Bangladesh Bank to develop uniform policy, monitoring system, performance standard as well as a regulatory framework for this sector.
MRRU is an abbreviation of Micro finance Research and Reference Unit. It was established by GOB in June 2000. The Unit is housed in Bangladesh Bank. A national steering committee was also formed to oversee the work of the unit and to formulate the regulatory framework. Governor of the Bangladesh Bank was the chairperson of the committee. An Executive Director of the bank has been working as the member secretary. Other eight members were selected from related public sector and private practitioners.
Terms of Reference of the Steering Committee formed for Micro finance Research and Reference Unit (MRRU) are as follows;
1) Formulation of policy guidelines to regulate the NGO-micro-finance institutions and setting performance standard to ensure their qualitative improvement.
2) Preparation of uniform accounting guidelines for micro-finance institutions to ensure their transparency and accountability.
3) Monitoring the activities of the MFIs in compliance of the policy guidelines prepared by the committee.
4) Recommendations for preparing a legal framework in support of the Micro-finance Research and Reference Unit or a new regulatory body in its place to act as the regulatory authority for the micro-finance institutions.
# Concern Bangladesh is running the Food for Work program for village reconstruction in Khaliajuri and Itna, with food assistance from World Food Program. Food for Work is commonly known as the Earthwork Program, which’s open to all categories of poor.
