Two of the most widely recognized microfinance institutions in the world today are both located in Bangladesh: the Grameen Bank and BRAC.
The Grameen Bank was founded by Mohammed Yunus in 1976. Since then, they have loaned nearly 13 billion US Dollars to almost 4.5 trillion borrowers. In November of 2012, the bank had 8.4 million active borrowers with more than one billion US Dollars in outstanding loans. The Grameen Bank’s repayment rate for all its loans is nearly 97%.
The Bangladesh Rural Advancement Committee (BRAC) was started in 1972 as a relief organization following the War of Liberalization. In the early 1970s, BRAC began lending microcredit to landless people in some of its development projects. In November 2012, BRAC had 5 million active borrowers with outstanding loans totaling 725 million US Dollars. BRAC has a repayment rate of 99.36%.
In Bangladesh, the poor account for one fifth of the total loan portfolio for the entire country.
Both of these microfinance institutions (MFIs) follow a similar structure in the way that they lend to their borrowers. They provide “solidarity group lending” in which prospective borrowers must be part of a lending group in order to receive a loan from one of these institutions. Every group member is accountable to, and liable for, all the other members’ loans. Given that the poorest communities in Bangladesh lack financial capital or assets that can be used as collateral for loans, these lending groups act as a form of “social capital”:
These organizations have become increasingly powerful and important to the economic environment in Bangladesh. According to their financial statistics they seem to be doing rather well. But, are they having the desired economic impacts set out in their mission?
This question has been raised recently regarding the microfinance model. Much criticism has been directed toward these two organizations specifically because of their long history in the sector, their exponential growth and popularity, and their apparent financial success.
Many critics believe that microfinance does not have significant impact in reducing poverty, but simply acts as a “consumption stabilizer” by reducing the shocks of natural disasters, illness, and seasonal hunger. They argue that “in the absence of other measures or more dynamic growth processes, (microcredit) can amount to no more than a redistribution of incomes among the relatively poor, rather than an overall increase in incomes of the poor”. While these benefits are significant for poor households, it is not the benefit of “increased wealth” that both the Grameen Bank and BRAC argue come from their microfinance programs.
Additionally, there is some evidence that microcredit is causing over-indebtedness for many Bangladeshis. Aminur Rahman, in his research analyzing the impact of the Grameen program on its borrowers, found that “many Grameen borrowers used their savings and household assets for weekly installment payments on microloans. Pulling resources from households, and diverting funds from consumption needs to loan repayments, causing further hardship to members of poor households…” He also noted that “bank employees used group pressure to ensure borrowers timely repayment of loans and to achieve high loan recovery rates. Such pressure compelled many borrowers to pay installments by recycling loans (i.e. paying off old loans with new ones); this contributed to increasing household debt.”
These problems occur more frequently for households that are below the poverty line. In his book Livelihood and Microfinance: Anthropological and Sociological Perspectives on Savings and Debt, Rahman argues, “microcredit has the potential to improve household conditions and living standards particularly for borrowers living over the poverty line. But microcredit can also have negative consequences for the poorest households, such as increasing debt burden.”
Microfinance is a loan; loans are a form of debt. When you are in debt, you are more vulnerable. This “prescription” for poverty eradication can be very dangerous for those living in extreme poverty.
In fact, many microfinance institutions have a hard time reaching the poorest populations due to their high vulnerability. The Grameen and BRAC “group solidarity system” makes it hard to include the poorest groups; many members are not willing to include very poor borrowers within their lending groups because they are too risky. Additionally, extremely poor households often cannot afford to pay the registration fees or attend the weekly meetings and training sessions required in order to be part of these programs.
So, what is the economic impact of microfinance on poor households?
It depends on the specific situation of the family that chooses to borrow. Microfinance institutions must not be too quick to believe that they can help any family increase their income. While it is a successful tool for many borrowers throughout Bangladesh and the rest of the world, microcredit is not a blanket prescription to help people improve their economic situation, as many MFIs including the Grameen Bank and BRAC argue. This theory can be a very dangerous when applied to real communities; it may actually do more harm than good.