Microcredit in Theory and Practice in Bangladesh : A Case Study on Grameen Bank

Posted on 13th Oct 2024 12:40:55 AM Human Resource Development, Population Science


INTRODUCTION

After industrial revolution most of the world still has to challenge with the daily pain of poverty. Nearly half of the people live in poor countries with an average annual income per head of $9097or less. Bangladesh ranks as the world’s eight and Asian’s fifth most populous country with a land area of only 147570 sq. km. resulting in a population density of about 1246 persons per sq. km. (World Development Report 2012) which is one of the highest in the world. It is one of the poorest countries of the world where 76.9% of the total population live in the rural areas. About 49% of the rural populations live below the poverty line (Population and Housing Census 2011).

Bangladesh is primarily an agricultural country. About 77% of the populations live in village and 75% of them are dependent on agriculture, which contribute more than half of the GDP. In recent years, Bangladesh is overwhelmingly characterized by poverty, disease, malnutrition, illiteracy, unawareness that dominates the lives of the rural poor. The underdevelopness of the rural economy of Bangladesh is reflected in the low productivity, high population pressure, underemployment, lack of work opportunities outside agriculture and the resultant deteriorating living condition of the rural poor. As Bangladesh is one of poorest countries in the world, having a per capita GDP at current market prices (in US$) 1620 (World Development Report 2012).

In Bangladesh 60% of rural populations are functional landless, 20% do not even own their homestead. Majority of them are directly or indirectly depend on agriculture and selling labor. In addition due to the society by the rural sites most of the available resources are owned by the upper socio-economic strata. The rural poor are victim of various kinds of oppression, deprivation and injustice. Land takes the leading role in generating rural income and its distribution.

Government of Bangladesh has given priority to the development of villages and agriculture too. Beside Government, non-governmental organizational can play an important role in developmental activities. The importance of micro leading has how been recognized world –wide leading to world microcredit summit in February 1997. The declaration of the summit for the creation of an institutional capacity to reach the very poor in the developing countries by strengthening exiting microreader, savings and business development institution through networking and exchange of experience.

Microcredit-broadly speaking, the provision of small loans to very small businesses, typically self-run enterprises with few if any employees is an increasingly common weapon in the fight to reduce poverty and promote economic growth. The motivation for the continued expansion of microcredit, or at least for the continued flow of subsidies to both nonprofit and for-profit lenders, is the presumption that expanding credit access is a relatively efficient way to fight poverty and promote growth. Yet despite strong claims about the effects of microcredit on borrowers and their businesses, there is relatively little rigorous evidence about these programs.

In practice, the policy discussion about micro-lending typically emphasizes the upside, arguing that micro-lending mitigates market failures, empowers women, and spurs enterprise growth and improves subjective well-being.

In theory, expanding credit access may not have positive effects on borrowers and could even have negative effects. Financial institutions may disrupt relatively efficient “informal” mechanisms. The often high cost of microcredit, from 10% annualized interest rates to 100% means that even higher returns to capital are required for microcredit to produce improvements in business income, and thus in household income and consumption. Finally, some argue that psychological biases may induce some to “over borrow” and do themselves more harm than good.

1.1  Definition of Microcredit

Microcredit is a small size of loans that is given to the poor for self employment. Today Bangladesh is called the land of, microcredit revolution. The poverty of the world can be rooted out through effective microcredit program that was originated in a poor country like Bangladesh.

Conceptually, microcredit can be described as collateral free small loan offered to the poor to create self employment in income generating activities based on group leading methodology.

Microcredit can be broadly defined as a program that provides credit for self employment and other financial and business services including saving and technical assistance to the poor people.

Microcredit is a method for providing small amounts of capital to poor people so that they can improve their existing income-generating activities, or develop new ones, and is widely used in developing countries. It is based on the principle of providing credit to individuals within a group, where each person in the group is mutually responsible for the credit repayment of the other members. This social collateral removes the need for physical collateral, which poor people generally lack. The term ‘microcredit’ has changed into ‘microfinance’ in recent times due to its wider role, as microfinance adds the provision of savings and insurance services to that of credit.

A major aim of microfinance is to reduce poverty. Studies that claim to have demonstrated a positive effect of MF on poverty include those by Swain et al. (2008), Abed and Matin (2007), Khandker and Pitt (2005), Littlefield et al. (2003), Mann (2003), Quach et al. (2003), Robinson (2002), Vonderlack and Schreiner (2002), Manroth (2001), and Panjaitan-Drioadisuryo and Cloud (1999). From a review of the findings of 32 studies of microcredit programs around the world.

Sebstad and Chen (1996) concluded that participation in microcredit programs had positive effects at the enterprise, household and individual levels.

A recent study in Bangladesh (Chemin, 2008) indicates that although microfinance has a positive impact on the per capita expenditure of the participants, this is less than formerly believed. While another study in India (Banerjee et. al., 2009) claims that microfinance has no impact on participants’ average monthly expenditure per capita, health, education or women’s decision making. Altay (2007: 1) also argues that the microfinance approach does not offer sufficient solutions to reduce poverty’. A study by Mosley (2001) in Bolivia finds that microfinance is successful in reducing poverty for those who are near the poverty line, but ineffective in reducing extreme poverty. Another study by Hulme and Mosley (1996) of 12 programs of microcredit from seven developing countries also demonstrated that household income rose due to microcredit intervention, but with a qualification. They postulated that the increase of income from a microcredit loan depended on the socio-economic condition of borrowers.

Other researchers have also argued that the poorest of the poor (the hardcore poor) are excluded from MF programs (Daley-Harris and Zimmerman, 2009; Pronyk et al., 2007; Ahmed et al., 2006; Matin and Hulme, 2003; Hashemi, 2001; Rahman and Razzaque, 2000). Gulli and Berger (1999), for example, show that in six Latin American countries microfinance did not reach many of the poor households, with the proportion of poor people reached by each program ranging from 7 to 77 per cent. Woller (2002: 306) argued that ‘the widespread exclusion of the very poor from MFI client rolls contradicts the image of MF as a tool for global poverty alleviation’. A recent study by Gehlich-Shillabeer (2008) in Bangladesh argues that microcredit creates indebtedness and leads to poverty traps. Daley-Harris and Zimmerman (2009) also argue that when microfinance is used to meet day-to-day consumption it can lead to debt for the borrowers. A comparative study of micro-enterprise programs in Vanuatu and El Salvador showed that the increase of income for poor people and the development of successful micro enterprises were conflicting, instead of complementary, objectives. The poorest were excluded from the programs due to the selection of people who were likely to succeed (Tomlinson, 1995). Khandker (1998:17) took a different view of this issue when he argued that ‘micro-credit is not relevant for the poorest of the poor and the most illiterate of the illiterate. For them wage employment is necessary for poverty reduction’. He did, however, believe that microcredit was very helpful in providing economic opportunities for those rural women who are unable to engage in wage employment outside the home, or who lacked the necessary qualifications to engage in the formal labor sector. Based on a study in Bangladesh, Khan (1999) also argues that women value paid work more than self-employment through microcredit, and that employment opportunities assist women to be economically and socially empowered.

From the studies reviewed above we can conclude that although many of them show that micro-finance has had a positive impact on poverty reduction, there is debate about the level of impact on poverty, and about whether microfinance is reaching the poorest of the poor. As Banerjee et al. (2009: 1) states ‘microcredit has spread extremely rapidly since its beginnings in the late 1970s, but whether and how much (it) helps the poor is the subject of intense debate’.

Studies of MF in Bangladesh, the country in which this case study is set, show the same divergence of opinion as those above. Some have claimed that microcredit has had a significant positive impact on household income, as reported by Husain et al. (1998), Mustafa et al. (1996) and Khandker (1998). While Pitt and Khandker (1996) found that microfinance had a profound impact on poverty reduction, Morduch (1998), using the same data set, claimed that microfinance had a minimal impact. He argued that the increase in income found by the researchers was due to the inclusion of borrowers from above the poverty line, that is, it was the result of a mistargeting of borrowers by the microfinance organization. Sulaiman and Matin (2008:4) also state that ‘it is now widely recognized that microfinance alone is largely inadequate for the poorest’. Zaman (1999) added a different dimension to the debate when he argued that the impact of microfinance has more to do with reducing vulnerability than increasing income. Other researchers (Husain et al., 1998; Morduch, 1998; Mustafa et al., 1996; Rogaly et al., 2004) showed that the impact of microfinance on vulnerability is through the diversification of income sources, the building of assets and the strengthening of crisis-coping mechanisms.

Using a village case study in Bangladesh, the overall study will evaluate the role of Grameen Bank in alleviating poverty. The specific objectives will attempt to contribute to the debate of microfinance microcredit by answering the following questions:

1. Does microfinance reach the poorest group in the community?

2. Has microfinance reduced the poverty of these households?

3. What do the respondents think about microcredit?

1.2 Features of microcredit

In the microcredit system, service provides go to the doorsteps of the poor based on the principle that the people should not go to the bank rather than bank should go to the people. The other important features of microcredit are:

· microcredit is given with minimum paperwork.

· Workers have to make regular visits to the borrower premises to offer advices and supervision.

· microcredit is collateral free.

· Small size of loans.

· All loans are to be paid back in installments on weekly or bi-weekly basis.

· microcredit is demand driven.

· 95 percent borrowers are poor women.

· Recovery rate is above 90 percent.

1.3 Introduction to Grameen Bank

In 1976, Noble laureate Professor Dr. Muhammad Yunus started a research project on micro-credit in Chittagong district at Zobra Village. In 1979 with the financial help of Bangladesh Bank he expanded his program in Tangail at suruj village.

Later, in 1982 with the International Fund of Agriculture Development (IFDA) this program expanded among the district Dhaka, Rangpur and Patuakhali.

1st October in 1983, Bangladesh Government Gezzeted Grameen Bank act 1983. At that time according to the rule of Bangladesh Government Professor Dr. Muhammad Yunus started official program on micro-credit by the named Grameen Bank.

At first, he started his program by $27(856 Tk). Mrs. Sufia Begum was the first loan receiver who died in 1998.

As of October, 2011, it has 8.349 million borrowers, 97 percent of whom are women. With 2,565 branches, Grameen Bank provides services in 81,379 villages, covering more than 97 percent of the total villages in Bangladesh. (Grameen Bank, Sunday, 20 November 2011).

13 October in 2006 the founder of Grameen Bank, professor of Economics department, Chittagong University,  Dr. Muhammad Yunus and his Grameen Bank got the honorable Noble Prize in peace for the contribution of economic and social development. He is the first Bangladeshi, who got this honorable Noble Prize.

1.4 Rational of the Study

In most of the developing countries in Asia growing attention has been given for rural development during past two decades. This is because majority of the people live in rural areas where problems of poverty, inequality, unemployment etc. are increasing rapidly. The percentage of rural population is as high as 77 in Bangladesh, 95 in Nepal and above 70 in India, Pakistan and Sri-lanka. The socio-economic background and population problems have prompted policy makers to take up specific rural development program in order to improve quality of life of vast majority of the rural poor who have not been benefited from the general development program. Though there is some positive in respect of firm productivity and overall economic growth rate in same developing countries, nevertheless, the extent of poverty, inequality, landless and unemployment has been become widespread in many countries. With a low level of income and pervasive poverty the development priorities in Bangladesh increasingly focus on efficient growth policies and provision of basic services to the poor.

The factors that create and perpetuate involve a number of dimension e.g. sewed distributions of assets and land, tenure systems, inequitable access to and control over new technology in irrigation, inadequate employment opportunities, low labor productivity and wage rates, low growth and unequal distribution of growth benefits, under developed physical infrastructure and lake of access to basic social services credit and off-farm activities. Within the general framework, poverty alleviation strategies in the country put emphasis on accelerated growth generation of productive employment human resources development and increased self-reliance.

Economic growth is recognized as fundamental to development but not to reduce poverty. In order to ensure the access of the poor to employment and basic social services, the growth-oriented strategies need to be supported by direct attacks on poverty.

Population means an aggregate of elements possessing certain characteristics of interest in any particular investigation. In this research, we want to consider all of the people who are actually engaged in Grameen Bank or not.

1.5 Organizations of the Study

This study consists of five chapters. Chapter one consists of introduction also includes definition of microcredit, features of microcredit, introduction to Grameen bank and rational of the study. Chapter two discussed on the problem definition and motivation, selection of the study area, sampling design, and preparation of questionnaire and objectives of the study, scope of the study and methodology and limitation of the study. Chapter three is the introduction result of survey findings variables use in the analysis using frequency distribution also includes the comparative study. In chapter four it includes contingency and regression analysis. Chapter five consists of summary conclusion and recommendation.

 

ABSTRACT

Microcredit institutions spend billions of dollars for fighting against poverty by making small loans primarily to female entrepreneurs. Proponents argue that microcredit mitigates market failures, spurs micro-enterprise growth and boosts borrowers well being. But poverty does not eliminate from the world.

Since 1970, the NGO’s development program in Bangladesh became an important factor for the reason that government is not able to manage all the development activities and welfare in a state. Among the NGOs, Grameen Bank is one of the well organized NGO in Bangladesh. Our study aims to get the idea about the poverty alleviation in Bangladesh and the respondent’s idea about microcredit through Grameen Bank activities depending on a sample survey.

This study mainly covers the socio-economic status of the respondents. The ultimate goal is to examine, “does the microfinance reach the poorest group in the community?” We also observe the respondent’s awareness about family planning and AIDS.

Univariate, bivariety and multivariate analysis are performed in our study. We found that most of the respondents are above 30 ages. In the logistic regression, 3 (respondents education, respondents husband education, age of respondents) variables out of 6 found highly significant negative effects on member of Grameen Bank. It can be said that comparatively undereducated peoples have the tendencies to connect with the microcredit program like Grameen bank.

In this short volume, researcher will not be able to give a comprehensive idea about the Grameen Bank’s development program in Bangladesh but the reader and development worker may get a clear picture of microcredit borrowers idea and opinion about microcredit, specially about Grameen Bank and its activity.

 

Contact us to read the full 'Research Project and Field Studies' internshipreport12@gmail.com

 

CONTENTS

Acknowledgement

Abstract

CHAPTER ONE: INTRODUCTION

1.1 Definition of microcredit

1.2 Features of microcredit

1.3 Introduction to Grameen Bank

1.4 Rational of the Study

1.5 Organizations of the Study

CHAPTER TWO : RESEARCH PERSPECTIVE

2.1 Problem Definition and Motivation

2.1.1 Defining Population

2.1.2 Selection of the Study Area

2.1.3 Sampling Design

2.1.4 Construction of the Questionnaire

2.1.5 Data Collection Period

2.1.6 Data Collection Method

2.1.7 Data Processing

2.1.8 Analytical Technique

2.1.9 Finalization of Survey Affairs

2.1.10 Selection of the Computer Program

2.1.11 Review of Literature:

2.2.1 Objectives of the Study

2.2.2 Scope of the Study

2.3.1 Methodology

2.3.2 Problem in Collecting Data

2.3.3 Limitation of the Study

CHAPTER THREE : SOCIO-ECONOMIC CONDITION OF RESPONDENTS

3.1 Age Distribution of the Respondents

3.2 Educational Qualification of the Respondents

3.3 Educational Qualification of Husbands

3.4 Husband Profession

3.5 Family Status

3.6 Monthly Income

3.7 Types of Residence:

3.8 Types of Latrine

3.9 Information About Aids

3.10 Sources of Drinking Water

3.11 Member of Grameen Bank

3.12 Distribution of Loan Taking Sector

3.13 Economic Conditions of the Borrowers 

3.14 Knowing Interest of Loan

3.15 Receiving Training 

3.16 COMPARATIVE STUDY

Education of Respondents

Education of Respondents Husband

Types of Family

Monthly Income

Monthly Expenditure

Toilet Facilities

Member of Grameen Bank

CHAPTER FOUR : AFFECTING SOCIO-ECONOMIC AND MICROFINANCE FACTORS ON GRAMEEN BANK

4.1 Introduction

4.2 Association between duration of taking loan with some other variables

4.3 Summary discussion

4.4 Association between member of Grameen Bank  with some other variables

4.5 Summary discussion

4.6 Logistic regression analysis

4.7 Category of variables

4.8 Logistic Regression analysis for duration of taking loan with some corresponding independent variables

4.9 Summary discussion

4.10 Logistic Regression analysis for member of Grameen Bank with some corresponding independent variables

4.11 Summary discussion

CHAPTER FIVE : SUMMARY

5.1 Conclusion

5.2 Recommendation

References



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