Micro-credit, poverty and development: the case of Bangladesh: very small loans used to encourage entrepreneurs in the Third World are being hailed by some as a powerful tool in the eradication of poverty. One of the founders of micro-credit describes what it is doing for the people of Bangladesh. (Insight).

Micro-credit has created enormous interest among development practitioners and policy-makers in many parts of the world. It has also garnered wide support from aid agencies, governments, non-governmental organizations (NGOs), and the public at large. Assuming the character of a movement, it has spread to four continents and even percolated into the heartland of the USA. In 1997, the influential New York Times went so far as to proclaim that microfinance was the `much needed revolution in antipoverty programs.' (1) Since then, there has also been a micro-credit summit `to extol its virtues before the world leaders and give a call for mobilization of $20 billion for channeling as small loans for alleviation of poverty not only in the Third World but also in the developed nations where pockets of poverty exist.' (2) According to the senior vice president and chief economist of the World Bank, `microcredit programs are an effective policy instrument for reducing poverty among poor people with the skills to become self-employed. It also shows that such programs are more cost-effective than other types of antipoverty program.' (3)

Micro-credit: definition and use

Simply put, micro-credit describes small loans made to poor households to finance small-scale entrepreneurial activities. NGOs in Asia, Africa, and Latin America are the largest providers of micro-credit to those sections of society - rural landless, disadvantaged women, marginal farmers, and wage labourers - who depend largely on selling their labour for a living. In many countries, the poor have little or no access to institutional credit because they have no assets that can be used as collateral. Micro-credit has emerged in those countries as a potent instrument to alleviate poverty and improve the access of the poor to financial services. Such credits, which are otherwise unavailable to the poor or available only at exorbitant terms from moneylenders, enable poor households to undertake productive economic activities and provide an opportunity to escape the shackles of poverty. Against this background, micro-credit programmes have expanded rapidly in the low-income countries and have become more than a poverty reduction strategy. Because they are attractive to donors, they have helped many NGOS to build a financially sustainable pool of independent working capital.

Micro-credit: some strategic issues

Many countries have established micro-credit programmes and micro-finance institutions (MFIs) over the last two decades. Their growth in different parts of the world has given rise to some critical issues and questions:

* where micro-credit is used and to what end;

* whether wider financial services can be used effectively by the poor;

* whether micro-credit is used as a development strategy and as an alternative and/or complimentary strategy;

* whether credit alone can address the problems of poverty, or whether it has to be accompanied by broader intervention programmes of social development and mobilization; and

* micro-credit's future potential.

These issues are discussed with particular reference to the experiences of Bangladesh where micro-credit has attained unprecedented growth. Bangladesh has provided models of recognized global significance in such aspects of micro-credit as scale of operation, modes and practices of micro-credit, alternative models of wider financial services, programme sustainability, and empowerment of women. Illustrations have largely been drawn from the Bangladesh Rural Advancement Committee (BRAC), one of the largest NGOs in the world, which has a sizeable micro-finance operation.

Bangladesh

Bangladesh can be considered the birthplace of the current concept of micro-credit; the NGOs here have rich experience in the field; and Bangladesh is regarded as a leader among those low-income countries that provide micro-credit. As some international commentators have observed: `while there are numerous models and practices around the world linking financial services to the livelihood strategies of the poor, the experience of Bangladesh has become globally influential.' (4)

Both public and private sector organizations are involved with micro-credit in Bangladesh, but NGOs have taken the lead. Of the approximately 15,000 registered NGOs in Bangladesh, nearly 1,000, including BRAC, provide a large part of the micro-credit services. Grameen Bank has received international recognition for its micro-credit services. Together, NGOs and Grameen Bank have enrolled around nine million poor in their micro-credit programmes. BRAC alone has organized over 3.3 million poor, approximately 96 per cent of whom are women, into its micro-credit programme. The growth of micro-credit programmes can be seen in Table 1.

Growth of micro-credit has spawned two new institutions to meet specific needs. The Palli Karma-Shahayak Foundation (PKSF), funded by the government and the World Bank, provides credit funds to MFIs. The Credit and Development Forum (CDF) is a networking NGO that provides need-based training and customized service to its member NGOs.

As NGO programmes expand in Bangladesh, so too does micro-credit. Programmes are expected to triple over the next seven years, thereby raising the annual disbursement to US$3 billion from the current level of one billion dollars. The number of borrowers is expected to reach 12 million. Some basic information about Bangladesh is provided in this context.

Bangladesh - some basic facts

Bangladesh, which broke away from Pakistan in 1971, is the most densely populated country in the world. With a per capita gross national product of US$280, it is also one of the poorest. Approximately 80 per cent of the population live in rural areas, and 60 per cent of the labour force depend on agriculture for their livelihood. Over half of the population is landless. Between 1975 and 1993 food production almost doubled, and life expectancy increased by 30 per cent between 1970 and 1996. Net enrollment in primary schools has increased to 77 per cent, and the gender gap has been considerably reduced.

Despite these impressive strides, Bangladesh ranks 18th from the bottom among 123 developing countries, according to the World Bank's new system of measuring the wealth of nations (PPP).

In Bangladesh the constitutional responsibility for development rests with the government, which has not always performed to its full potential, especially true in the area of poverty alleviation. The War of Liberation in 1971 raised new expectations and provided fresh impetus to create a just and poverty-free Bangladesh. The NGOs, born out of the need for relief and rehabilitation operations in the aftermath of war, got involved in this task and later in the field of development. BRAC is one such organization.

BRAC - from relief to poverty alleviation

BRAC started its work in 1972 with a relief and rehabilitation project. In 1973 it shifted its strategies from addressing the `acute crisis' of the aftermath of the war to dealing with the `persistent crisis' of development. Over the years BRAC has grown exponentially in development innovation and scale. It now works in all parts of Bangladesh and implements nationwide programmes on poverty alleviation through micro-financing, non-formal primary education, and health programmes. Its runs over 34,000 primary schools for 1.2 million children. Seventy per cent of the students are girls and over 90 per cent of the teachers are women. BRAC's health and population programme covers around 35 million people. Using village-based voluntary health workers, it provides essential health services to villagers with emphasis on specific diseases such as tuberculosis and women's issues such as family planning and nutrition.

BRAC's primary poverty alleviation effort is its Rural Development Programme (RDP), a multifaceted programme designed to promote both social and economic development. The RDP is active in over 50,000 of Bangladesh's 86,000 villages and involves nearly 3.3 million poor women from as many families. The twin goals of BRAC, poverty alleviation and empowerment of women, are reflected in RDP's activities and strategies.

Impact of micro-credit in Bangladesh

Micro-credit programmes have had an impressive impact on reducing poverty in Bangladesh. The provision of financial services, skills training, and targeting mechanisms has translated into big changes for the programme participants. For example, a variety of skills have been passed on to the poor participating in BRAC's RDP - modern methods of poultry rearing, cattle rearing, pisciculture, sericulture, vegetable cultivation, plant nursery, and so on. The technology diffusion in the poorer households has helped them to widen their income earning potential. A study sponsored by the World Bank has produced evidence of the wide-ranging impact of micro-credit on the conditions of borrowers. The study, which examined programmes of BRAC, Grameen Bank, and RD-12 of Bangladesh Rural Development Board (BRDB), a public sector organization, found that per capita expenditure had increased among the micro-credit borrowers in all of these programmes. A household's net worth also increased. The study clearly indicates that micro-credit reduces both moderate and extreme poverty, though at varying rates. (5)

Another study examined the effect of micro-credit on poverty, vulnerability, and female empowerment. (Micro-credit programmes operated by the NGOs, Grameen Bank and public sector organizations are largely, if not entirely, targeted at women.) Results suggest that micro-credit's greatest impact is on the set of indicators relating to female control over assets and knowledge of social issues. (6) Other empirical studies have also come to the conclusion that `micro-credit has been found to strengthen crisis-coping mechanisms, diversify income-earning sources, build assets and improve the status of women.' (7) One study specifically estimates that `for every 100 taka lent to a woman, household consumption increases by 18 taka; interestingly the figure is 11 taka if the same amount was lent to a man.' (8) Two other studies have found that `a small amount of money works as a miracle in a cash-hungry society and significantly raises the woman's power in the family.' (9)

Women in Bangladesh, particularly those in poor households, are the most disadvantaged group. A large number of studies on microfinance and women's empowerment suggest that the former has had an impact on the latter. The mobility of the women outside their home and some control over their own income have increased. In many cases, women participate in decisions that have to do with household issues. Women in BRAC's micro-credit programme have become critically aware of issues relating to dowry, family and inheritance laws, family planning, and education of their children.

All of these studies point to three things: micro-credit's impact on poverty, its protection against vulnerability, and its empowerment of women. Nearly half of the population of Bangladesh still lives below the poverty line. The women, particularly those from poor households, are the most vulnerable and disadvantaged. Alleviation of poverty has been accorded priority. So has the issue of gender equity and empowerment of women. As a part of the national development strategy, micro-credit programmes are playing an important role in both.

Some people question whether the poor can use wider financial services effectively. Micro-credit has helped capacity development of the poor in several ways. Training in marketable skills, diffusion of new ideas and technology, and peer consultation have enabled the poor who participate in the programme to use their credit quite effectively. All micro-credit programmes use community-based organizations to ensure the active and direct participation of borrowers in the lending process. MFIs have used the group-based approach to enforce their targeting criteria. This approach has fostered participation and social mobilization. In Bangladesh, a chronic problem for commercial banks and development finance institutions is the accumulation of large non-performing loans. This has, in turn, created a serious problem in the financial sector. Micro-credit has helped to break the legacy of defaulting on loans.

Micro-credit and modern technology

Micro-credit has largely been used in Bangladesh for traditional activities. Its full potential has, therefore, been held back by the virtual absence of modern production technology in rural areas. BRAC has made a significant commitment to new technology in its micro-credit programme. The technologies include: high yielding varieties of birds, vaccination, modern hatchery, and chick rearing units in poultry; insemination of livestock; fish hatchery development; seed multiplication, tissue culture, and the use of hybrid seeds in crop production; and improved varieties of mulberry trees, quality production of cocoons, and modern reeling facilities for the sericulture programme. Effective use of these technologies requires training, which can substantially increase productivity and profit margins. Micro-credit and skills development training have to go together. In combination, they can significantly increase the effectiveness and productivity of micro-credit programmes.

Micro-credit and social development

MFIs follow different approaches in providing micro-credit. There are basically three approaches: `credit alone,' `credit plus,' and `credit with social development.' In Bangladesh the four largest MFIs are BRAC, Proshika, ASA, and Grameen Bank. The first three are NGOs. BRAC and Proshika have combined credit with social development programmes. ASA is operating a one-dimensional credit programme. Grameen Bank's programme is also one-dimensional, but it encourages some social development activities for its borrowers. Proponents of the credit-alone approach argue that the poor need capital; if it is provided in the form of credit, the poor will be able to take advantage of some interactive forces within the economy to improve their economic condition.

This argument, however, neglects the fact that many other factors - health and education, to name two - are equally important for poverty alleviation. Take health, for example. Bangladesh is poor by almost all health indicators - morbidity, malnutrition, access to medical care, and so on. To focus on the first indicator, morbidity is associated with the economic status of households: income erosion as a result of morbidity further impoverishes the poor. A recent study found that poor households in Bangladesh, that is, those with a monthly income of less than taka 1000 (US$20), showed a morbidity of 215 per thousand or 35 per cent higher than the morbidity rate for those earning taka 3,000 or more per month. (10) These findings clearly suggest that if micro-credit programmes are to succeed, they should address the health needs of the poor.

A group of experts recently concluded that, while credit is obviously needed for poverty alleviation, it alone is not enough. Social development is a `precondition for realising the full potential value of credit and financial interventions.' (11) The importance of combining credit with social development interventions was emphasized at a 1996 workshop in Dhaka: `There is an overall preference ... for combining a strategy of wider, flexible financial services with a recognition that the value of such financial services can only be secured in a sustainable way by wider forms of intervention in the political economy via various strategies of social mobilisation and conducive macro-economic management.' (12)

BRAC believes that if problems of poverty are to be addressed, a micro-credit programme has to be accompanied by broader intervention programmes of social development and mobilization. RDP, which is designed to deal with poverty alleviation, comprises two broad activity areas - social development and economic development.

Impact of holistic approach 

Many experts and professional researchers have critically examined the impact of BRAC's holistic approach. BRAC has, of course, carried out its own assessments. Its Research and Evaluation Division (RED) has produced nearly 750 reports on different aspects of BRAC programmes, including their impact. One recent study, carried out jointly by RED and the International Centre for Diarrhoeal Diseases Research, Bangladesh (ICDDR, B), looked at the impact of BRAC's multi-sectoral programmes on a variety of indicators. It found that BRAC member households spent significantly more on food, which reflected higher calorie intake, decline in malnutrition, and increase in the rates of child survival compared to those not involved in BRAC programmes. The integration of credit and non-credit programmes, that is, the holistic approach, has been particularly effective in empowering women. The study concludes: `Poverty alleviation programmes focused on women as implemented by BRAC are effective in improving well-being, particularly in the areas of childhood nutrition and mortality.'

Micro-credit and the ultra poor

A criticism of micro-credit is that it has not reached the poorest of the poor. The criticism is valid. There is a segment within the poor who are worse off than ever. This is the segment that will not take loans because, with no regular source of income, they fear they will be unable to pay the regular instalments on a loan. The ultra poor are primarily women who are destitute, widows, or divorcees. They are less able and less willing to use credit profitably and to become self-employed. However, if safety nets and wage employment are provided, these women could be attracted to credit facilities.

In 1988, BRAC designed a large-scale endeavour that became known as Income Generation for Vulnerable Groups Development (IGVGD). IGVGD, which is supported in various ways by the government and the World Food Programme, provides wheat to the vulnerable women for 18 months. BRAC provides skills training credits and other support to these women to enable them to earn sustainable income. The Palli Karma Shahayak Foundation (PKSF), a newly developed financial institution, provides credit funding to BRAC and MFIs. Over 922,000 women have graduated from the IGVGD programme to BRAC's RDP.

Micro-credit: what's in the future?

Access to financial resources in the form of collateral free loans has helped many borrowers of micro-credit programmes to cross the poverty line. Some emerging entrepreneurs are now prepared to make larger investments in their enterprises and consequently seek larger loans than NGOs usually provide. This emerging aspect of many micro-credit programmes calls for new solutions.

BRAC has attempted to address this situation and to meet the financial needs of specific groups. One such attempt is the new Micro Enterprise Lending and Assistance (MELA) programme for micro entrepreneurs. MELA's objective is to create employment and increase community income by providing credit facilities of between Tk. 20,000 and Tk 200,000 (US$ 400-4,000) and technical assistance to small and new businesses. The borrowers in the MELA programme are the graduates of RDP and other members of rural communities.

Another item on BRAC's agenda for the future is a bank. A revitalized small or medium enterprise would create millions of jobs for the burgeoning population, including the poor who enter the job market every year. A BRAC bank would also provide financial services to NGOs. Experiences gained through micro-credit operations can be immensely useful for operating the MELA and the bank. Micro-credit programmes have thus created a new dimension of financial services in Bangladesh.

Concluding observations

Micro-credit programmes are tools used to address poverty in low-income countries, tools used by interested governments, development organizations, and NGOs. Micro-credit has a positive impact on poverty reduction and in empowering women. Because the ultra poor account for approximately one-tenth the population of Bangladesh, there are too many of them to be covered by micro-credit programmes. Since the poorest of the poor cannot be reached, an obvious question is: to what extent can micro-credit programmes be effective in poverty alleviation? Experience tell us that special programming with sufficient start-up support can attract many of the ultra poor towards micro-credit. BRAC's IGVGD programme is a case in point.

Financial intervention alone cannot address all the problems of poverty. Poverty is multi-dimensional. Reducing poverty requires job creation and an investment in human and social development to increase workers' productivity. Research has shown that micro-credit is more effective when it is used with other interventions. Preoccupation with microcredit should not displace social mobilization and social development programmes. NGO micro-credit programmes in Bangladesh have recently concentrated on addressing basic human needs such as food, shelter, health, sanitation, and education of those most afflicted by poverty. The search for programme innovations and operational strategies must be ongoing if micro-credit programmes are to grow and to have an impact.

Table 1: Micro-credit in Bangladesh
(NGOs and GB) : June 1998

Membership                 9,511,427

Savings of the members           234
(million US$)

Cumulative disbursement        3,038
(million US$)

Source: F H Abed, `Micro-credit
programme of BRAC: meaningful
cooperation in poverty alleviation';
unpublished paper, 1999
Table 2: Some basic facts about
Bangladesh

Population (1996)            126 million

Density (population per              850
su. km)

Human Development                    147
Index Rank (1998)

Infant mortality (1996)               83

Adult literacy (1998)                51%

GNP per capita (1998)            US$ 280

Landlessness                         50%

Population in poverty                47%
(below 2,122k
cals/day/person)

Source: UNDP, 1998; UNICEF, 1998;
A.M. R. Chowdhury and A.
Bhuiya, `Do poverty alleviation programmes
reduce inequalities in
health? The Bangladesh experience,'
in Leon and Walt, eds, Poverty
Inequality and Health (Oxford:
Oxford University Press forthcoming).
Table 3: Some basic facts about BRAC: 1999

Full-time staff                       24,200

Part-time staff                       33,746

Number of districts               64 (of 64)
with BRAC programme

Participants in                  3.3 million
poverty alleviation               households
programme

Loans disbursed              US$ 900 million
to the poor

Percentage of loans                      98%
repaid

Amount saved by                       US$ 68
village organization                 million
members

Primary schools run                   34,517
by BRAC

Students enrolled                1.2 million
                                 (70% girls)

Population covered                35 million
in BRAC's health programme

Total budget                 US $131 million

SOURCE: BRAC programme records

NOTES

(1.) Cited in M.G. Quibria, `Comments on leading issues in micro-finance,' paper presented at the regional workshop on Micro-finance Development Strategy, Asian Development Bank, Manila, 1-3 September 1999, 1.

(2.) M. Asaduzzaman, `Micro finance in Bangladesh: do institutions matter?,' background paper presented at the Conference on Poverty Alleviation Strategies: The Next Gen-era-tion,' BIDS-Dhaka and IFAD-FAO, Dhaka, 6-7 June 1999, 1.

(3.) Cited in Shahidur R. Khandker, Fighting Poverty with Micro-credit: Experience in Bangladesh (New York: Oxford University Press 1998), ix.

(4.) Geoffrey Wood and A. Sharif Iffat, Who Needs Credit? Poverty and Finance in Bangladesh (Dhaka: University Press 1997), 27.

(5.) Khandker, Fighting Poverty, 37-62.

(6.) Hassan Zaman, Assessing the Impact of Micro-credit on Poverty and Vulnerability in Bangladesh, policy working paper, development economics, World Bank, Washington DC, 1999.

(7.) Cited in ibid, 1.

(8.) Ibid, 3.

(9.) A.M.R. Chowdhury and A. Bhuiya, `Do poverty alleviation programmes reduce inequalities in health? The Bangladesh experience', in Leon and Walt, eds, Poverty Inequality and Health (Oxford: Oxford University Press forthcoming).

(10.) M. Mahmud Khan and Md Shahadar Hossain, Health Situation of Women and Health Care Expenditures in Bangladesh: Evidences from Nationally Representative Surveys (Dhaka: Bangladesh Bureau of Statistics, Ministry of Planning, Government of Bangladesh, 1999).

(11.) Wood and Iffat, Who Needs Credit? 41.

(12.) Ibid, 57-8.

F.H. Abed is the founder and executive director of BRAC, Dhaka, Bangladesh