DP – Microfinance: The Grameen and BRAC Experience

Two of the most widely recognized Microfinance Institutions in the world today are both located in Bangladesh.

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 of 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 an incredible one fifth of the total loan portfolio for the entire country.

Both microfinance institutions (MFIs) follow a similar structure in the way that they lend to their borrowers; they provide “solidarity group lending” in which loans are given to individuals of the group.  In order to receive a loan from one of the institutions, you must be part of a lending group. Every member is accountable to, and liable for, all the other group members’ loans.  Given that the poorer 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. Given their financial statistics they seem to be doing rather well.  But, are they having the desired economic impacts set out by their organizations? 

These questions have been recently been raised 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 microfinance critics believe that microcredit does not have significant impact in reducing poverty, but simply acts as more of 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”. This benefit is significant for poor households; however, 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 done 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 found 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 ay installments by recycling loans (i.e. paying off old loans with new ones); this contributed to increasing household debt.”

These instances typically occur more frequently for households that are below the poverty line. In the 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, and loans are a 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 and most dire situations. The Grameen and BRAC “group solidarity system” makes it hard to include the poorest groups; many group 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 to weekly meetings and training sessions, required in order to be part of these programs.

Some critics believe that when MFIs scale up their organizations and become too big, they can lose their focus on their mission and on the customers. When they “over-reach”, they can move away from their target market.  BRAC began by first lending to landless people in rural Bangladesh.  However, as they have grown, it seems they have lost sight of the extremely poor, and begun to focus more on those slightly above the poverty line; they are much easier to finance.

So, what is the economic impact of microfinance on poor households?

It is definitely very dependent on the specific situation of the family that chooses to borrow.  Microfinance institutions must not be too quick to believe that it can help any family increase their income. 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.

When we look at the research and real world assessments, it seems that the Grameen Bank and BRAC have been a bit to idealistic in their expansion, and have forgotten to focus on the specific economic situations of those that they claim to be helping.

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