Assignment on Micro Finance

MICRO CREDIT FINANCE
Literature Review

Microfinance and microcredit.

In the literature, the terms microcredit and microfinance are often used interchangeably, but it is
important to highlight the difference between them because both terms are often confused. Sinha
(1998) states “microcredit refers to small loans, whereas microfinance is appropriate where NGOs
and MFIs1 supplement the loans with other financial services (savings, insurance, etc)”. Therefore
microcredit is a component of microfinance in that it involves providing credit to the poor, but
microfinance also involves additional non-credit financial services such as savings, insurance, pensions and payment services (Okiocredit, 2005).

The History of Microfinance

Microcredit and microfinance are relatively new terms in the field of development, first coming to
prominence in the 1970s, according to Robinson (2001) and Otero (1999). Prior to then, from the
1950s through to the 1970s, the provision of financial services by donors or governments was mainly in the form of subsidised rural credit programmes. These often resulted in high loan defaults, high loses and an inability to reach poor rural households (Robinson, 2001).
Robinson states that the 1980s represented a turning point in the history of microfinance in that MFIs
such as Grameen Bank and BRI2 began to show that they could provide small loans and savings
services profitably on a large scale. They received no continuing subsidies, were commercially funded
and fully sustainable, and could attain wide outreach to clients (Robinson, 2001). It was also at this time that the term “microcredit” came to prominence in development (MIX3, 2005).

The difference between microcredit and the subsidised rural credit programmes of the 1950s and 1960s was that microcredit insisted on repayment, on charging interest rates that covered the cost of credit delivery and by focusing on clients who were dependent on the informal sector for credit (ibid.). It was now clear for the first time that microcredit could provide large-scale outreach profitably.
The 1990s “saw accelerated growth in the number of microfinance institutions created and an increased emphasis on reaching scale” (Robinson, 2001). Dichter (1999) refers to the 1990s as “the microfinance decade”. Microfinance had now turned into an industry according to Robinson (2001). Along with the growth in microcredit institutions, attention changed from just the provision of credit to the poor (microcredit), to the provision of other financial services such as savings and pensions (microfinance) when it became clear that the poor had a demand for these other services (2005). Microcredit Summit in 1997. The Summit aims to reach 175 million of the world’s poorest families, especially the women of those families, with credit for the self-employed and other financial and business services, by the end of 20154 (Microcredit Summit, 2005). More recently, the UN, as previously stated, declared 2005 as the International Year of Microcredit.

Micro-credit in Bangladesh

Bangladesh has experienced rapid growth in the micro-credit sector since 1990.
Prior to 1990, only a handful of organizations were in operation. Many NGOs adopted
and built on the experience of the Grameen Bank. Some of these NGOs experimented
with the Grameen Bank micro-credit delivery system at the beginning and gradually
they developed their own micro-credit delivery system such as BRAC and ASA. Currently, more than 1,000 NGOs operate micro-credit programmes in
Bangladesh. The contribution of many of these NGOS to microcredit
disbursement is very small. For example, a study of 369 NGOs indicates that
the top three NGOs as of June, 1998: held 69 per cent of total credit; held 83 per cent
of total net savings; held 85 per cent of cumulative credit; held 82 per cent of
outstanding loans; and captured 71 per cent of the total revolving fund. Most of the micro-credit institutions follow the flat rate method in calculating
total interest. A very small number follow the declining method in calculating total
interest. Under the flat rate method, NGOs charge interest rates typically between 10
to 30 per cent.

The empirical analysis presented below is based on data collected for three
organisations involved in micro-credit activities in Bangladesh: (1) the Grameen
Bank; (2) the Bangladesh Rural Advancement Committee (BRAC); and (3) the
Association of Social Advancement (ASA).

The Grameen Bank evolved from research project aimed at identifying the
causes of poverty carried out by Professor Muhammad Yunus. He found that capital
constraints had been forcing women to sell their handicraft products to input providers
at prices that were much lower than market prices.
In 2000, membership in the Grameen Bank was about 2.3 million, with a
cumulative loan disbursement of about $3.2 billion.

After independence in 1971, the Bangladesh Rural Advancement Committee
(BRAC) was established. Initially its main objective was to conduct relief and
rehabilitation programmes. It continued to widen its activities and in 1976 established
a micro-credit programme. At present it is prominent among the biggest NGOs in
terms of development and micro-credit activities. BRAC started its micro-credit
programme in 1976.

The Association of Social Advancement (ASA) was established in 1978. It
began its micro-credit programme in 1991. Currently, ASA is the third largest microcredit
organisation in Bangladesh. It has developed a less expensive model for the
implementation of savings and credit program, which has helped it become a more
cost effective and sustainable program (Jain, 1999; Rutherford, 1995). Kalily, Imam
and Khan (2000) conclude that ASA is more cost effective and more sustainable than
the Grameen Bank. By 2000, ASA had extended credit to poor people in 22,740
villages out of approximately 86,000 villages in Bangladesh. The total number of
members of ASA in 2000 was 1.2 million. In the same year the cumulative loan
disbursement and cumulative savings of members stood at $466 million and $97
million respectively. In 2000 the recovery rate of ASA was 99.9%.