Microcredits performance

helping and reaching the poorest:

the case of Bangladesh.

Jorge Primo Soto / 100061283

Profesor: Juan Carmona

Julio 2012

Introduction:

Bangladeshi Nobel Peace Prize winner, Professor Muhammad Yunus, once declared “I have come

to believe, deeply and firmly, that we can create a poverty free world if we want to.” Mr. Yunus

envisions a poverty free world by the year 2050 through his operations in microcredit and social

business. For him, microcredit aimed at delivering the alleged sixth right of humans, credit, to those

who are excluded from the traditional private banking system. However, one must always question

the consequences of the methods involved in poverty reduction and if these methods have both a

clearly and defined scope. In this writing I will try to identify some socio-economic issues regarding

the isolated and poor society of Bangladesh, for sure one of the most poverty-stricken places in the

world.

Microcredits are powerful financial instruments commonly used in this country and the rest of the

world as a basic tool when fighting against poverty, besides of improving the living standards of

those with less economic resources than the average population. There are small amounts of money

which are lent by banks or institutions under certain terms and conditions. By definition,

microcredits are not demanding huge amounts of money to the financial system and due to the scale

not generating big amounts of income. Productivity of the acitivities done by the borrowers are in a

certain sense limited and are designed to allow them entering into competitive markets or weak

oligopolic economic structures (for example, curtains knitting or rickshaw drivers)

Borrowers have a prevalent lack of capital and their socio-economic conditions preclude them the

access to regular creditice conditions with most of formal banks in the market, as they don't have

guarantees or collateral. In order to provide larger monetary sums without needing that collateral,

joint liability / group lending among informal groups who needed credit was created. Lending small

amounts of money directly to poor people who are not bankable for the financial system has became

a widespread practice by banks and institutions at a national and international level.

Currently the way microcredits work is by giving a small loan, which amount is determined by the

potential repayment ability of the borrower and for a short period of time. After repaying the first

loan and having passed several requirements, the borrower can opt for a second loan equal or

greater, now that he/she has learned to manage his/her investments. If the business is going good

and the borrower keeps repaying the loan, it will be then easier to achieve bigger amounts of credit.

Size of the next loans is regulated by the evolution of borrower economic needs, the level of

compliance in the payment of the previous loans and the evolution of its business.

After analyzing the consequences of microcredit applications, I realize that this particular

instrument is insufficient if not goes accompanied by other economic and social tools, such as

training (education, equality, respect, etc) and technical assistance to facilitate the access to the

market, for example. Assistance is a key tool in order to improve borrowers productivity and

achieve greater scales of production and services, education at all levels of age, business

management techniques, etc.. By applying these improvements above, microcredit then becomes a

very powerful tool that accelerates the process of social and economic inclusion of borrowers.

In most of the countries but specially in Bangladesh, microcredit programs have been mainly

focused on women as they have shown better repayment rates than those reported by men.

Furthermore, there is evidence that the income generated by women usually has a higher potential

impact on family welfare.

However, microcredit system also has its own detractors, people against this practice who suggest

that it deactivates international cooperation and banking policies, transforming poverty into

bankable assets and borrowers into slaves forever. Moreover, there are also economists supporting

the idea that microcredits are not sustainable in the long-term because they depend mainly on

donations and special economic conditions. Some of them considered microcredits as a way of

privatization of poverty, being poor people unable to manage any type of small amount of money

borrowed. I do believe that some of this suggestions are not false and that the microcredit sytem has

indeed a lack of productivity coming from both sides lenders and borrowers.

Besides, members working for institutions in extreme poverty countries as Bangladesh tend to act in

certain ways different than the purely economic: from an altruistic behavior by facilitating access to

credit and paying no attention to the regulation of the system to an oppressive one by cheating and

imposing additional requirements to borrowers just for their individual interest.

Are microcredits really helping the poor? Is this system effectively reaching the poorest? How have

actually changed over time social interactions between institution workers and poor borrowers?

What is the point of view of the private sector? Are just institutions offering microcredits? Several

questions like these come out when trying to anlyze microcredits and its efectiveness, here

examined and judged. Issues like collateral and repayment system, social business or financial

intermediaries are being questioned and its real contribution to growth.

Moreover, established social problems as corruption or illiteracy and the lack of reliable institutions

appear to make even bigger the entanglement of this particular point. Besides of that, social point of

view brought by microcredit fundations plays an important role when analyzing the behaviour of

the different actors involved in microcredit. Both of these have been called into question during this

last decades and giving a clear and unhampered socio-economic perspetive is more than just

necessary.

In section number one I will try to give an approach to front row economic day-to-day issues like,

as I mentioned before, collateral management, repayment and saving system, assymetric

information and group lending versus financial intermediaries procedures and other practices. Later

on I will discuss about the private sector performance and strategies and will give a personal view

of the situation. Section number two is based on social problems currently affecting the society of

Bangladesh and how are they related to the introduction of microcredits, borrowers and lenders

included. Concluding, key points are summarized in order to understand somehow the microcredit

issue and particularly the case of Bangladesh.

Keywords: Microcredit, Bangladesh, socio-economic, institutions, borrowers, lenders

1.Economic point of view: considerations and reasoning. Private sector appraisal.

First of all, it would be important to address some brief but basic features. According to the BBS

(Bangldesh Bureau of Statistics), Bangladesh is one of the world's poorest countries where most of

the population, 85% aproximately, live in rural areas. Here there are some tables that illustrate the

situation of the country. Although most of the data comes from 2005, global development within the

country has not changed dramatically.

Moreover Bangladesh is continuously facing frequent floods and coastal cyclones; within relatively

short periods of time millions of households are being affected by these natural disasters, loosing

their arable lands and assets. Malnutrition and undeveloped sanitaty institutions have resulted in

high mortality rates from a variety of diseases.

During these last two decades poverty has been slowly reduced, among 10-15% of people living

below the poverty line although nowadays the total percentage of population living with less than

2$ per day is more than half. The official Bangladesh Poverty measurement differentiates two types

of poverty lines: the Upper Poverty Line, which are poor households and members of the

community living with at least 2$ per day, and the Lower Poverty Line: living with less than 1$ per

day, being classified by microcredit fundations (MfiD's) as struggling members and getting some

more accessible economic conditions when asking for credit. The Upper Poverty Line is about 20%

higher than the lower one and on average below this point households are often illiterate and may

also suffer serious illnesses or disabilities.

Micreocredit institutions appeared primarily to solve the main problem financiers thought that

population had: money administration and managed cash flows to basically increase their economic

position within the society and thus improve their living quality. By creating a micro financial

marketplace, individuals with no resources at all could be able to have access to credit, start their

own business, study abroad or face the often disasters naturaly-occurring in these areas.

By aplying all the inside workflow techniques of these institutions, mid-term results show up that

there are several issues to take into account in order to consider if they effectively contribute to

growth.

From now on, I will refer as members for all individuals enrolled on a microcredit institution

program. One of the most relevant economic problems faced by the members side is group lending.

Some of the microfinance institutions (MfiD's) encourage this practice, which basically consists in

creating small groups of borrowers in order to disminish both repayment and moral hazard risks.

Focusing on these borrowers we certainly must take into account that when living with less than one

or two dollars per day, the way of thinking of every each facet of life is different from what we the

first world could ever imagine.

Members under these conditions are often, as I mentioned before, under severe unhealthy

conditions and most of the times they cannot work or accomplish any simple task. For the

institution salesmen it is indeed really difficult to reach them and even more to convince them to

enroll on a microcredit program, as most of the times they have no idea about the existence of this

supply market side.

During the last decades microcredits have been shaped for women wanting to start a business or

keep working in the existing one. Usually, as Grameen Bank started, groups of five women were

matched for a better managing of the money loaned. Problems arise when one member in a group of

five defaults on his/her loan, sanctions are placed on the other four and they cannot receive a new

loan until they together pay for the defaulted one. This leads to an increased burden on the members

and effectively raises real interest rates for them. Besides, there are a few problems against group

lending techniques that we should take into account, starting from struggling members asking for

loans having not enough skills to develop almost any activity or applying assymmetric information

on their favor for just pure economic reasons.

Repeatedly, when microcredit institution staff members travel across rural areas to catch up new

clients to start a new borrowers group, they find potential members that maybe are skillful but don't

know anything about handwriting so that they cannot even sign the microcredit contract papers.

Bank staff workers are then encouraged by the institutions to teach these potential members how to

write just the initial letter of their names as a proof that they agree the terms and conditions

explained in the contract. This may sound brilliant cause now new members can enjoy being

enrolled in some type of program and develop their own businesses. By giving them a loan for an

income-generating purpose, they can support themselves and become productive members of

society. Not only does the recipient of the loan benefit, but society as well benefits through the

increased production output. But the reality is noticeably more serious than that. Most of the

struggling members that live in such unhealthy conditions don't know how to manage their cash

flows neither the concept behind microcredit system and group lending. Although they get

explained, it's still not enough to be economically satisifed with this financial operation.

Members after signing the contract are just focused on their diary working tasks and don't take into

account the consequences of having asked for a loan. This point is considered as a very influential

one by economists like Cécile Lapenu or Manfrd Zeller and I personally agree with them in most of

their thuoughts. Regarding the poor borrowers who live with more than one or two dollars per day,

group lending seems to be an effective way of managing behaviours by microcredit institutions.

I personally do believe that, in case microcredits were considered as one possible solution to reach

and help the poorest, we should first consider applying group lending techniques depending on the

period of time borrowers have spent enrolled on a microcredit program, I mean, the seniority within

the program. For example at the first stage of asking for a loan, by creating groups of poor people

willingly to work and to make an socio-economic progress can result in a better outcome. In this

case borrowers create by themselves some kind of financial group commitment (also known as

social collateral); they are now enrolled on a microcredit program and theorically will help the other

members of the group with the repayment process and some forthcoming drawbacks. In the

meantime, considering their personal businesses have been developed enough to a higher status and

everything is going smooth, it's not difficult to notice that maybe every individual prefers to ask for

a particular loan in some other institution rather than having this last commitment or being

“trapped” by the strictly economic conditions of the agreement as a group (most of the times the

interest as a group is lower than as an individual). Solvent borrowers achieve a point where group

lending has a nule socio economic contribution and should continue no more. In the short run

commitment is then useful taking into account the special circumstances as it reinforces the internal

pressures between borrowers and this leads to better socioeconomic outcomes, but in the long run

these pressures and a high level of commitment within the group may be unsuccessful for the

economic environment; borrowers will prefer to voluntarily drop out and search for new

opportunities.

The progressive lending issue and the private lenders option.

A further concept supported behind institutions for which they prefer this commitment to go on is

called “progessive lending”, which means that as soon as poor borrowers are repaying their loans,

bankss are continuously offering bigger new ones to allegedly expand their businesses. We will be

seeing some reasons that for the poorest borrowers, far from expanding them, the only effect caused

by progressive lending is eventually a reduction of their available pocket money they could have

saved instead in the medium and long run. Economically, after the sixth week (in the case of

Grameen bank, for example) or a relative short period of time from having repaid their first loan,

borrowers are allowed to ask for a new one, encouraging a better outcome coming from this new

credit operation. Banks convince future members trough commercial acting and when they ask for a

new loan even after no fully having repaid the existing one, the whole debt increase with a

questionable uncertain future and expectations due to a bundle of factors explained below. Through

progressive lending, taking into account the starting economic point of the members, there is no a

clear outcome demonstrated for poor people and a more defined socio-economic program would be

necessary in order to achieve a better one. Nowadays, I think progressive lending just leads to an

increase in the level of poverty due to several determinants that make money management

impossible to do properly. These determinants have to do with the structure of the society and the

economic performance of institutions, both explained afterwards.

Other way by which borrowers in Bangladesh can ask for a microcredit is dealing with private

microlenders. This option usually offers the freedom of keeping out from the group lending process,

being paid off in contrast by higher interests most of the times negotiable. Both the poorest

households and the less poorer ones are able to deal with them and in some cases it's the lender who

is seeking for new customers to offer this double-crossing service. I mean, reaching to an agreement

really has several bad consequences; as it cannot be legally monitored, if there are problems with

the loan repayment microlenders are going to be more likely to use the violence instead of putting a

demand on the borrowers, this last worsen off, resulting most of the times in some kind of potential

slavery over time. This is a crucial point in the sense that microlenders often offer different

economic conditions apart from the institutions and poor borrowers cannot report any abuse to legal

institutions. Some authors like Jonathan Morduch believe that microlenders can create dynamic

incentives by which there is a personal relationship between the two sides and incentives to grow

are much higher (Microfinance Beyond Group Lending, Jonathan Morduch, 2000). Moreover

competence between them and financial institutions can lower interest rates so that economic

conditions when asking for a loan are enhanced (as Morduch states, some microlenders often

attempt to break repayment installments into smaller ones so that borrowers are not suffering that

much). But in my opinion the reality is that even if there is competence between financial actors in

the market, when one side of them has no legal regulation, if problems with the repayment arise this

side will turn to practice extortion to borrowers rather than legal proccedures resulting in the worst

outcome possible for the members side. Although some authors support this competence and the

private practices of clandestine microlending, I do think that this results directly on corruption

practices, manipulation and slavery that must be eliminated. Borrowers then could get inside some

kind of feudalism treatment, an infinite spiral being microlenders and their practices incredibly

difficult and laborious to monitor with an 80% of rural population. Definitely microlenders in this

framework is not the way of reaching and helping the poorest households of the country, instead

they becoming borrowers poorer over time without turning back.

The repayment problem: schedules and asymmetric information.

Poor population of Bangladesh must also face one more issue right after asking for a loan, a main

financial one: repayment schedules. As more than half of the population is currently living with less

than 2 dollars per day, the amount of credit they can request is no much higher than this and the

most importante thing, repayment conditions are going to be the critical point when analyzing the

economic power development of these households over time. Repaid cash money is aimed to be the

main source of microcredit fundations income and possibly the one for borrowers to improve their

socio-economic status; for this reason it should be deeply interpreted in order to determine if these

institutions are really reaching the poorest families and helping out the poorest businesses.

Microcredit fundations mostly ask for a repayment system scheduled on weekly installments of a

certain quantity of money, depending on the amount of the loan, and this is the main problem that

arise for borrowers: from an economic point of view they have no time to do virtually nothing

within that short period of time. As economic and organizational resources are limited, having that

brief interval between receiving the loan and the first coming installments makes microcredit some

kind of trap that not all borrowers notice at first.

Here we are naturally assuming that borrowers are always entrepeneurs that want to start their own

business and they just need an external cash flow to implement it. But in most of the cases rural

population don't even undertsand the concept of “undertaking” a full business project and managing

all the organizational and accounting departments of that potential firm. As I said, rural population

sign papers thanks to the quick lessons by the bank staff, receive the little amount of money and

literally go away with it. Most of them living in the rural areas end up loosing every each of their

assets including their houses while trying to start some kind of uncontrolled business, being victims

of natural disasters or simply spoiling their money. Again they come back to the bank officers to

ask for a new loan to see if there is still one more chance of getting their money back. Most of these

banks (Grameen, BRAC, ASA...) agree saying that there is a huge problem for borrowers wasting

the credit cause they don't give value enough to the loan just received. They offer a new loan

encouraging progressive lending, but at the same time setting up higher interest rates and charging

all kind of taxes.

Repayment schedules are set up to both generate income for paying bankers and control the

development of the money that have been lended. In the particular case of Grameen Bank, poor

borrowers after the second week from receiving the loan are asked to start repaying it plus the

interest. After the sixth week, if repaid correctly, they can even ask for a new loan. This early

repayment schedule set up by fundations will contribute for poor borrowers in the long run, as we

will discuss, to be financially worse off. Population enrolled will see how their purchase parity

power (PPP) is disminishing in the meantime and pressure by institutions arise as time goes by.

From the second week after receiving the loan and being paid the first repayment, weekly

installments are imposed to continue within the program. That was one of the reasons why creating

groups at first stages of the process could be a great idea in order to diversify the pressure over the

borrowers and create the concept of commitment between them.

By Organizing borrowers into groups who pledge joint liability for each other’s loans has been the

key mechanism to ensure repayment to the poorer *. I then agree with Morduch and the rest of

coleagues in the sense that borrowers, as soon as they earn some pocket money from working or

investing the credit, they must give it back to the bank plus the interest in order to go on. An this,

being suffered by millions of bangladeshis, could lead to misinterpreting the concept of credit and

thus creating a clear moral hazard situation due to the asymmetric information within the economic

system that should be analyzed and judged.(“Portfolios of the poor”, Daryl C., J. Morduch, S.

Rutherford and O. Ruthven, 2009)

Repayment problem goes larger when it exists asymmetric information, that is, where one party has

more or better information than the other regarding for example money management, interest rates

or economic skills . This creates an imbalance of power between struggling members and bank

officers leading to an automatic market failure, so we should first divide population into two groups

as before: those living with less than two dollars per day and those living with less than one, the

struggling members. Poor borrowers, as they know about the existence of weekly installments and

in order to keep enrolled in the program, immediately ask when allowed (6 weeks in the case of

Grameen Bank as I explained) for a new bigger loan, following the progressive service provided by

the bank and borrowing a little more quantity of money. It may seem taht struggling members are

actually expanding their own business, but in reality population is following a trend by which they

are just asking for new loans as soon as they can to repay the interest plus principal of past loans,

not to continue growing up their potential businesses. They are nor economically neither socially

able to earn that money in that short period of time, so they just decide to ask for more money to

keep a better living quality while repaying past loans. Banks at the other side are then showing up

high repayment rates for their poorer borrowers while the reality is slightly going far away from

that. Briefly, situation ends up within the first or second repayment stages leaving the poor borrower

even poorer with a little debt or maybe being reinforced by progressive lending dragging on severe

interest rates and quantites that never will be repaid again.

So the point is that repayment problems are being partially solved by borrowers just asking for new

loans, using asymmetric information to keep enrolled on a microcredit program while maintaining a

certaing living quality. Some cases are for example poor borrowers asking for loans when seasonal

floods are helping the crop and being afterwards ruined for the same floods drawback; then they

ask for a new loan expecting a better weather while repaying the interests of the past loan, so long

run financial situation is eventually worsen off.

Are then microcredits a solution to poverty taking into account this information? I don't think so. As

poor borrowers notice about their long term decreasing utility of their money and must face these

early installmens we have talked about, they will not care about their economic long run position

when asking for a credit, they just will care about the present issues cause they have previously

noticed the only way of moving forward in living quality is by repaying past interests as soon as

possible by asking for new and bigger loans, so they will always be better off watching over the

short run agreements.

Concluding, I think most of poor borrowers seem to understand that weekly installments are not

beneficial for them on the long run so they are asking continuously for new loans. This is not the

correct practice from an economic point of view. Institutions are not clearly helping them in nor in

the the long run neither apparently in the short one. Microcredits are then not helping Bangladesh to

come out of poverty although every day are reaching more members asking for new loans and

creating more debt for these people.

Regarding the struggling members, we must take into account that as they are not asked for any

collateral, the problem of controlling how loans are distributed is even more complex. When

analyzing if institutions are really reaching and helping this side we should notice that they give

members such a little leeway that they cannot do nothing with the money. They don't know how to

manage cash flows: just receive the money, sign papers which cannot read and move on. It has

reached a point where microcredits, in any case just will reach the less poor side of the society and

it's absolutely not clear if they help households to come out free of poverty over time.

The strictly private market opinion and the Grameen Bank example.

Some economic private points of view outside from the inherent poverty dilemma in the country

criticises the system and offers other solutions supporting the idea that microcredit diverts

production in the country and it does not reach neither help the poor population. After analyzing the

situation and the loans management evolution over time, both of these microfinance institutions

neglect to consider. Through their diversion of production, among other factors, microcredit

institutions are essentially detrimental to society in this way. Long run scope for poor borrowers is

being worsen off over time due to these last reasons I have briefly explained and in the meanwhile

microcredit institutions support it and operate under the guise of one of the greatest economic

failures: looking at the immediate effects of a policy towards one special group of people, while

disregarding the long-term effects of the policy on them.

Moreover, some private banks are against delivering credit to the poorest. These private institutions

think that resources are being wasted when giving loans to poor members of society who could not

otherwise give them privately. The loan, being self liquidated, also costs almost nothing. This is

precisely what occurs every day in the private banking system. A person who only has a third of the

capital needed to buy a milk cow or open a shop borrows the rest from the bank and uses the initial

capital as collateral. However there is a great difference between private banks and microcredit

banks. Private banks are profit maximizing firms that risk their own capital. For this reason, they

carefully investigate all loan proposals for their legitimacy. They weigh the chance of full future

repayment with interest against the chance of default, highly extended in microcredit fundations. If

microcredit institutions acted by the same standards, there would be no purpose for them entering

the market in the first place, if they do exactly what private banks do. However, microcredit

institutions invariably act on lower standards in order to reach the poorest and help them. They give

loans to people without collateral who could not receive loans in the private sector.

This scheme might seem favorable at first, until one observes the long-term consequences of the

policy to all groups of people. Credit is a scarce resource, that is, credit that is given to one man

cannot be given to another. A milk cow given to a poverty stricken person cannot be given to a

middle class entrepreneur. A grocery shop given to a destitute family cannot be given to a middle

class entrepreneur. This of course assumes that a surplus of milk cows and grocery shops are not

solely produced at the expense of other goods. Therefore, one must analyze the respective merits of

the two individuals to determine who should receive the loan, that is what the private banking sector

firstly argued. Some private banks criticize the microcredit fundations when reaching also the

middle class arguing that they have passed the brutal test of natural selection by existing in the first

place and they don't want microcredit institutions inside the market operating with lower interest

rates. It would be definitely interesting to study and find some point where middle poor households

can receive and manage credit by themselves and struggling members are not involved into the

savage microcredit system.

By continuing with this system, struggling member are better off when asking for credit and default

than working for repaying it. I'm not completely for some of this measures but in a certain way

some private institution workers, although noticing the whole company is loosing money with

microcredit practices, they keep doing their job astonished by the poverty of the country.

However, the fallacy of microcredit is still perpetuated by feeble shortsightedness. People observe

the direct benefit of microcredit to an identified poor person, but neglect to witness its harm to an

unidentified middle class entrepreneur. In short, microcredit does not increase the total national

production, but rather diminishes it. Microcredit institutions also completely disregard inflation and

opportunity cost in their accounting methods. For instance Grameen Bank, BRAC and ASA offer

several loans to poor people that are either lower than the rate of inflation or barely enough to

counteract it the five year average inflation rate in Bangladesh is upwards of seven and a half

percent (Manfred Zeller, 2000). Moreover, these banks offer loans to its struggling members that are

interest free. It also gives higher education loans that are interest free for the first five years and for

the following five years have a meek five percent interest rate. Both of these loans are under the rate

of inflation so that they lead to economic losses for these institutions. Insitutions are in some kind

losing money and people is not clearly being helped out on the long run.

In addition Grameen Bank offers housing loans at an interest rate of eight percent, scarcely higher

than the inflation rate, but significantly lower than for example Grameen’s opportunity cost of

twelve percent interest (source: Grameen Bank). Not only will Grameen lose money due to these

loans, but they will consistently lead to costly overstimulation and overexpansion in certain sectors

that will lead to busts in the market in the near future. In order to offset the increased liability of the

poor members’ loans, Grameen uses the mechanism I talked before: joint liability and a new one,

forced savings, which has a complex scheme and we will also treat it from a social point of view.

Focusing for example on Grameen Bank mechanism, every week, members in the groups are

required to save money in the Grameen Pension Scheme, which pays barely enough to counter

inflation. Instead, if members had been given the option to use the savings to pay off their twenty

percent interest loan quicker, they would have had economic profits. As a result, this too raises real

interest rates for the borrowers. In essence, through joint liability and forced savings, the real

interest rates can be significantly higher than the stated twenty percent. In addition, while

microcredit fundations intend to give loans to asset-less and landless people, they often give loans

to people with several lahks of taka, which certainly does not aid in global poverty reduction.

Economically, these reasons just support the idea that microcredit is actually noR reaching neither

helping the poorest population in the country, but disminishing their potential capital available.

Another polemic issue regarding these fundations is financial sustainability. It has been proved that

it relies on massive grants and subsidies in order to break even. About twenty two percent for every

Taka lent by Grameen Bank comes from grants and subsidies (Source: Grameen Bank workers). In

fact, if microfundations like Grameen Bank had not received grants and subsidies from external

benefactors, they would lose millions a year.

To conclude with this economic view, I do believe that microcredit system is not as efficient when it

is applied in Bangladesh and has several key point that should be revised in order to achieve a better

outcome form every each credit it manages (repayment schedules, progressive lending techniques,

private microlenders and so on). I do support the idea by Morduch when he asses to “help

customers to manage cash flows, since it helps banks to give banks access to customer resources

before they are spent or otherwise dissipated”. Moreover, poor peole has to deal with income

fluctuactions depending on so many factors among credit repayment schedule apperas to be one of

the most crucial ones. As Sajeda Amin estimates about Todd writings (1996): “the purchase of some

comodity goods are commonly reported uses of Grameen loans, but in practice loans a re often used

to lease land and repay other loans”. In addition, after analyzing the distribution of consumption

conclusions remark that there is a “strong indication that members are poorer than nonmembers”

and that these mechanisms don't reach the poorest population. Thus financial systems are still not

enough well developed to assist the poorer housholds and looking for new and efficient

mechanisms would be an extensive task to carry out in order to reduce poverty. Microcredit is then

not the solution and deeper studies would be necessary in order to design financial instruments

purely focused on the poorest.

2.Social controversies between borrowers and lenders; socio-economic point of view and

behaviour theories.

Besides the complex desinging tools developed for the microcredit market, there are some basic

inherent social problems in the Bangladeshi society that would be interesting to take into account in

order to realize about the situation in the country and the available ways of getting out of poverty. In

Bangladesh poverty has been conceptualised just only in terms of cash income; when in fact it has

to do with all aspects of life, involving both basic material needs such as food, clothing and

housing; and basic human needs such as human dignity and rights, education, health and equity.

In order to move on, some social issues should be deeply explained. Education is one of the most

worrying one: there is a huge illiteracy rate that condem population over time. Struggling members

suffer more as they cannot read neither write and they are not able to manage cash flows. The little

amount of money coming to them is quickly used to immediately buy food and luckily essential

items. Although they wanted to work, poverty stricken members are synonym of unskilled labor

force that is not contributing to growth.

Source: Bangladesh Bureau of Statistics.

Other problems faced by the society are for example living conditions, health system, corruption,

job market , law frameworks, dowry system and in general, most of the institutions which are not

reliable and society is not currently being reflected by them. Here there is a summary of labour

force key points also from the Bangladesh Bureau of Statistics, where we can notice slightly

improvements on the economy and labour force during the last decade, emphasizing on a better

position for women both in urban and rural areas. There is also an increasing number of

unemployed population represented by unskilled workers, poverty stricken members of the society

and people with severe illnesses caused by malnutrition or unhealthy living conditions.

Regarding corruption, population faces one of the biggest problems in the country, which affects

every each of the rest social ones and obviously the economic side. Focusing on rural areas, some

borrowers are dealing directly with the branch officers of the village who, in most of the cases, are

inhabitants of the same area so that they know each other. They often ask for private agreements

between the office manager and them looking for a better economic repayment conditions.

Managers agree but then the concept of collateral substitutes explained by Morduch arise, which

reflects the day-a-day workflow for these specific situations. That is, as members cannot afford the

repayments schedule, branch officers offer new substitutes in such a way that some consumption

goods are sold within the same branch as if it was a shop. From mosquito nets to sim cards, these

low-cost products are sold “necessarily” with the only purpose of retaining economic power and

liquidity, keeping borrowers savings tied up for the next week. (The Microfinance Promise,

J.Morduch, 1999)

At a lower level, the economic practices carried out by branch officers in the villages who friendly

forced borrowers without money to buy several consumption goods is just a meek example.

Moreover, bribes are becoming commonplace and people cannot access to a job without having to

pay just for getting interviewed. The same happens with child labor within the villages being

consented by the mayor or negotiated prices in advance among the government and the

pharmaceuticals, that is, corruption has become an accepted behavior as if the government has

legalized the payments of bribes for most of the services that were supposed to be a free handout.

This is incredibly disgraceful.

For instance, immediately before an election, the government usually cancels all debts owed by the

poorest to instantly gain votes: massive bribes to keep the majority of the population happy while

destroying the economy. Firstly, it encourages struggling members to keep asking for loans not

taking into account long term effects; secondly, as nobody complain against these measures the idea

that bribes are used commonly and that they don't represent any market fallacie is thus reinforced.

This measure happened during the last elections causing commotion between fully private

institutions. For this reason, banks are wary of future loans to the poor as they do not want to see

their capital disappearing every each time there are elections. Furthermore, if a poor person defaults

on a private loan and the bank attempts to seize the collateral and assets, the poor person will

usually sue the banks and the corrupt courts will side with the poor person. This too will make

banks less inclined to loan to the poor in the future and poor borrowers more inclined to continue

asking for bigger loans. For example, if the court corruption was eliminated, then the poor could

effectively enter the traditional private banking system or a special one clearly defined within a

legal framwork behind it. (Source: www.weeklyblitz.net/2120/cycle-of-corruption-in-bangladesh).

Another important socio-economic issue within the Bangladeshi society is dowry system.

Microcredit fundations focusing on an effective use of their funds are in a certain way against this

old tradition. By this, newly married women have to give out a generous amount of money, plus

funiture for the new house, electrical appliances and lots of expensive products, everything for the

mEn. If these gifts are not fully accomplish according tho the expectations, violence problems and

so on may occur being the two families involved in the fight. In fact, most of the men interpret

weddings as just another way of making money and creating business opportunities. The most

known gender violent practice applied to women is “bride burning” where the man literally spill

gasoline over the woman and burns her down. Acid attacks and even murder and suicide are a

consistely routine. That is unacceptable. These practices are so detrimental to society and contribute

to an underdeveloped and poorer society, they don't help women getting out of poverty but

encourage gender violence en empower men in the society. Focusing on Grameen Bank practices

for example, their hypocrisy regarding dowries is absurd. One of Grameen’s 16 decisions for its

members (some kind of mantras) is that women should neither pay dowries nor practice child

marriage. However, Grameen and also other microcredit banks specifically give loans for women’s

daughter’s weddings and it's available at the bank accounts how they are offering “loans for

weddings”. If not directly encouraging dowries, Grameen at least condones its practice and gives

some money to it not even being critic with this important point.

Thinking positively about microcredit fundations allowing these credit facilities is indeed very

difficult. Sometimes poor families are to take loans, sell their lands, ornaments, cattle and even their

own house to arrange the money needed to pay for the dowry. As it's an old tradition some victims

don't want to continue the legal battle against their husbands for fear of them. Men just think about

getting rich quick, a common mentality among poorer who use their wife’s parents’ money to better

secure their own futures. Those households with lower levels of education and less land owned have

fewer assets and face the most difficulty in escaping poverty. The only solution to these problems is

to define a well developed legal framework which covers all these procedures and erradicate these

older traditions that precisely humillate women in society.

In general terms, living every each day with less than two dollars per day are in fact hard to

imagine; living on so small income results in the only thing people care about is to at least have

something to eat. It doesn't mean that every day they are able to make this money: as it's an average

there are some days not making nothing and other ones making three or four dollars per day. Poor

can do little for themselves beyond hand-to-mouth survival, so after all microcredit system for them

is effectively not an economic solution for the poorest. As Morduch suggests, chances of poor

people of moving out of poverty are mainly two: charity or eventual incorporation to the globalized

economy, and I partially agree with him.

If thinking about how poorers are going to manage the one or two dollars per day is such a

complicated task, conceive that they should find a spot to save is impossible. We cannot then

consider real cost for health coverage or last minute emergencies like punctual diseases, crop

damages and so on. After reading about the main causes of this extreme poverty situation, it seems

quite easy to understand the general trends during the last twenty or thirty years but, whether these

factors were or not relevant and why is more complicated to determine and is still nowadays the

topic for a long discussion.

Behaviour trends inside microcredit fundations.

As poorest behaviour has been reflected with their preferences when asking for loans, some other

point of view coming out from comparing the behaviour of bangladeshi population working for

microcredit fundations should be analyzed. During the last years, workers inside these companies

have protested against the current financial system applied to the population resulting in small riots

and strikes to show up that even the same workers applyig this financial techniques were against

some of the banking practices established. Some of them have left these companies and now work

in other countries or against their past firms. There is one author who I would personally like to

refer cause by his thoughts he illustrates another way of treat the microcredit performance within

the society: Albert Otto Hirschman, gives a personal view of how to understand population

behaviour in real cases and, lately they have been proven that some of them are actually true.

Proposing formal behaviour models in real-life models, general situations are described and are

applicable to diverse environments. I would try to summarize in this particular case in which these

models are observed and analyze their main features. As I said before, inside the private institutions

there is not always a common way of thinking about microcredit practices and some workers

against credit practices keep doing their job being consequent with the poverty stricken situation of

the country.

Basically, Albert Otto Hirschman suggested that when individuals dissatisfied with the performance

of an organization they belong, the company they work for (in this case, microcredit fundations) or

when they realized that there is a failure in it they may try to improve their position either by exiting

from the organization and thus leaving the goods and services it provides (not always it is possible

to exit), or by remaining with the organization but attempting to improve its performance via the

voice option (to protest and try to fix the problem). It is supposed that these forms of response may

force organizational leaders (bank head chief officers) to be more responsive and move forward to

improve the actual matter. Organizations also can try to find a way to reduce the exit option by

giving individuals a simple and painless way to exercise their voice. This process is then building

what Hirschman called loyalty for the individuals, which will be represented by the level of

attachment to the organization or company, which in Bangladesh also represents a cultural issue.

Having loyalty to an organization could keep individuals from exiting and increases their incentive

to voice their discontent and bring changing ideas from inside. In fact, inside of microcredit

fundations are usually groups of people who are against the microcredit practices applied by the

company and want to change them in order to offer a better and real economic possibilities to

struggling members. Some workers inside microcredit fundations think that loyalty is associated

with less costly exercise of voice, they just will be better of individually if they do not practice

voice, so they don't have such incentives to move on. They just are too much selfish just caring

about their own interests; they are more likely to manage an internal solution within the company

rather than being the first person to exit.

The fact that poverty is so common in the country and the fear faced by most of these workers result

in different kinds of answers coming out, most of them against the system. They actually know

hoW to improve the situation but they also need to feed their families so definitely going on strike is

not the best way to keep the job. This is a huge problem coming from inside the organizations in

Bangladesh and due to the cultural, social and economic influenced barriers there is a lot of work to

be done in order to change it. Besides, Hirschman's treatment of the concept of loyalty is very

special. In his model, loyalty to an organization may be sufficient to encourage voice, that is, if the

individual working at for example, Grameen Bank, is really attached to an organization, it will be

easy to use voice in order to improve the internal matters. Being more loyal is also reflected in a

greater cost of exit from the organization, then it will be a reduction of the potential welfare

achieved for individuals working inside and the organization leaders will be forced to concede less

to, in this case, bank officers working at villages or poverty stricken population facing higher

interests and worse financial conditions. (Source: See bibliography)

On the other side, if wanting to ask for a microcredit people in the streets rational pourpose will be

also to get the best economic conditions available for them. Average individuals actually know

almost anything about repayment schedules or management of money so they just go to the bank

officers and buy the credit product they think they need, want and can afford as I explaied before.

People microincentives will be as expected by the overall, to behave in their own interest. So, after

a well-known decrease of the expected economic expectations and conditions plus an increase of

interest rates and pressure, according to Albert Otto Hirschman individuals can either choose

between the exit or the voice option. Here, individuals have reached a point where they have

noticed they cannot repay the loan and if trying to exit, there are lots of possibilities bank officers

turn the situaion into violence and force members to repay the loan (explained before when

resulting in some kind of slavery). The same violence situation appears when trying to use the voice

option, as here corruption may play an important role here and no one is “freely allowed” to

complain without, we will say to be easy, restriction. Exit is then too difficult to accomplish

although most of the borrowers know about the consequences of not repaying the loans and increase

with the size of the credit asked.

These microincentives of different actors, bank officers and microlenders against struggling

members asking for loans, leads to a point on which the leaders don't know if population could

organize by themselves and protest against the economic pressure of the microcredit system, but the

probability of organization is in this case determined by factors within the same leader’s control.

Here, companies and bank workers always have an incentive to suppress voice (and keep

economicaly oppressing by maximizing their profits ant not thinking about the nearly future of

poverty stricken population). As a result, I think everybody will neither prefer the exit option nor

the voice due to corruption and voilence situation that leaders may apply.

People in the streets are illiterate to practice the voice option although it may be the last chance to

change the current and critical situation. Customers asking for microcredit products and looking for

a better economic status have to make telephone calls, write letters to institutions, organize

committees or syndicates, hire lawyers...No one is able to go through all of that heavy, laborious

and skilled work if they just can think about getting some food or drink no to die of starvation or

dehydration.

Conclusion

Nowadays, microcredits are neither reaching the poorest nor helping them to come out of poverty in

the medium and long run. There are lots of key factors to take into account but solution is not a

particular question about taking something out of the Bangladesh economic system, that is, not just

a question of taking out some firms selling loans to poor members with oppresive conditions or

eliminating dowry forever, but of establishing a microcredit system that effectively reach and help

poor people through different techniques, being supported by the government (which means

eliminating corruption, promoting full literacy among young population or creating reliable

institutions caring about the problems of the society, etc) and even allowing for an economic

amnesty from one specific starting point to the poorest members within the society. If not trying to

solve this, it will be reached a point in which the level of beggary due to the expansion of

microcredit techniques is so critically high that it is not posible to get population out of poverty.

Microcredits are only helping banks and administrations and it's difficult to apply legally against

them casue governments have been used to forgive poorest debt to gain their vote. Intitutions have

aggressive sales teams and mobile offices placed in the villages to reach the most disadvantaged and

offer them a financial product, even if it doesn't financially help them. In addition, market failures

are economically suffocating borrowers and just by keep borrowing money they can maintain their

low living standards, creating then a non-ending cycle of interests and debt over time. The problem

of information management is still one of the biggest ones as all data from surveys is still very

doubtful; most of the population lives in rural areas and it's difficult to create reliable and realistic

studies, they are needed in order to move forward. Borrowers also have a lack of training and a full

education program together with social programs focused on the poorest is required for a complete

and integrated renovation of the socio-economic system and thus for being able to help and reach

the poorest. Key points such as progressive lending or credit conditions should be checked and

shaped again focused on the development of long-term members, relying on social tools to enhance

the security of a good governance of microcredit.

Besides, it's known that large amounts of money supporting microcredits comes from donations

from external institutions so, as a result, many of the workers of these institutions act in their

personal benefit by creating both situations of altruism but also of slavery, which are strenghtened

in rural areas where there is less control from the bank root. Practices of these workers should be

avoided (like forcing borrowers to buy products from their particular businesses to access credit) in

order not to have an irrepressible market failure.

I'm not really sure if solely this measures above could solve this huge and global problem.

Regarding Hirschman suggestions, I would say that one possible solution carried out by bank

workers and poor microcredit members would be going on strike together, but this is such a quimera

in reality. Just in that assumption, full exit from supporting microcredit firms will be consummated

and a change on the general policy towards eliminate poverty could be then achieved. Since exit is

not a possibility, hence, banks are less open to improvements in the system since neither exit nor

voice are a real option and they are profit maximizing minded. By creating legal frameworks for

intitutions and starting them from pillars as education, health, or corruption and bribery practices

removal, micorcredits could be a solution for the Bangladesh economy. In-depth studies have been

already made but would be essential to make an effort to start developing the country with a solid

project.

Bibliography

* Albert Otto Hirschman (1970), “Exit, Voice, and Loyalty: Responses to Decline in Firms,

Organizations, and States.”, Cambridge, MA: Harvard University Press. ISBN 0-674-27660-4

* Armendáriz de Aghion, Beatriz (1998), “Group Lending with Joint Responsibility,” Harvard

University, typescript.

* Beatriz Armendáriz, Jonathan Morduch (2000).”Microfinance Beyond Group Lending”

* BDNews24 (2011): “Microcredit is a mirage, says UK study”, http://bdnews24.com/details.php?

id=203518&cid=2

* Cécile Lapenu and Manfred Zeller, (2001), “Distribution, growth and performance of

microfinance institutions in Africa, Asia and Latin America”, Food Consumption and Nutrition

Division, International Food Policy Research Institute. Washington, D.C.

* Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven (2009), “Portfolios of

the Poor”, Princeton University Press.

* Ghatak, Maitreesh and Timothy Guinnane (1999), “The Economics of Lending with Joint

Liability: Theory and Practice,” Journal of Development Economics 60: 195-228.

* Henry, C., M. Sharma, C. Lapenu, and M. Zeller. 2000. Assessing the relative poverty of

microfinance clients: A CGAP operational tool. Consultative Group to Assist the Poorest (CGAP),

Washington, D.C. (forthcoming).

* Jon Elster (2007), “Explaining Social Behavior: More Nuts and Bolts for the Social Sciences”,

Cambridge University Press.

* Morduch, Jonathan (1999a), “The Role of Subsidies in Microfinance: Evidence from The

Grameen Bank,” Journal of Development Economics 60 (1), October: 229-248.

* Morduch, Jonathan (1999b), “The Microfinance Promise,” Journal of Economic Literature 37 (4)

* Patrick Bond (2010): “The danger of Grameenism”,

http://himalmag.com/component/content/article/53/355-The-danger-of-Grameenism.html

* Sharma, M., M. Zeller, C. Lapenu, C. Henry, and B. Helms. 2000. Assessing the relative poverty

level of MFI clients. Synthesis report based on four case studies. International Food Policy

Research Institute (IFPRI) and Consultative Group to Assist the Poorest (CGAP), Washington, D.C.

* Sharma, M., M. Zeller, C. Lapenu and C. Henry. 2000. “Do Microfinance Institutions Reach the

Poorest?”. International Food Policy Research Institute (IFPRI), Washington, D.C.

* Sajeda Amin, Ashok S. Rai and Giorgio Topa (2002), “Does microcredit reach the poor and

vulnerable? Evidence from northern Bangladesh”, Journal of Development Economics 70 (2003)

59–82.

*Thomas C. Schelling (1978). “Micromotives and Macrobehavior”, Norton.

FCND Discussion papers

An Operational Tool for Evaluating Poverty Outreach of Development Policies and Projects,

Manfred Zeller, Manohar Sharma, Carla Henry, and Cecile Lapenu, June 2001

Repayment Performance in Group-Based credit Programs in Bangladesh: An Empirical Analysis,

Manohar Sharma and Manfred Zeller, July 1996

The Determinants of Demand for Micronutrients: An Analysis of Rural Households in Bangladesh,

Howarth E. Bouis and Mary Jane G. Novenario-Reese, August 1997

Women’s Assets and Intrahousehold Allocation in Rural Bangladesh: Testing Measures of

Bargaining Power, Agnes R. Quisumbing and Benedicte de la Briere, April 2000