THE WORLD BANK GROUP A World Free of Poverty


For Sadia it was the end of the line. With her husband suffering from tuberculosis, two hungry children to feed, and all her assets including their tin shed house gone, the future looked bleak.

But then came a ray of hope when some villagers advised her to join a women’s credit group run by a local NGO. Today, Sadia is making ends meet from her small shop, selling beatle leaf, oil, chutney, and other staple items. She set up her shop with a Tk 2000 (about US$40) loan from the Association for Social Advancement (ASA).

Like Sadia of Kuliarchar village, millions of poor women and men across Bangladesh are striving to make a comeback using microcredit.

Thanks to a microcredit loan, Sadia now runs her own shop
Microcredit, the provision of small loans for income generating self-employment activities, can make all the difference for a poor woman and her family. The World Bank is supporting Bangladesh's microcredit movement with the help of a US$105 million credit for a Poverty Alleviation Microcredit Project.1 The interest-free International Development Association credit is to be repaid by the Government of Bangladesh in 40 years with a 10-year grace period. The government, in turn, give this money to PKSF at 1 percent interest to be repaid in 20 years.

The project channels funds to Palli Karma Sahayak Foundation (PKSF), an innovative quasi-government poverty foundation, which lends to promising small and medium NGOs to expand their microcredit programs. It is also helping PKSF and the microcredit NGOs who borrow from it to become financially viable through training, research, and disseminating best practices on increasing cost effectiveness. The project has helped more than 170 NGOs extend microcredit to an estimated 1.4 million poor borrowers, most of whom are women.

“Microfinance has tremendous potential as an instrument for poverty reduction,” says Reazul Islam, Operations Officer in the World Bank’s Dhaka Office. “The project supports the Bank’s twin objectives of poverty alleviation and broad-based economic growth.”

A growth model that grows

Fakerun Bibi, a 40-year-old woman living in Gaurnadi Masum, relentlessly pursued Proshika’s Area Coordinator for more loans to expand her business.

Bhaijan, (brother) I won’t let you leave my yard until you promise me a bigger loan next time,” Fakerun demanded. Her dark, bony figure bore witness to long years of hardship, distress, and poverty. “You have given me only Tk 5,000. But I need more money. I want to start a small hotel.”

Fakerun Bibi’s forthrightness reflects the hunger for microcredit in the rural areas that are beyond the reach of formal financial institutions. Severely short of capital, the rural poor have proven that they can change their destiny if cash flows into their hands.

“Demand is expanding so fast that we initially could not provide all our group members with credit,” says Dr. Qazi Faruque Ahmed, President of Proshika. “On the other hand, the average loan size was too small because members have developed their loan utilization capacity. The other important factor was that grant funds are drying up, requiring new sources to be channeled to the poor.”

Aminul Islam, Director of the Bangladesh Rural Advancement Committee (BRAC), echoed this sentiment. “The demand for funds is increasing fast. Once a woman finds that credit can change her lifestyle, she dreams of going higher and higher, and the demand also grows. We found that grant money couldn’t keep up with the large demand. So we opted to take funds from PKSF.”

Now that PKSF is providing a new source of funding, NGOs are able to meet the demand for microcredit. Meanwhile, more and more members of NGO groups are taking out new loans everyday.

Ranzida’s story--A lesson for banks

With almost half of their loans resulting in default, Bangladesh’s commercial banks have much to learn from Ranzida Khatun.

Ranzida, a small peanut trader, is a member of Keya Bhumihin Women’s Group in the village of Kuliarchar and has taken out four loans from ASA. There has not been one single instance in which she has defaulted.

“The first time I borrowed only Tk 2,000 to see if I can really make use of it. Since it was successful, I found the courage to borrow another Tk 3,000, then Tk 4,000, and finally Tk 5,000 eight months ago,” says Ranzida. “I have already paid 32 installments on my last loan and have 13 more installments to go.”

The NGOs that have been giving loans to these women are also regularly repaying their lender.

“We place top priority on paying back loans to PKSF,” says Shafiqual Haque Choudhury, Managing Director of ASA. “Our loan recovery rate is 99.82 percent.”

Explaining the secret to their success, Choudhury says, “We are able to maintain such a high rate of loan recovery by providing training to borrowers before giving them loans. Projects are also vigorously scrutinized by our staff before giving loans and these are constantly monitored,” he added.
Microcredit makes dreams a reality

“Monohori Hotel”, reads a freshly written sign on the top of the tin shed beside the dusty road. From inside wafts the mouth-watering smell of fish curry.

Between the narrow gap of the two rows of stretched tables and benches, Jamila Begum moves along deftly with a bowl of rice in one hand and curry in the other. Customers, mostly cattle traders who came to sell their animals in the market a few hundred yards away, eat heartily.

Members of women's credit group supported by ASA, a microcredit NGO, display their account books

“The hotel is my brain child,” Jamila says while serving her customers. “First, I borrowed Tk 1,000 from BRAC and started a poultry farm. But when I found out that those hotels near the market were booming, I thought, well, if they can sell food to the cattle traders, why can’t I? I am a good cook, and I can offer them better food at cheaper prices. So I took out another Tk 6,000 loan from BRAC and along with the profits from the poultry invested in this hotel.”

“Before starting the hotel, I used to work as a maid in other people’s houses,” recalls Jamila. “I had to work from dawn to late night almost for a pittance. We used to live in temporary housing made of straw. Those terrible days are now behind me. Now, I have replaced my old house with a tin shed and my two children are attending primary school.”

Linking the poor to the money market

Even a few years ago, NGOs would never have imagined running their micro-credit programs with funds from commercial sources. Subsidized loans and, more often than not, grants were used to finance their programs for the poor. The main reasonno one wanted to bear the risk.

Today, the situation is changing fast as many NGOs are encouraged by PKSF to borrow from banks to lend to the poor. As the money flows from the World Bank through PKSF to the poorest of the poor, the buzzword at each stage is commercial sustainability. The whole system to channel funds to NGOs for microcredit programs is based on profitably, not subsidies. And the World Bank also stresses that to run an efficient credit program, it must be run with a keen eye on sustainability.

With this in mind, the World Bank monitors the credit performance of PKSF on a quarterly basis. “If its loan recovery rate ever comes down to below 98 percent, we would stop disbursing funds. But we don’t anticipate that happening.” says Reazul Islam.

“Our loan recovery rate is consistently over 98 percent,” said Fazlul Kader, Deputy General Manager of PKSF. “We want to make our program with NGOs commercially sustainable. From the very first year of our operation, we have been making profits.”

“We are linking the microcredit program with the formal money market,” Karim adds “If an NGO can run its operation with our loans, it can do the same with a commercial bank’s money. Our aim is to make the NGOs self-sustainable so that they can take money from the formal money market and carry on their credit programs even if donors no longer provide funds.”

Today, a number of NGOs are taking money from the commercial banks at competitive interest rates and run their microcredit programs at a profit.

“Besides PKSF, we have also taken loans from other financial institutions like Agrani Bank and BASIC,” says Enamul Hauqe of ASA. “We paid 9 percent interest to Agrani and 7 percent to BASIC. But this did not affect our financial health. This proves that it is sustainable to tap into the formal money market to help the poor.”

“BRAC has also taken loans from banks,” says Aminul Islam. “From Janata bank we had taken funds at 11 percent interest, and from IFIC Bank at 9 percent. And we are planning to take fresh loans from AB Bank at a 9 percent interest rate. We have already repaid our loans to Janata.”

From social silence to empowerment

Under the shade of a jackfruit tree, some 20 women sit in a cluster. Standing in front of them, Arjina Begum speaks in a loud voice. “Dowry is an evil. Anybody seeking dowry is punishable under the law of the country. You can get your daughter married off by paying dowry, but you can’t buy her happiness this way.“

The women of Khudirampur village of Tangail listen to her. They nod their heads to each other in agreement.

“Don’t marry off your child until she is at least 18,” Arjina says, “Child marriage can be fatal for her health. She can die from it. Childhood is for education, and growing.”

“I myself was a victim of child marriage,” says Arjina, now an 18 year girl, but looking much older. “When I was married off to my 30-year-old husband, I was only a child of 11. My parents also had to pay a Tk 10,000 dowry to my father-in-law. I know very well what torment it can mean to be a wife when you yearn for the love of your parents. I wept the whole day before I was sent off to my father-in-law’s home. My own parents had to sell their everything to pay the dowry.”

Arjina now has a four–year-old daughter and has learned from BRAC workers that her parents had committed two crimes in marrying her off—paying a dowry and marrying their daughter before the age of 18.

“Now that the BRAC workers have told me about the law, I would never let the same fate befall my daughter. I have already told my husband about my decision, and he did not dare to disagree with me, because I am also an earner in the family. With the Tk 4,000 loan from BRAC, I run a small business in rice,” Arjina said.

Arjina is just one example of how dissemination of information on social issues can empower an illiterate village woman. The NGOs, along with their micro-credit programs, are helping the rural poor by teaching them their legal rights, literacy, and other skills. They now have learned, for the first time, that husbands cannot simply utter the words “I divorce you” and walk away leaving his wife behind. They are now learning about inheritance law, civil law, and land law.

“For poverty alleviation, social empowerment of the poor is a must,’ says Qazi Faruque Ahmed of BRAC. “Poverty cannot be eradicated through credit programs alone. There is a synergistic relationship between human development and economic development. Social empowerment cannot come automatically with credit.”

In the case of Malina of Karotia Madhyapara village in Tangail, this change in attitude of the village women saved her from an illegal divorce. Her husband wanted to walk away leaving her behind simply by uttering the words, “I divorce you.”

“When we heard the news, the members of my women’s group went to meet Malina’s husband,” says Arjina. “We told him that it is illegal to divorce a wife just by uttering the word. We threatened him with legal actions. We even discussed the problem with his wife and in the end, he understood that he was doing something wrong.”

The women’s intervention proved to be successful in the end. The break up of Malina’s marriage was stopped. Malina is still with her husband and is planning to take a loan to start a small business.

“Unless you prepare them with knowledge to face the challenges of the world and unless they are aware of their rights, they can not face the odds of the society,” says Aminul Islam of BRAC. “When a positive change comes, the power structure of the society is changed.”

The Microcredit Movement and How Microcredit Works

The microcredit movement was started in the early 1980s by the Grameen Bank. In the late 1980s, institutional credit providers mushroomed when many non-profit NGOs—recognizing the importance of stable income and capital accumulation in reducing poverty— started targeted savings and credit programs for income generating self-employment. During the past five years, the Grameen Bank disbursed about US$2.4 billion to nearly 2.3 million borrowers, while more than 495 NGOs have disbursed about US$4.3 billion to more than 3 million borrowers. Some of these NGOs provide not only money but also technical assistance in the form of skills training and marketing assistance.

Microcredit programs target those without land or assets, and 90 percent of microcredit recipients are women. Loans are collateral-free, and usually have a maturity of 50 weeks with weekly repayments. Borrowers are part of a 15-20 person group that meets regularly Savings is an integral part of the program and financial transactions are recorded in individual passbooks in the presence of the entire group to enhance transparency and self-monitoring.

Microfinance institutions start with a small loan (about US$50-$75) and provide repeater loans of increasing amounts as long as repayment of the earlier loan is satisfactory. This repeater feature is critical to the excellent repayment performancemost microfinance institutions have loan repayment rates in excess of 95 percent. More importantly, the basic premise is that the poor need to have continuous access to credit for eight to 10 years to accumulate enough savings or assets to escape poverty. Microcredit institutions usually have upper loan limits, but few have a policy of "graduating" a borrower from the program, since borrowers of large loans are low risk after being in the system for several years and are also financially more efficient. Borrowers can choose the activity to be financed by the loan, such as poultry farming, petty trade and shopkeeping, cattle raising, or handicrafts.

1 The interest-free International Development Association credit is to be repaid by the Government of Bangladesh in 40 years with a 10-year grace period. The government, in turn, give this money to PKSF at 1 percent interest to be repaid in 20 years.

Also see:
Bangladesh-Poverty Alleviation and Employment Promotion (Microfinance II)
Poverty Alleviation Micro-Finance Project
Poverty Alleviation and Employment Promotion Project
January 2000
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