Efficiency and effectiveness of microcredit management in Bangladesh: a comparative analysis on public and private sectors

Abstract

Bangladesh is the birthplace of microcredit. Different countries are adopting Bangladeshi model to reduce poverty. To evaluate the achievements of microcredit a huge number of studies have been conducted. But it is necessary to discuss the comparative performance of private sector and public sector in which dimension shows the best performance in microcredit management. The broad objective of the study is to evaluate the management systems of microcredit in Bangladesh. The objectives are specified as (1) to investigate into the various microcredit management systems in Bangladesh; (2) to compare public and private sectors’ interest rates; (3) to evaluate the training provided by the microcredit providers; (4) to evaluate the collateral systems both private and public sectors; (5) to evaluate the use of microcredit both the sectors; (6) to compare the income change of microcredit recipients of public and private sectors; (7) to identify the problems of microcredit management; (8) to suggest major recommendations and put forward policy implications based on the findings of the study. Randomly selected 125 borrowers from two areas are interviewed. Borrowers use credit money for cultivation and small business. About 70% borrowers use credit at least 5 years. Private sector borrowers have to pay weekly basis installment in a fixed place where as public sector borrowers have liberty to repay installment at anytime at the office or another place fixed by the authority. Borrowers (56%) of the study areas prefer public sector and only 44% prefer private sector. The literacy rate of the borrowers’ is more than 80% i.e. more than the national achievement and it is higher in the case of public sector borrowers’. The borrowers who get loan from public sector organizations, expend 135% more in education than before getting credit, where as result is reverse in the case of private sector. The expenditure in education decreases by 10% for the private sector borrowers’. Borrowers about 20% purchase land after getting credit and more than 70% borrowers now save to bank or cooperatives. Borrowers (100%) drink safe water, cast vote in election and sleep on cot or choki (lower level wooden cot) and about 97% borrowers have access to modern health services in the case of sickness. Still about 25% families face child mortality. In the case of electricity use, public sector borrowers are in privilege position and in an average, about 60% borrowers’ family use electricity. Microcredit has empowered the borrowers also socially, because 30% public sector borrowers became candidate in local level election (union parishad, management committee of educational and religious institute, club etc.). Only 4% private sector borrowers become candidate in local level election. It is significant that the income of the borrowers’ increase more than 100% in comparison to before getting credit. In the case of public sector the income increase is 133% and 53% for private sector. The 38% borrowers claim that they would be able to improve their lives if credit is provided with less than 10% interest and 34% demand loan without interest. Among the rest of the borrowers 18% want allotment of land and 10% claim grant money. The study’s aim is to compare the management systems of private and public sector microcredit of Bangladesh. Within few exceptions private sector organizations like, ASA, BRAC, and Samadhan are charging interest more than 20%. But GB’s rate is 20% flat. Due to weekly installment the actual interest rate is higher than 20%. Private sector bank IBBL claims 10% profit that is the lowest among the selected private sector organizations. Department of Youth Development charges 10% service charge with reducing balance method. BRDB and BKB implement general and special credit programs of the government and claim interest/service charge prescribed by the government. Government gives emphasis production of different crops and demand only 4% service charge. On the other hand, the government has various incentive programs and claims interest accordingly. Government implements these programs through BRDB or BKB or by other government departments. But BRDB charges 11% flat rate interest for its own fund and 27% for the fund borrowed from commercial banks. BKB normally charges 10% flat rate and 14.5% interest for its own fund. NGO Samadhan and BKB don’t have any training program though BRDB provides training for special cases. All other public and private sectors have training program for capacity building and motivation. BRDB and BKB don’t have scope to sanction loan without collateral either land or FDR. Other organizations both public and private sectors sanction credit without collateral but they have savings program that indirectly treated as collateral. In the public sector only BKB supervise credit use though all of the private organizations closely monitor credit use. Only Department of Youth Development of public sector and all other private sector organizations give chance to the borrowers an additional grace period if the borrowers fail to repay on time. Public sector borrowers have no insurance coverage but all private sector organizations provide insurance coverage. Rebate on interest is given to the borrowers by the microcredit agencies as an incentive for advance repayment. Normally, it is practiced there where flat rate of interest is claimed but for reducing balance system, rebate on interest is in built. IBBL gives the highest (2.5%) rebate on profit and BKB’s rate of rebate is 2% but Department of Youth Development and GB have no scope though others have limited scope. Savings ultimately plays role as collateral as well as insurance. Recovery rates of the selected agencies in present study are 80% and above. It is significant that BKB’s local recovery rate is 100%. BRDB and Department of Youth Development’s recovery rates are below 90% whereas private sector’s recovery rates are above 90%. Due to the inappropriate credit policy the rural poor could not get adequate credit from a single source. So, overlapping is taking place and the borrowers enjoy relative advantages from both the sectors. It is found that microcredit increases the socio-economic status of the borrowers and the borrowers increase their income utilizing microcredit. Private and public sector microcredit organizations established a parallel money market in the rural areas, which is actually the better replacement of usurious money lenders. So, microcredit organizations increased rural indebtness and fail to reduce dependency on credit. Due to the availability of private and public sectors microcredit organizations, borrowers are also using credit from similar organizations simultaneously. They prefer public sector organizations’ credit though they enjoy different incentives from private sector. Microcredit organizations always give emphasis on safe recovery of credit and target borrowers considering safe recovery. So, assetless hardcore people are hardly come under credit activities. Group based activities and changed livelihood have increased the social empowerment of the borrowers. Actually microcredit is not collateral free. Savings and group responsibility become collateral against credit. Rural level capital formation through institutional savings is a significant development in rural economy and positive change of development indicators means the borrowers’ livelihood is on the positive track. Considering the analysis to make microcredit programs both private and public sectors effective and borrowers-friendly, some policy recommendations are suggested as: (1) rate of interest of microcredit need to fix below 15% as decreasing balance method and both public and private sector organizations must follow the similar rate, (2) government and non-government organizations should take special initiative for poverty reduction program aiming ultra-poor and assetless people lifting their livelihood with zero rate of interest, (3) private sector organizations should start recovering the loan after six months from disbursement so that the borrowers can have a reasonable time to generate some income before starting repay, (4) for income generating activities monthly installment may be introduced. But in the case of production based investment like, crop production, installment should be fixed after harvest or completion of production process whatever the time may be, (5) size of loan must be raised initially at per economic demand of the borrowers, (6) vocational knowledge should be provided to the borrowers and according to the training capital goods can be provided instate of cash capital in the initial stage, (7) government should introduce rules and regulations not to control the NGOs but to ensure transparency and accountability for the sake of mass population, (8) internal efficiency of MFIs need to improve not for the sake of their own but in favour of the borrowers, (9) to avoid the overlapping problem the operational areas of different MFIs should be separated, (10) borrower households should be given interest free education loan from the obligatory savings deposit fund of borrowers to achieve the objectives of education and human development, (12) in the case of youth borrowers, literate and potential male and female persons must be undertaken into credit program to make the loan more effective. So, the government can consider the implementation of recommendations in order to ensure the efficient and effective management of microcredit.