Beneath The Surface
Alternative credit arrangements
ACCESS to credit is considered as the key in enhancing economic activities. Both rich and poor need credit for productive pursuits -- for working capital as well as investment -- or smoothening consumption. In rural Bangladesh, roughly half of the households are reported to borrow money from different sources and for different purposes. On average, a rural household borrows $170 a year (Poor: $127, marginal: $181, rich: $312).
Over the years, the role of non-institutional sources of credit (mainly money-lenders) drastically declined while that of institutional sources (especially of NGOs) increased. For example, non-institutional sources of credit now account for 42% of the total household loans compared to 73% two decades back.
But do not miss the point that the small and marginal households still depend on non-institutional sources for about 60% of the required loans. That means, access to credit somewhat increased for the poor due to NGOs and for the rich due to banks. Unfortunately, small and marginal households are missed out in the process of credit-led poverty reduction.
Arguments against money lenders/mohajons are in avalanche. It has been alleged that they charge an exorbitant rate of interest. For example, in Barendra village under Chapai Nawabganj district, I was told that farmers have to surrender 5 maunds of paddy (worth Tk.2500) for a loan of Tk.1000 for three months! NGOs tend to charge much less than that, but still the interest rate is considered to be very high (as much as 40% per annum). Critics call them "quasi-mohajons."
Besides this aspect, ultra-poor households remain outside the orbit of credit from these two sources. Of course, recently Brac and other NGOs are targeting the ultra-poor groups in different places. By and large, the very poor and the marginal households continue to depend on the mercy of the moneylenders in the absence of institutional arrangements for them. How could they be accessed to credit? Allow me to draw upon some innovative arrangements developed in selected sites.
In some villages under Rajshahi and Chapai Nawabganj districts, very poor (owning less than 10 decimals) households -- comprising mostly pure tenants and agricultural labour households formed groups of 25-30 for mobilisation of savings. The group formation was encouraged by Care, Bangladesh under the aegis of Food Security for Sustainable Household Livelihood (Foshol). It is a project for food security of the resource poor households (funded by EC and coordinated by IRRI).
The group has been induced to deposit Tk. 20 per household, per week to the committee elected by them. The money is deposited in banks under the signature of the elected secretary/president and treasurer. The transactions are transparent and accountable as everyone has access to information from group meetings.
The members could borrow from the group fund following a discussion within the group members about the "feasibility" of the proposed purposes of the loan. The interest rate charged is usually 10% per three months (crop season). This amounts to an interest rate of about 40% per annum which is close to that charged for NGO loans.
The members I met seem to bother little about this high interest rate on the grounds that: "Hamar taka hamar thaikbe" (our money will remain with us). However, the involvement of the group in the whole process of deposits and withdrawals apparently reduced travel time, screening costs and moral hazards. These are, in fact, the traditional problems of rural finance that we are familiar with.
The groups appeared very enthusiastic and eulogized about this innovative credit arrangement. They seemed to be in celebrating mood. Most of them have already saved Tk. 2000 a year kept in their 'informal' bank and the total deposits for the group hovers around Tk. 60, 000 a year.
For households who remain half-fed for nearly half of the year, ill-clothed and pure landless, and who never possibly counted few hundred taka at a time, an amount of Tk. 60, 000/year is something to pride on. They are now thinking of leasing in ponds for fish culture, rural roads to transplant trees.
The credit-crazy households could easily access and some of them have already taken, on average, Tk.4000 with an interest rate of 40% per annum. Most of the credit is used for rearing livestock and poultry but also in buying inputs for MV crops. Access to credit has increased the share of land under MVs. More importantly, women for homestead-based income generating opportunities use a large chunk of the credit. From maid-servants, they have become self-made by virtue of the access!
Another point to note: if a member defaults due to sickness or any other problem, the group sits to see that such genuine cases are immune from paying excess interest rates. Payment of installments does not begin instantly but covers a crop season. These two attributes make the arrangement quite different from other sources of credit.
There is another reason that made them so happy. Foshol provides them with a matching grant of almost an equivalent amount. That means, per household savings is now Tk.4,000 a year and the group savings is Tk.120,000! The matching grant puts an incentive for these poor households to save. Not only matching grants, care Bangladesh also helps them with extension knowledge on crop and non-crop cultivation so that optimal utilisation of credit would come up.
Thus, while such innovative credit arrangements put the poor households on an even keel, the sustainability and reliability of the model looms large as a moot issue. I reckon that, to some extent, it is serving as a substitute of NGOs and moneylenders as far as the very poor are concerned.
In the past, shortage of credit crippled them in crop seasons as a result of which they were far from cultivating input intensive modern crops. Non-availability of credit also squeezed their efforts at increasing home-based crop and non-crop activities. I also assume that homogeneity of the group -- where everyone is very poor -- is an essential precondition for sustainability.
But, on my way home, I sought answers for few key questions: first, would withdrawal of matching grants and external non-monetary inputs affect the outcome? Second, could such model be replicated elsewhere and if so, how? How could these local levels innovative arrangements be institutionalised? I think researchers could take a queue from Foshol-driven experiences and come up with answers. Happily for the moment, the alternative credit arrangement seems to serve well.
For all latest news, follow The Daily Star's Google News channel.
Comments