Some criticisms and critiques of micro finance ..
Micro finance could be defined as banking for poor. It had been developed and popularized by Professor Muhammad Yunus. The word micro-finance itself covering a wide range of micro loans, which need to be defined in a proper manner in order to know what one, is speaking about.
The introduction of micro finance in Bangladesh is being thought of as a useful way to alleviate the financial problems of the common people, as most of them are not well off economically. However the micro finance in Bangladesh works in the form of an organized industry.
There is a proper market form of the micro finance industry in Bangladesh, which consists of the non-government organizations, programs for the public sector cooperatives and perhaps the most important name in South East Asian micro finance, Grameen Bank.
The micro finance service providers in Bangladesh were not really attentive with regard to their financial statistics and updating them. These companies used to emphasize more on the social aspects of their work more rather than the financial one. The situation has improved significantly over the passage of time.
Beginning from that moment, microfinance program is being used for poverty alleviation in Bangladesh with great enthusiasm and has gained world-wide recognition.
The main purpose of microfinance is to break the vicious circle of 'low income low investment-low profit' by inserting capital from outside into the economic life of the poor people. According to Adam Smith "Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get the little" (Adam Smith, 1937: 93).
Microfinance provides "the little" money. Thus it helps to improve the condition of the poor and the extreme poor by raising income and profit, thereby making them free from poverty and improving living standard. Its key feature is bringing the bank to the poor where traditional banking system does the opposite and involves a lot of bureaucratic complications and hidden transaction costs like travel cost and sometimes bribing the bank officials.
In marked contrast to the microfinance institutions, local moneylenders charge a very high - 120 to 200 per cent annually, depending on the seasonal condition and region. Microfinance has substantially reduced the hegemony of these informal moneylenders.
Where the traditional banks did not consider the poor as loan worthy because of the uncertainty of their returning ability, NGO MFIs have claimed around 99 per cent recovery rate from them. Being the primary clients, women are regarded as more trustworthy and able to deal with money more skillfully than men and this in turn has led to their empowerment.
During the last few decades the microfinance industry has become quite larger. There are more than one thousand microfinance institutions in the industry. Approximately 700 billion taka has been disbursed with some 175 billion taka outstanding among some 30 million borrowers, and around 35 million members. Interesting and alarming to note that despite this huge size, the microfinance industry is still fragmented and coupled with numerous problems.
Challenges facing MFIs:
This is always easy to name some common problems of microfinance from the common observations. But interesting to note that, an in-depth review and investigation may reveal more insights and dynamics of the commonly observed problems along with a bunch of new challenges, faced by the MFIs.
Challenges in the microfinance industry are widely varying in terms of their shape and nature over the last 30 years without regulation.
Delay in service delivery makes business for moneylenders:
Experience shows that due to delay or long time in processing any loan or other services, poor households are compelled to go to the loan sharks. The major obstacle for the poor households appear to be the unavailability of instant and fast supply of credit or loan in the event of emergency need.
Multiple borrowing is a serious concern:
Multiple borrowing has become alarming currently. Recent experience shows that many female borrowers move away forever from their home due to inability to repay their multiple loans. More dangerously, there were many examples of suicide by the indebted borrowers in the different regions. Moreover, to repay the multiple borrowing, many poor households are compelled to go to the loan sharks, and many become landless.
Severe lack of training and education:
A great degree of inefficiency exists at the borrowers as well as the management level of the microfinance institutions. The employees and the higher management of MFIs are not adequately skilled in delivering efficient financial services. This also prevents innovation from developing in this sector at the grass root level.
High turnover rate and unfair competition:
The turnover rate of skilled manpower is very high in the microfinance sector. This is quite evident that large MFIs always attract highly skilled staffs of the relatively small MFIs. Because of the large deviation in terms of capabilities and size, relatively small MFIs always feel pressure in the market, and thus face unfair competition from the large MFIs not only in terms of skilled employee turnover but also increasing market share. This is a great concern that a chronic unhealthy competition exists among the NGOs in loan disbursement and increasing outreach.
Misuse of credit causes more miserable lives for borrowers:
A major and probably the most responsible cause for the ineradicable misery of the poor people is the misuse of credit by borrowers. Borrowers either fail to utilize the credit properly due to inexperience or lack of capacity or they may intentionally use the loan amount for purposes other than the one promised wile taking the loan. Such borrowers are often found defaulting on repayment of the loan.
Lack of central database:
There must be a central database for the microfinance industry in Bangladesh. The Credit and Development Forum (CDF) has been putting in their efforts for last couple of years but unfortunately they could not succeed up to the desired level as many NGOs are left out, and in many cases required information cannot be collected due to diverse nature of problems encountered.
Sectoral disbursement without technical experts:
The days of disbursing loan to any sector are over. In this huge industry, NGO MFIs disburse loan to many investment sectors but in major cases they do not have proper technical persons experienced in those investment sectors.
Lack of intention to serve in the apparently inaccessibly location: Despite the rapid growth of the microfinance sector and disbursement of a large volume of money, yet there are many parts of the country out of the network of microfinance institutions. Experience shows that NGO MFIs do not intend to operate in many distant places (i.e. Char areas) that are termed as inaccessible and not cost-effective. They feel it as a burden, a complicated job and also hard-to-profit activity.
The current scenario of micro finance in Bangladesh has shown that the industry is at the juncture of evolution. The following factors or phenomena could be regarded as indicators to the same:
• Highest Frequency of Prevailing Interest Rates.
• Evolving Microcredit Theme
• Individual Loans
• Product Diversification
• Enterprise Loans
• Savings Collection from Non-Members
• Huge Uncalled For Consumption Loans
As the microfinance industry has now become more competitive, MFIs should be careful in loan disbursement. Sectoral loan disbursements in profitable ventures should be identified and analysed properly through employing experts on various sectors. Microfinance institutions should concentrate on other income generating activities (i.e. micro-enterprise) to sustain and improve their revenue portfolio.