Peddlers of poverty and lords of poverty

Source: Siddiqui (2002)

Second, the micro-credit organisations have remained busy in arranging seminars and symposiums rather than doing something realistic for reducing country's poverty.

Third, such organisations sometimes hire people from Harvard or other foreign institutions to deliver lecture on poverty alleviation; implying thereby that efforts at poverty alleviation have to be homegrown rather than transplanted from outside.

Fourth, the organisations involved in micro-credit charge high interest rates. This means that the poor borrower tend to get trapped in the vicious cycle of poverty.

The arguments articulated by the Finance and Planning Minister may appear, at first sight, to be rather sweeping. Borrowing from external sources by the micro-credit organisations need to be viewed in the context of the dependence on external aid by the government itself. To pursue this line of reasoning further, the government has been borrowing and continues to borrow funds from the World Bank at 0.75 percent service charge and onlends to Palli Karma Sahayak Foundation (PKSF) at one percent interest rate. PKSF further onlends to non-government organisations involved in micro-credit at rates varying between 3 percent and 4.5 percent. What interest rates do the NGOs charge then from the ultimate borrowers? It is in this area that the scathing remarks from the Finance and Planning Minister appear to have substance and merit serious consideration for corrective actions.

Stated and real interest rates

Some studies have pointed out the difference between stated and real interest rate charged to the clients by some NGOs as follows.

The researcher has identified three reasons for the above state of affairs. First, some NGOs calculate interest on the initial balance of principal amount and not on declining balance of principal amount. Second, some NGOs borrow from savings of own members and recycle it by lending at higher interest rates while interest to members is paid at bank rate. There is thus a margin which goes to NGOs. Third, at the time of disbursement, some NGOs withhold part of the principal amount. However, interest is charged on the full amount. In this process, the burden of loan on the poor increases as indicated in the above table. The table also shows that some NGOs such as CARITAS follow the standard banking practice of calculating interest on declining balance. The client's savings are completely liquid.

With regard to the impact of micro-credit on poverty alleviation, there are studies (DFID, 2000) that have led to the findings more or less supportive of what the Finance and Planning Minister has said. Researchers, therefore, argue that reducing interest rates may contribute to the achievement of broader goals of poverty alleviation

Development of regulatory framework

The above scenario underscores the need to establish an appropriate regulatory framework that will lay down the standard operating procedures (SOP) for the NGOs involved in micro-credit. Without such a framework, the micro-credit may degenerate into traditional money lending system operated by the Mahajans. Even for the Mahajans there used to be laws that sought to protect poor borrowers from excessive rates of interest.

The first of these legislations is titled Usurious Loans Act, 1918 followed by Bengal Money Lenders Act, 1933. These two Acts authorised the courts of law to prevent charging of excessive interest. It was laid down that if the interest charge exceeded the rate of 15 percent per annum in case of secured loan, or 25 percent per annum in case of unsecured loan, the court could presume the rates charged were excessive and the transaction was harsh and unconscionable and was substantially unfair. The courts had further power to limit interest recoverable in certain cases. It could also prevent the money lenders from recovering by suit interest in kind at rate exceeding 10 percent per annum in respect of any loan made after the announcement of the Bengal Money Lenders Act, 1933.

The issue of a regulatory framework has been debated in the past few years. A stakeholders' workshop of May 6, 2000 strongly recommended the need for regulating the NGOs in micro-credit industry. The regulatory mechanism as envisaged in the recommendation was to be an independent body with representatives from the Bangladesh Bank, PKSF, the Securities and Exchange Commission and industry experts. On June 18, 2000 the Ministry of Finance issued a notification affirming that the task of formulating regulatory framework and recommendations for institutional arrangement to ensure compliance standards would be completed by June 17, 2003. It is said that the final regulatory and supervisory framework for micro-finance sector and the implementation arrangements should be satisfactory to the World Bank (World Bank Report No. 21400-BD). This condition is because of funding Second Poverty Alleviation Micro Finance Project (Micro Finance II) by the World Bank. It is not, however, known whether the regulatory framework has since been finalised.

The World Bank view

In the appraisal report of the project, the World Bank emphasises the need for (a) sustainability and commercialisation of micro-credit organisations and (b) variable lending terms for NGOs. It views two issues to be inter-related. The NGOs involved in micro-credit are categorised into (i) those that lack the institutional capacity needed to deal with a large loan portfolio and (ii) those that have the institutional capacity. The latter category consists of big NGOs like BRAC, Proshika and ASA. It further views reduction in intermediation costs as critical to the sustainability of such NGOs, in particular of the former category.

On the interest rate issue, it recommends adoption of an interest rate of 4.5 percent for small and medium size NGOs and 7 percent for the big ones. This applies to the lending from PKSF to the NGOs. This prescription on interest rates appear to be valid at first sight.

In not too distant past, the World Bank was criticised through the publication of a book called 'Lords of Poverty'. Its staff were criticised for recommending measures for poverty reduction in the developing countries which did not deliver the desired outcome.

The interest rates recommended for different categories of NGOs may lead towards sustainability but what about the poor who would be at the receiving end? The three issues that add up to the burden of micro-credit borrowers stated earlier appear to have been lost sight of.

Ethics and development

It is necessary to further examine the prescription given by the 'Lords of Poverty'. How the issue of sustainability of poverty reduction will be achieved remains unclear. In this context, researchers have drawn attention to the second generation problems of micro-credit. It is just not a question of providing micro credit to millions of poor households. It is basically a question of helping them to capture increased livelihood opportunities that go beyond their existing quality of life. The project appraisal report indicates that large NGOs involved in micro-credit account for four-fifth of the micro-credit market and therefore it argues for increase in on-lending rates to encourage them (NGOs) to move towards integration with the formal financial market. What has been left unsaid is that increase in on-lending rate may well lead towards an increase in interest rate now being charged from the poor borrowers. Movement towards market may well involve movement away from equity and considerations of equity is part of the ethics of development as recently was articulated by Amartya Sen at the International Congress on "The Ethical Dimensions of Development: The New Ethical Challenges of State, Business and Civil Society". In his words:

"The new challenges of the contemporary world not only demand that we re-examine old issue (for example the role of the market) in new light, but also that we address new ethical issues that have been brought to prominence by the interactive world in which we live (including the demands of un-segmented global ethics). Even though these concerns raise difficult ethical as well as economic issues, we cannot really escape these questions in the contemporary world. Let nothing defeat us in this modest recognition."

AMM Shawkat Ali is former Secretary, Ministry of Agriculture.