Microfinance presence lowers rural interest rates

When a formal microfinance institution (MFI) enters a village and joins the existing rural lending ecosystem, the influence of both informal moneylenders and exorbitant interest rates declines significantly, according to a study.

The research, titled "Microfinance Competition in the Presence of Moneylenders: Theory and Evidence," found that a village has five MFIs or NGOs on average.

In such cases, the entry of an additional MFI into a village reduces reliance on traditional moneylenders, colloquially known as mohajons, by 33 percent.

Additionally, the arrival of a new non-governmental organisation (NGO) brings down interest rates by 25 percent, the study noted.

Prof Shyamal Chowdhury, director of the Australia South Asia Research Centre, unveiled the findings at a seminar organised by the Bangladesh Institute of Development Studies (BIDS) at its office in the capital's Agargaon yesterday.

The study was based on a survey of 150 villages across four districts in Bangladesh.

It found that while 50 percent of rural borrowers take loans from NGOs, nearly 20 to 30 percent still rely on moneylenders.

"There are many banks and MFIs in Bangladesh. Yet, we still find a significant presence of mohajons in rural areas," Chowdhury said, adding that the entry of an additional MFI reduces the total volume of loans taken from traditional moneylenders.

However, Chowdhury noted that mohajons are unlikely to disappear anytime soon.

"The average interest rate charged by mohajons is a staggering 145 percent. Yet, rural communities continue to rely on them in times of urgent need as they lack access to credit cards and other formal financial services available to urban populations," he said.

He explained that villagers often turn to mohajons for immediate expenses, such as medical emergencies or crop losses, highlighting the persistent gap in accessible financial support.

Echoing those concerns, Md Fazlul Kader, managing director of the Palli Karma-Sahayak Foundation, said there is a mismatch between MFIs and borrowers regarding expected loan disbursement period, which often forces rural borrowers to turn to moneylenders.

Sajjad Zohir, executive director of the Economic Research Group, and Kazi Iqbal, BIDS research director, also spoke at the event.