Credit where credit is due
THE importance of financial intermediation in attacking rural poverty is recognised as well as being rigorously researched. Examples are in abundance that financial constraints -- rather than lack of skills, market opportunities, or supply bottlenecks -- are reported to prevent poor families from making a pie to escape poverty.
The fragile financial side also tends to undermine economic returns from pro-poor public investments e.g. irrigation, school. Because, in the absence of necessary working capital for buying fertiliser or pesticides, poor farmers may fail to reap a better harvest from modern technology.
Likewise, government efforts at enhancing school participation rates through raising buildings, may recoil in the face of a shortage of savings to meet children's school expenses. The punishing consequences of inadequate financial support for the health, well-being, and earning capacity of the poor are, thus, established in available literature.
Generation of self-employment in non-farm activities may require investment in working capital and basic skills in reading, writing and arithmetic. Lack of both financial and human capital could constrain the poor from taking up productive pursuits. The amount of financial capital needed may be small but, at a very low level of income, accumulation of that "small" amount becomes a big task.
The situation speaks of the quotation from Adam Smith: "When you have got a little, it is often easy to get more. The great difficulty is to get that little." Obviously, development of human capital involves a long-term process but the shortage of working capital could be addressed in the short-run through making credit available to the poor.
Our policy makers and politicians often talk of the importance of rural credit for rural livelihoods. More often than not, their perceptions are based on poor statistics, mostly derived from secondary sources of information. In this column today, we have used the household level survey data from 62 villages developed through repeated sample survey. The survey started in 1988 and ended in 2008, the most recent one being supported by Brac.
We can talk of two sources of credit in rural areas: institutional and non-institutional sources. Historically, the latter dominated the scenario till governments realised the importance of state participation in rural credit market through banks and, of late, through NGOs. It may be mentioned here that non-institutional sources mainly comprise money-lenders, land owners, friends, and relatives. This source is alleged to charge very exorbitant rate of interest from the clients. Possibly because of the absence of screening and monitoring costs (moral hazards and adverse selection as well), non-institutional sources continue to still survive with some impunity in rural areas.
From the Brac-backed survey of 2,000 households in 62 villages between 1988 and 2008, we observe the following changes. Only one-tenth of rural households now borrow from non-institutional sources compared to about 30 per cent in earlier periods i.e. in 1980s. This means, access to highly usurious forms of credit (120 percent interest rate per annum) has been replaced by relatively cheap sources of credit (20-30 percent interest rate per annum).
That had positive impacts on all groups but especially on the poor. For example, less than one percent of the poor segment of borrowers (having homestead only) now borrow from non-institutional sources like money-lenders, traders, etc. But two decades back, one-third of these households used to depend on these sources. The change is almost the same for households owning up to 0.2 hectares of land. The diminished role of non-institutional sources of credit and the rise of institutional sources should be construed as a positive development in rural areas. The landless households mostly benefited from this development through availing credit and creating assets for livelihood.
With the advent of NGOs and commercial and specialised credit institutions, the institutional sources became prominent over the same period of time. For example, 38 percent of rural households now borrow from NGOs and banks compared to roughly 12 percent in the 1980s. This source emerged as very important for the poor segment. For example, about 42 percent of households (with homestead only) now have access to institutional source compared to less than one-fifth in the past. Again, 44 percent of the households having lands up to 0.2 hectares now borrow from this source compared to roughly 5 percent in the past. For large land owning groups, however, the increased access to institutional source came mostly from banks rather than NGOs, while the poor were mostly served by NGOs. By and large, less than half of the rural households now have access to credit from both the sources.
However, as information tends to reveal, the average size of loan from institutional source accounts for Tk.17,590 ($259) compared to Tk.55,234 ($690). That means, even though the role of non-institutional sources of credit declined over time, the size of the loan from this source speaks of the great demand being generated for credit. In other words, only one-fourth of the credit needs are being supplied by the institutional source and the rest comes from non-institutional side.
It is the responsibility of the government to cater to needs of the rural households through supplying credit to households and thus save them from the clutches of the village level informal lenders who, allegedly, charge an exorbitant rate of interest. Quite obviously, banks and NGOs could operate only when infrastructural facilities like roads and electricity are developed. It also needs security of the lenders institutions in rural areas.
If rural areas are to thrive and poverty to be reduced, there is very little option other that building a large credit network in rural areas. Rural people need the access to credit and evidence is abundant that their repayment capacity remains beyond any doubt. A pro-poor strategy of rural development should see expansion of bank branches and NGO operations in every nook and corner of the country.
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