The invisible hand of microfinance

Fazle Hasan Abed

One bright spot shines in the lives of the poor: microfinance. It is the next best thing for nongovern-mental development organisations to fight poverty with -- in a country where 40 percent of the population lives under the poverty line. BRAC, the world's largest nongovernmental organisation, has taken microloans to almost all parts of the country.

The purpose is simple, yet urgent: to lift millions out of abject poverty. Women, billed as the agents of change by BRAC's founder and Chairperson Fazle Hasan Abed, are at the centre of the microlender's attention.

Microfinance has taken root in much of the world. What is unique about Bangladesh is the size of the borrowers, says the chief of the leading microfinance institution that boasts more than 80 lakh recipients.

Abed sat with the The Daily Star for a recent exclusive interview to share his views on the growing trend of micro-lending and the functioning of BRAC's network that has kept widening since independence.

Abed set up BRAC in 1972 with a focus on easing the burden of the poor as the economy was in tatters after the Liberation War.

It had started off in the district of Sylhet as a small-scale relief and rehabilitation project to help rebuild the lives of war refugees. In nine months, 14,000 homes were reconstructed as part of the relief effort. Several hundred boats were also built for fishermen.

Medical centres were opened and other essential services were ensured. BRAC then went from strength to strength, now covering 69,421 villages in 64 districts in Bangladesh. It disbursed Tk 8,428 crore with a 15 percent interest rate last year from its network of 3,000 branches.

“The unique thing is that we have been able to scale up the number of borrowers with large sums of loans,” Abed says. On the other hand, NGOs or microfinance institutions in other parts of the world deal with up to 5,000 customers each. BRAC has also spread its network to the war-ravaged Afghanistan, where it is the largest microfinance institution.

“We are the largest in Tanzania and Uganda as well. We have just started our microfinance programmes in Sierra Leone and Liberia. We started a mircofinance programme in Pakistan last year,” Abed says. BRAC has a unique way to bear the burden of loan losses. Historical figures show that 2 percent of microloans do not return from the borrowers.

“What we do is that as soon as we give a Tk 100 loan, we keep 2 percent (against the loan) in reserves in order to cover future defaults,” Abed says. “If the loan has to be written off, we will write it off from the reserves. So we created the reserves right at the beginning.” The process helps the organisation beat the risks of lending money to the people with no credit history, no steady income, and no collateral.

The unique thing about microfinance in Bangladesh is that about 90 percent of borrowers are women. “Women in Bangladesh are very entrepreneurial, and disciplined and repay the loans in time. If a woman's income increases, most of her earnings will go into supporting her family,” Abed says. “Lending to women has a bigger social impact than to men.” “We think women are the agents of change in our society.

That's the reason we have concentrated on lending to women.” In Afghanistan and Pakistan, all borrowers are women in clear signs of bringing about a social change through the process.

The microloan recovery rate is higher than other loans as the sector is focused on women who are more disciplined than men. BRAC runs a series of services -- from education to healthcare, but microfinance is the entry point in a greater development design.

The microcredit programmes get clients together in villages and run through what came to be known as “solidarity groups”. Abed does not shy away from dealing with criticism against microfinance that it does not put borrowers on the path to prosperity through entrepreneurship.

“Not everyone is an entrepreneur. Some 20-30 percent of the poor borrowers show some entrepreneurial skills and improve their conditions far better than others,” he says. Most others are quite content to provide food and clothing for their families. Most are merely doing their jobs all through their lives and will remain so. “We are all doing our jobs.

Why shouldn't people seek jobs created for them. And we are creating a lot of jobs in our banks.” “Microfinance clients don't create jobs for others; they create work for themselves, which is called self-employment,” Abed says. Here comes the role of BRAC Bank that helps small enterprises create jobs for others.

“This is important. So we are not only creating self-employment. We thought we need to create jobs in our economy so a large number of people can get jobs,” Abed says. BRAC Bank with institutional shareholdings by BRAC disburses loans for small and medium enterprises -- the amount ranging from Tk 3 lakh to Tk 30 lakh.

“If some people show signs of light in their lives and need bigger loans, they can go to BRAC Bank. We are providing them with a ladder to get out of poverty,” Abed says.

BRAC Bank does not take collateral against loans of up to Tk 10 lakh provided that the bank is satisfied that the borrower's business is generating enough cash flow to repay the loans. BRAC Bank focuses more on small and medium enterprises than on the full-fledged corporate sector that accounts for only 20 percent of the bank's total loan portfolio. On the other hand, most other banks tend to bankroll the corporate sector and consumer goods.

Even if the banks that are heavily focused on corporate lending come under strains from the global financial crisis, Abed believes, BRAC Bank will be able to bypass any crisis as it does not cater much to the corporate sector.

“If the economy slows down, it may have some peripheral impact (on the banking system),” he says. In bigger impacts from the global recession, Abed explains, corporate borrowers will find it difficult to pay back loans as their sales will decline.