Microcredit in Bangladesh and India - Example

Strengths and limitations of provision of microcredit and industrialisation as means of alleviating poverty (Date) Introduction Microcredit is the giving out of small amounts of money to the very poor at low interest rates. This aims at ensuring that they can engage themselves in income generating activities that eventually will improve their livelihoods (Kuhnel 2011). This definition according to Kuhnel is not fully exhaustive. On the other hand, industrialisation is the process through which a country characterises itself by industry and commerce, and, most of the population live in urban areas (Moore 2001). Poverty alleviation can be alleviated in any of the above mentioned strategies. This article will look at both methods as ways of poverty alleviation with the aim of testing their workability with emphasis on Bangladesh and India. Microcredit in Bangladesh and India Looking at Bangladesh, microcredit has done a lot to alleviate poverty in the rural settings. One innovation that cannot go without mention in this case is the Grameen Bank founded by Mohammad Yunus. The bank has been responsible for the provision of credit to the rural poor. It has especially focused on women (Rahman 1999). This bank whose name translates to rural or village bank started its operations in 1976. It has 1,100 rural branches that span over 37,678 villages in the country. It has a cumulative asset base of over 1 billion US dollars disbursed over its 22 million members, 95% of whom are women (Rahman 1999). Grameen Capital India, a partnership of the Grameen Foundation, The United States and Industrial and Technical Consultancy Organization of Tamilnadu (ITCOT Consultancy) are the vehicle that the Grameen Bank has penetrated India (Shaikh 2010). Strengths of Microcredit Financing Microcredit financing is a strong bet for the eradication of poverty in both India and Bangladesh for a number of reasons. One of these reasons has been its ability to avail credit facilities to the women in rural areas at low interest rates (Rahman 1999). This thus empowers the marginalised women who are also the greatest victims of poverty. This can be seen in Grameen Bank’s success; in the 1980s success of the bank’s activities with rural poor women in Bangladesh. Microcredit is responsible for the introduction of group based microfinance. This is where the women come together to form groups which then received funds to invest (World Bank 2001). These group members impose both a support and pressure system on each other. This replaces traditional collateral that that laid emphasis on the property such as land and houses (World Bank 2001). This method ensures that there is availability of funds to a vast majority of the poor women in the rural Bangladesh. In India, the Self Help Group (SHG) Bank Linkage programme has been tremendously instrumental. In this system, people come together to form a self help group. These groups, which average 14 members, are then eligible for credit facilities from commercial banks (Ghate 2008). By March 2007, 2.92 million groups benefited through this method. The positive aspect to this is that it has allowed credit to flow down to an even larger group of people. This is unlike the case where the individual women would have to seek credit facilities individually. The result is that it has brought a sense of togetherness as well as a form of community welfare where people look out for each other. The microfinance sector has two roles that it plays within any society that it operates. One role is the business role where the institutions within this sector have to turn profits so that they can be self sustaining (Moore 2001). This role plays itself out through interest rates on the borrowed funds although, in this case, it is lower than what commercial banks normally charge. The other role is that of welfare to the poor members. A lot of these members happen to be women (Ghate 2008). The microfinance institutions are responsible for the improvement of the poor members of the community. As indicated above, there are a lot of these poor women who are getting the much needed boost from microcredit projects. There has been a diversification of the services offered to the poor people in the community in India. These services include savings and insurance, in addition to the credit facilities (Sarkar and Dhar 2011). This has had the benefit of improving the livelihoods of women, children as well as businesses that the beneficiaries of the microcredit facilities. As a result, people have a safer working environment since they can manage to access personal insurance and at the same time secure their businesses against dangers that challenge their future investments. Limitations of microcredit Financing Though there have been positive outcomes of microcredit provided to the rural poor especially women, there are a number of issues that come up. One of these issues is the strict regime of rules by which the loaned must abide. According to Muhammad Yunus, these rules operate in such a manner that once the women fell off track, it was hard to get back (Roodman 2010). At the same time, he felt that once someone stopped payments, he/she could influence others to stop payments. This has a significant impact on the microfinance institutions since they do not have sustainability. Source: Centre for Global Development. As the graph above indicates, the Grameen bank has been on the negative trend for a while in terms of bad debts. This is an indication that there is a need to rethink the entire strategy for the sake of the future borrowers as well as the microcredit institutions that advance these loans. Another downside to the entire microcredit scheme is the competition among the microcredit institutions (Sarkar and Dhar 2011). When the Grameen Bank showed indications of success, there were a number of imitators who came up. These imitators were attempting to ride on the wave of success that the bank had achieved (Roodman 2010). This has affected the performance of the Grameen Bank and with it the fate of a lot of those who borrow from her. At the same time, another limitation of the microcredit system is that, in several cases, it sometimes leads to further impoverishment of the borrowers (Hopper et al 2012). This occurs because of the expensive repayment regime. At the same time, it is difficult to live up to the requirements demanded of them (Hopper et al 2012). Hopper et al (2012) go on to explain that the investment options open to the poor majority are extremely limited, and some even encourage competition which leads to unhealthy returns. The results of this whole scenario are, those to whom microcredit aimed to reach end up not being the beneficiaries. Microcredit institutions face a number of problems. As in Bangladesh, the situation is not so different in India. Indian microcredit institutions face funding problems since the donors tend to be unreliable in the long term. This has pushed most of these institutions to become state-dependent (Srinivasan 2009). Like most developing nations, the country does not always have enough funds to supply to these institutions. At the same time, this opens up these institutions to government manipulation. The institutions will eventually lose their independence and with that their ability to make decisions that will assist the needy in the society. Another problem with Indian Micro Finance Institutions (MFIs) is the matter of leveraging their funds. According to Srinivasan (2009), the Indian leverage ratios are the highest in the world. Their debt to equity ratio is 40 while in other countries like the Philippines it is around 4. Srinivasan (2009) indicates that some of the firms have leveraged themselves twenty times or more. This state of affairs has led to these firms being in a particularly prickly position since this inhibits the amounts that they have in reserve. In most instances, the microcredit institutions lack real owners. This means that these organizations which function as Non-Governmental Organizations (NGOs) are not well regulated. This opens them to exploitation, embezzlement and other management related problems. This means that firms are susceptible to collapse once they run out of funds or even those managing them get what they want. This exposes those who borrow from them to various risks related to unsteady flow of credit. In the long-run, the economy will end up being the victim since it has to bear the expense of keeping up with the welfare situation in the country (Fernando 2004). Infrastructure limitations also arise in the case of MFIs in India. Issues involved here include the availability of electricity, good roads to the people who need the services which hamper transportation and the availability of banking facilities. In the absence of these facilities, the MFIs find that going to remote places is limiting in terms of service delivery (Churchill and Frankiewicz 2006). Attempting service delivery without these amenities means that the cost of operations is too high and forbidding. Aside from infrastructure, there is the case of natural disasters (Churchill and Frankiewicz 2006). These are a threat since the MFIs give assistance in many cases to small scale farmers. These individuals will be at risk since they will lose all their produce to these disasters. Loss of the produce means that the farmers default on their payments and this in the end affects the MFIs since they lose a lot of money in this manner. Industrialization in Bangladesh and India Industrialisation as defined above is the shifting in reliance of a country from agriculture to industry and commerce. In both Bangladesh and India, industrialisation has occurred with the development of factories that manufacture finished goods. In India, there is TATA and Mahindra. Both of these vehicle manufacturing industries are native to India. This second segment of this article will look at the strengths and limitations of reliance on industrialisation as a means of poverty reduction. Strengths of Industrialisation A fundamental aspect here is that of rural industrialisation (Kumar 1997). This is an effective vehicle that has proven effective in the reduction of poverty. This happens through job creation hence income generation to the rural poor people. This is helping in the transformation of the rural areas from a situation of abject poverty to a place where people have the ability to be self reliant. Industrialisation has the benefit of taking advantage of the population to increase production. A vast majority of the people in India live in the rural areas. This rural population comprises 76.27% of the entire countrys population. The local industries can take advantage of this highly available labour force in the factories (Dak 1989). To the economy, this has the benefit of increasing the tax base. This is because more people have disposable income that can then be fed into the country’s tax kitty. This allows the government to indulge in more development activities that will benefit a vast majority of people like hospitals among others. The cost of establishing most of these cottage industries is not unusually high (Dak 1989). This means that the people in the rural areas can come up to set up one such industry for their benefit. According to Dak (1989), the establishment of the large scale industries in the rural areas does not have as effective an impact as when the cottage industries come up. These industries will equip the people in the rural areas with new skills that then empower them and improve their income. It will as well as gives them an opportunity to venture alone in the setting up of a cottage industry. The result is that the government gets to have a larger income base from taxing such industries. Promotion of industries in the rural settings has the benefit of bringing amenities like electricity and transportation to the people. At the same time, it evades some of the problems that come with urbanization (Dak 1989). Some of these include overcrowding of people in small housing units as well as the danger of the coming up of slums. This means that the provision of industries in the rural areas of India leads to improved lives. At the same time, it avoids the dangers that come with the coming up of slums as is in the case of many urban settings. The setting up of Export Processing Zones (EPZs) has been of tremendous help to the growth of industrialization. Some of the benefits include reduced taxes, better infrastructure, and simplified procedures among others. This has the benefit of increase in employment of the people in India (Soundarapandian 2012). Aside from job creation, the availability of industries in the country has the added advantage of increasing the revenue of the government. It also has the benefit of improving the standard of living among those who work within these industries. Industrialisation has had the benefit of rejuvenating the economic structure. This is because it breathes life into the structure. In the case of industrialisation, the setting in the economic structure changes because it will bring about a new way of doing things (Seshadri 1991). The people will be able to enjoy the fruits of this rejuvenation by getting better quality jobs and pay. As a result, the standard of living goes up. Another benefit of industrialisation has been the value addition to the produced or final goods (Seshadri 1991). Value addition has a number of benefits. One of these benefits is the improved prices for the products either locally or internationally. In the case of either India or Bangladesh, the farmers will come together to set up a factory. This factory will then process the products and eventually come up with a much more refined product. An example of this is tea leaves. The farmers will in the end be able to make more from the finished product than they would have done in the case of a raw product. Limitations of Industrialisation One challenge of industrialisation being a means to eradication of poverty is the high cost of production. Currently, due to the competitive market environment, the industries have to streamline their production to allow them to accommodate the market. This thus leads them to lay off a lot of their employees (Rao 1973). This situation has in the long run contributed to the exacerbation of the situation as it leads to the retrenchment of many people. The unemployment will then lead to the poverty rates going up. Political will and lack of it are another limitation to industries coming up to play their role of poverty reduction (Chowdhury 2004). The high level of corruption and the industrial policy that the government of Bangladesh adopted led to the closure of a lot of industries. This indicates the low level of willingness of the government to support the local industries. As a result of the collapse of these industries, the poverty has been on the increase. This negatives any perceived benefits that industrialisation may have on the rural poor. Though the industries have had a lot of benefits like employment promotion, there are instances in Bangladesh where the politically connected few of the country gained majority of the profits accrued by these industries. According to the International Labour Organisation (ILO 1993), during the Pakistani era (1947-71), those who benefitted from the policies promoted, were a select few non-Bengali entrepreneurs. This situation leads to extremely few people gaining more than the collective poor people whose cheap labour they exploit. Technology transfer in Bangladesh has been static in nature. This means that the nation imports the technology but lacks the capacity to generate its own. This means that the nation cannot lay claim to any form of innovation. Alongside this is also the fact that the nation does not conduct a substantial level of value addition. As a result, the country’s import bill still remains high which is a weighty burden for the country. This is because it is spending more resources purchasing foreign goods than it makes selling its products to other nations. Another limitation of industrialisation is lack of reliable data on the industries especially in the case of cottage industries. This makes it hard for the proper assessment of the progress of these industries (Kumar 1997). This also means that it is hard for employee welfare can be properly safeguarded from abuse from their employers. At the same time, the ratio of resource distribution is not equally availed. In the case of India, the entrepreneurs will usually set up industries in areas that have a relative advantage (Dutta 2000). This means that the industries will not be set up in places without infrastructure, security, closeness to the market among others. Needless to say, the people who reside in areas that do not have these resources will remain disadvantaged, and poverty will continue to exist. Management of the Entrepreneurship Development Programs (EDPs) sometimes fails to succeed due to morale (Dak 1989). Morale of the management is usually low. This means that they do not in most instances care what happens. Because of this negligence, these programs do not end up attaining their desired end. It also means that there are few beneficiaries that get a chance to benefit from the funds. The trainees for the EDPs need to be well, motivated through amenities such as salaries, promotions as well as other incentives for the project to succeed. Conclusion Looking at the above article, the eradication of poverty is something that any nation must strive to attain. Industrialisation, as well as microcredit facilities are some of the methods that this can be achieved. As seen above, microcredit has served to ensure the empowerment of rural women. This is because they gain access to business funding. This allows them to decide what to invest in and thus gives them control of their lives. In the case of industrialisation, the coming up of industries in a country spurs development and wellbeing of the people. It is possible to bind these two innovations. This will mean that small scale businesses will get funding and nurturing to enable them to grow into large scale industries. These industries have the capacity to influence the fate of many people whom they employ. Bibliography: Chowdhury, M. R., 2004. Economic Exploitation of Bangladesh. Nebraska: Universe. Churchill, C. and Frankiewicz, C., 2006. Making Microfinance Work: Managing for Improved Performance. Geneva: International Labour Organization. Dak, T. M., 1989. Rural Industrialisation: Challenges and Perspectives. New Delhi: Northern Book Centre. Dutta, D., 2000. Economic Liberalisation and Institutional Reforms in South Asia: Recent Experiences and Future Prospects. New Delhi: Atlantic Publishers and Distributors. 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