Do Rural Banks Matter by Burgess and Pande - Article Example

Strategies of Economic Development

Table of content

1. Introduction3

2. Micro-credit System3

3. Strategies of Micro credit system4

4. Lack of access of poorer people in credit market6

5. Availability of micro credit in poverty reduction6

6. Importance of micro credit8

7. Conclusion9

Reference List10

• 1. Introduction

Micro credit is an effective strategy for economic development by ensuring social improvement in which poverty can be reduced by taking small loans, investment, small savings, pursuing business venture and self-employment (Burgess, and Pande, 2005). In order to develop economy, Muhammad Yunus founded Grameen Bank to provide credit and banking service to the rural population. The Grameen Banks accept deposits, provides financing opportunities and other services for improving living standard of the people and majority of the borrowers of Grameen bank are women for starting own business or personal uses (Burgess, and Pande, 2005). The objective of Grameen Bank is to provide financial independence among the poorer population and encouraging borrowers to become savers through financing their assets.

The Grameen Banks also set goals of making every branches of it poverty free through providing micro credit, by ensuring adequate amount of food and health care service for improving society. In 2006, 13th October, the founder of Grameen Bank has awarded by Nobel Committee as Nobel Peace Prize 2006 for the efforts for creating economic and social development. This is the most effective instrument for struggling against poverty and ideas and models under the strategy of micro credit support poorer people in mitigation of poverty. The Grameen Bank is successful in expanding their business through approximately more than 2565 branches through 41000 villages and also successful in generating approximately $4 billion assets (Burgess, and Pande, 2005).

• 2. Micro-credit System

According to Burgess and Pande (2005), the micro credit program is necessary for poorer people by providing small loans to wide range of people. The strategy of micro credit is mainly to provide financial service to the poorer people and foster more self-employment and income generation so that the standard of living of the people can be increased. As stated by Burgess, and Pande (2005), micro credit system is thus effective for providing business opportunities and financial service including both credit and savings program. Charity is not the answer of poverty as it increases dependency of the poorer people and is not appropriate strategy for breaking cycle of poverty. In this context, the strategy of micro credit system provides small loans to the people such that they can take initiatives for starting up small business and improving agriculture. This strategy is thus effective for increasing potential of the people by ensuring more economic and social growth. The Grameen Bank offers credit to the people including poor, women, illiterate and unemployed people in the country. There are several strategy of taking credit in reasonable way such as low interest rates, weekly installment payment and group lending system. These strategies decrease the burden of the lenders and spread the risk among a wide range of users of micro credit. As an example, Burgess, and Pande (2005) opined that, Village Phone Program is a micro credit program in Bangladesh which is efficient for women entrepreneurs for starting new businesses mainly in rural areas. On the other hand, Struggling Members Program is also another effective micro credit program that exclusively targets the beggars in Bangladesh and the managers try to distribute small loans with the facility of interest free system to the beggars. Thus, the strategy and programs of micro credit are effective for the developing nations such as India and Bangladesh. According to Burgess and Pande (2005), there are also other related ventures of Grameen Bank such as Grameen trust, Grameen Shiksha, Grameen Phone, Grameen Software Limited, Grameen Telecom and Grameen CyberNet Limited which are effective for country’s social and economic development. Thus, the micro credit system through Grameen Bank is popular and successful in providing credit to a wide range of people in Asia Pacific, America and Africa.

• 3. Strategies of Micro credit system

In order to provide effective finance and credit to the people, the Grameen bank incorporates appropriate financing models under the micro credit system.

Figure 1: Financial Model of Micro Credit

(Source: Burgess, and Pande, 2005)

According to Burgess and Pande (2005), there are two types of financing models, one is direct financing and another strategy is Self Help Group (SHG) bank linkage model. Under the direct financing model, most of the Micro Financing Institutes (MFI) utilizes the group of intermediaries for financial transactions. Moreover, Non Governmental Organisations (NGO) promotes several strategies for providing credit to the poorer people. Under this model, SHG can be formed by NGOs, MFIs or formal financial agencies to utilize the system of micro credit. On the other hand, under the model of SHG-Bank linkage model, NGOs act as facilitators or financial intermediaries between SHG and Grameen Bank for taking initiative of micro credit system (Burgess, and Pande, 2005). Through this strategy, the SHG can utilize the system of micro credit successfully with the help of NGOs.

• 4. Lack of access of poorer people in credit market

The poorer people cannot access the credit market properly due to small amount of their financial assets as well as lack of efficiency in managing financial resources. Accordingly, the interest rate in the credit market is high which is unaffordable for the poorer people and for that, they cannot lend money from the credit market. Moreover, Burgess, and Pande (2005) stated that, lack of transparency in the credit market adversely affects the trust of the people to seek credit form the market. Interest rate conflict and lack of efficiency in meeting the needs of the poorer people and thus they cannot afford to manage finance through credit. As suggested by Burgess and Pande (2005), most of the rural people are not educated properly to access the credit market due to complex system as well as lack of transparency and thus, the poorer population are not satisfied with the service of credit market. In this context, Grameen Bank supports the rural population by offering small credit facility as well as small investment planning with higher interest rate.

• 5. Availability of micro credit in poverty reduction

Micro credit strategy helps the poorer people to resolve the problem of poverty through providing small financing facilities. As described by Burgess and Pande (2005), micro credit generally provides small loans for working capital and also for assets to the people through which people can make proper planning for financing. Intensive supervision and close monitoring process helps the strategy of micro credit to reduce poverty. In order to help poorer people, the strategy of Grameen Bank provides small loans and also provides a scope to save small amount of money with attractive interest rate so that the poorer people can manage their finance. Burgess and Pande (2005) stated that, there are different options for monthly or weekly instalment payment which provides flexible service and help the people to save according to their budget. The strategy of collateral free and compensatory savings is also effective under the strategy of micro credit through which the poorer people can save small amount of money for financing their asset.

Burgess and Pande (2005) stated that, micro credit correct imperfections in the credit market to reduce poverty in the country and help the poorer people to live a normal life by ensuring proper management of their financial assets. Grameen banks provide loans for working capital or fixed asset which increase business profitability of the business ventures. Working capital helps the people to utilize it for business and run it efficiently and on the other hand, fixed asset helps the people to invest it in different purpose such as machinery, property and equipments. Utilising the loans for purchasing goods and financing the business is the main aim of the poorer people behind microcredit system. Thus, Burgess and Pande (2005) described that Grameen Bank can improve productivity and profitability of the business through which it is possible to reduce poverty from the country. Micro credit has influence on the entrepreneurial activities which further has positive impacts on households. Thus, this positive influences help to reduce poverty of the people.

According to Burgess and Pande (2005), most of the people face poverty due to lack of control, financing strategies and income; thus, micro credit plays a crucial role in reducing poverty and increasing consumption level of the consumers. Moreover, children’s demand can be fulfilled and children’s education also increases due to reduction of poverty through micro credit. Moreover, as per the suggestion by Burgess and Pande (2005), micro credit motivates more MFIs and NGOs to implement more micro credit programs for educational improvement, providing better health care service and nutrition and facilitate more growth economically and socially. Henceforth, there are various factors under the system of micro credit which are effective for successful mitigation of poverty from the country. Proper access of micro credit confirms efficient use of financial resources by ensuring increasing consumption of the people, business growth and effective utilization of fixed assets and improving economies of scale. Micro credit loans can be used efficiently by the borrowers to reduce poverty and increase income level by ensuring high productivity and economies of scale. Thus, the micro finance programs are effective for reducing poverty and improving health care service, nutrition, social development and education and income level of the country.

• 6. Importance of micro credit

There are several advantages for which the poorer people adopt the strategy of micro credit and also there is rapid growth of the population who use the facility of Grameen Bank for micro financing. The strategy of micro credit helps to include poorer population of the country into the financial system who can access loan as well as gain financing opportunity for their self-employment. There are several benefits of the poorer people such as opening a new business, improving housing condition, purchasing of asset and due to these benefits the self help group is also increasing rapidly nowadays. Grameen Ban provides money with lower interest rate as compared to the local money lenders and thus the poorer people can lend money with lower interest rate. After getting proper help from the Grameen Bank, employment generation is rising as well as the people can live with more dignity and self-respect.

Figure 2: Importance of micro credit for poorer people

(Source: Burgess, and Pande, 2005)

Accordingly, Burgess, and Pande (2005) stated that the poorer people also adopt the strategy of micro credit for going beyond the traditional approach of financing and utilize the new approaches for small financing as well as saving opportunities. The strategy of Grameen bank is also successful in providing educational program and develops social community through micro credit and other social development strategies. The poorer people depend on micro credit in order to reduce debt burden, finance own assets and manage upcoming risks. Thus, Burgess, and Pande (2005) stated that, micro credit can support the people below poverty line and help them by providing loans and giving attractive returns against savings of the customers. Thus, the poorer people seek micro credit for improving standard of living, economic growth and high productivity and utilize the opportunity of investment. Thus, the main of micro credit is to develop economy and society such that the people below poverty line can improve their standard of living.

• 7. Conclusion

Micro credit is the most effective tools for reducing poverty and improving economic and social development. In this context, NGOs and MFIs play a crucial role in incorporating micro savings by using sustainable model of micro credit. The Grameen Bank provide sufficient returns against the investment of the people as well as offer financing planning through credit system which is also effective to support poorer people such that they can mitigate poverty. The poorer population cannot access the credit market due to small amount of investment and high debt burden and in this context; micro credit system is an effective strategy for helping the population mainly in rural people. In order to improve the system of micro credit through Grameen Bank, there needs to develop proper communication and cooperation with the NGOs and MFIs such that they can help more SHG by offering credit. Moreover, proper training can improve working efficiency of the employees which further helps to provide effective service to the population. Moreover, the upper level managers need to arrange more social campaign such that the social communities can access education, food and shelter, water, health care service and other basic needs.

• Reference List

Burgess, R. and Pande, R., 2005. Do Rural Banks Matter? Evidence from the Indian

Social Banking Experiment. American Economic Review, 95(3), pp.780‐795.