Making the Poor More Indebted

Apr 29, 2011

Microfinance institutions are pushing loans to the poor in Bangladesh.

703 Millions of Bangladeshi women have received loans they cannot afford. (Photo credit: Sam Sherrat/Flickr)


Lack of regulation and a surplus of donor funds in Bangladesh’s microcredit industry have led to NGOs pushing loans to over-indebted borrowers, says BRAC, the world’s largest development organisation and heavily involved in the country’s microfinance industry.

Asked whether BRAC itself had pushed loans onto borrowers who could not afford them, Shameran Abed, programme head of microfinance at BRAC, told IRIN: “Yes,” citing “excess liquidity” and a lack of communication between lenders.

“In the mid 2000s, the microfinancing industry grew too fast. And yes, we did,” said Abed. “But I’ll tell you why we did – we didn’t have perfect information.”

In 2009, BRAC disbursed US$1.1 billion worth of loans to women throughout Bangladesh, and like many other microfinance institutions (MFIs), claimed that 99% of their borrowers paid back their loans, a win-win situation.

However, the industry has also come into disrepute. A Norwegian documentary, “Caught in Micro Debt”, sparked international outrage in 2010 by showing the difficulties people have under the burden of paying back a loan.

Some borrowers are even taking out more loans to meet repayments, experts say.

Microcredit, the practice of loaning sums as small as US$20, was first pioneered in Bangladesh in the 70s and 80s by Nobel laureate and politically controversial figure Mohammad Yunus and the organisation he founded, Grameen Bank.

Since then, the industry has mushroomed to over 500 registered MFIs in Bangladesh and has come under increasing scrutiny.

Women, who are the borrowers in most cases, are subject to high interest rates and aggressive debt recovery techniques, said Lamia Karim, associate professor of anthropology at the University of Oregon. She has been researching microfinance for more than 15 years.

But BRAC’s Abed said the popular belief that high interest rates are to blame for loan defaulting is wrong. The interest on a $140 loan, he explained, is 15%, with weekly installments of $3.40, of which about $0.40 is interest.

"Is that 30 taka [US $0.40] tipping you over the edge? I don't think so," he said.


Inadequate regulatory body

Despite having more than 20 million micro-borrowers, the Bangladesh government still has no effective system in place to protect microcredit lenders and clients, experts agree.

The Microcredit Regulatory Authority (MRA) formed in 2006 after repetitive calls from the microcredit industry to establish control over smaller MFIs, is hamstrung by a lack of manpower and funds, according Prodip Chandra Roy, MRA assistant director of research.

Furthermore, Roy said the MRA’s authority is severely undermined by other organizations that offer registration.

“For us the biggest challenge is to control other authorities that also have the authority to register microfinance organisations,” he said.

To register with the MRA, an MFI has to show either that it has 1,000 members (potential borrowers), or $50,000 worth of dispersible funds. To date, the MRA has registered some 548 MFIs out of thousands operating in Bangladesh.


Strong-arm tactics

Many microcredit borrowers have little or no property to be used as collateral, which makes trust a key element of the loaning process.

The court system doesn’t work here. So, the only way you can get your money back is to keep pestering them.

“For our microfinance borrowers we do not have any collateral, so we cannot take anything back. The court system doesn’t work here. So, the only way you can get your money back is to keep pestering them,” Abed said.

However, BRAC, Grameen and other NGOs have been found to do much more than pester borrowers who missed payments, some claims suggest.

As an attack on a family’s honour, women are regularly shamed in public, an activity that can have grave social repercussions, Karim said.

Stronger measures are used if the borrowers default even after public humiliation.

“Grameen, BRAC, ASA and Proshika all strong-armed women into paying back. In extreme cases homesteads are taken apart and the timber and tin sold off,” said Karim.

Though the NGOs don’t actively take part in ghar bhanga (house-breaking), community members do what NGO officers order them to do, out of fear of losing access to loans, she said.

However, despite numerous papers by independent researchers, the NGO community refuses to accept such allegations.

“I’ve not had one issue of complaints [of house-breaking] coming from borrowers, or the media or the society that we work in,” said Abed.


The article was first published in IRIN in April 2011.