Micro-credit, a New Version of Feudal Economy
Micro-credit is a popular tropics among the under developing countries. Governments, non-governmental Organizations, donors and development partners are also emphasizing on Micro-credit. As a result most of the so-called "Non Profit Nongovernmental Organizations" are driven in the Micro-credit Market and making illegal Profit. In the name of Development, what's really going on? This is the proper time to check back Micro-credit. Otherwise an ill financial transaction can break down the socio-economic backbone of a nation.
In present days Micro-credit is defined as small finance to the poor people to eliminate poverty and upgrade their livelihood. In the process, the word Micro-credit or small finance has been imputed to mean everything to everybody. No one now gets shocked if somebody uses the term "Micro-credit " to mean agricultural credit, or rural credit, or cooperative credit, or consumer credit, credit from the savings and loan associations, or from credit unions, or from money lenders.
We can clarify at the beginning of our discussion the types of micro-credit and for which we are talking about. This is very important to arriving at clear conclusions, formulating the correct policies, designing appropriate institutions and methodologies. We can specify the categories as
1) Informal micro-credit (such as, moneylender's credit, pawn shops, loans from friends and relatives, consumer credit in informal market & other informal groups)
2) Formal Activity-based micro-credit (through conventional or specialized banks such as, agricultural credit, livestock credit, fisheries credit, handloom credit Consumer credit, and other rural credit.)
3) NGO-Cooperatives & Specialized Institute based Micro-credit.
The Informal micro-credit has a long history and still alive in the society. From the Feudal Moneylenders & 'Kabuliawalas 'it played a historical rule in the society. Their suppression demanded materialization & Institutional Micro-credit. Still it exists in the individual level. Its terms are flexible upon lender borrower relationship. Our present discussion is not on this decaying micro-credit practice.
Formal activity based Micro-credit has good reputation in the society from the very beginning of Modern Baking system. More or less, it played a positive rule in the rural Advancement. Its interest rate is enough lower and repayment schedule is flexible. Depending on the natural crises or disasters it frequently waive the interest, even it has also history of remission of the Principal loan Amount up to a certain ceiling. Formal activity based Micro-credit has still great demand and existing facilities are still inadequate. This type of Micro-credit is not at all the main focus of this Article.
Let us focus on NGO-Cooperatives & Specialized Institute based Micro-credit. It's the type of Micro-credit, which is flourishing everyday. As the article aimed to this category of Micro-credit, from this step by 'Micro-credit' we indicate only NGO-Cooperatives & Specialized Institute based Micro-credit and address them as MCP (Micro-credit Provider). Before justifying this type of Micro-credit, let us know what are really Micro-credit and its Social Aspects.
Micro-Credit Program was started from Bangladesh form early eighties with conception of small credit, high recovery with tremendous profit. The Entrepreneur starts his feasibility study in a remote village of Hill tracts district with his own small money. He distributed the money among very poor people with backward know-how, illiterate & week social existence. Mainly the lower custom's working classes were the target group. The entrepreneur was with a signboard of teacher with a strong influence in that locality. Like a feudal Lord of this century, he was capable to get recovery of his divestments with full profit on daily basis. The borrowers were really sufferer; they have to refund the loan by selling out their households. The entrepreneur was also annoyed with the borrowers and become dishearten.
In the next year, for vicious circle of poverty and lack of institutional finance, the borrowers again come to the entrepreneur. He saw the light of hope. He asked the borrowers to say that his previous finance was really helpful for them and they lead micro scale economic activity and generated profit. He also imposed condition to mobilize more groups of borrowers. That was also done successfully.
The entrepreneur then formed an institute naming Rural Banking. He then knocked the donor agencies and development partners to finance him with approach of poverty eliminating initiative. In Bangladesh the Banking sector has a very low recovery rate. So the approach of 100% recovery rate was really convincing. The project was financed and started operation Countrywide. By the back up of donor agencies & development partners, the entrepreneur becomes hero. From a teacher he becomes a business magnet owner of Bank, Group of Industries even also Mobile operator.
Not at all the Donors & Development Partners looked behind what's the methodology lies behind of 100% recovery, what's the exploitation rate and how the human rights violation held. Even they are encouraging Micro-credit program to other countries. Hundreds of NGOs are working with Micro- credit and poverty elimination is only their paper work, there is no existence in the root level.
Positively Micro-credit t has a thousand years history and its new version of Feudal moneylenders. Only the difference is that the Feudal moneylenders needed Collateral of Corps field, but the modern micro- credit institutes don't bother for Collateral. In all other context Micro-credit is similar to Feudal moneylenders. From lending process to recovery all are same like Brower -Lender relation, interest rate, and recovery system Punishment clause in all aspect. There is nobody finds it as an exciting piece of historical information.
It is quite okay that Micro-credit practice has created money flow and employment opportunity simultaneously it has quite criminalized the Economy. Micro- credit practice also breakdown the local custom & culture. They are patronizing gender inequality, illiteracy, environmental pollution, radicalism & the process of becoming landless. All this back draws make the way of exploiting wider for them. For long practice of micro-credit inequality & injustice increase in the society. Poor people don't get any way to protest against the exploitation. So society gets a new dimension of migrating trend among its people and religious terrorism.
To avoid the misunderstanding and confusion in the discussion about micro-credit, it' s social aspect, exploitation in the name of development and it's long run impacts on the economy, we have to analyze the complete Micro-credit system - how it works and what is potentiality.
Let we look for an example of Micro-credit practice. Micro-credit practice has a common approach -
1) To provide Banking Facilities to the poor people,
2) To save the people from the exploitation or feudal moneylenders,
3) Create self-employment opportunity,
4) Eliminate poverty,
5) Create social security for the landless poor people.
Grameen Bank of Bangladesh is the pioneer of modern micro-credit practice. It has achieved both national and international reorganization for its brilliant success in micro-credit practice. There are to many studies on 'Grameen Bank' by the donor agencies and all they have admired it as follows-
1) It has a great achievement Credit Adjustment or Re-payment.
2) It has given Banking facilities to the people under poverty level,
3) It has invested in the productive sector in rural area,
4) It has increased the income level of the landless day laborers,
5) It lenders among poor people both for male & female
6) It has very low bad loan,
7) It has also worked for birth control & non-formal education among the poor.
8) It brings household females to the physical laborer in the field.
Micro-credit data are compiled and published by different organizations. We find them useful. We can identify the sectors of micro-credit each organization provides and information of poor borrowers, and their gender composition, loan disbursed, loan outstanding, balance of savings, etc. under each of these sectors, country wise, region wise, and globally. These sets of information will tell us which sector of micro-credit is serving how many poor borrowers, their gender break-up, their growth during a year or a period, loans disbursed, loans outstanding, savings, etc. The categories, which are doing better, more support can go in their direction. The categories, which are doing poorly, may be helped to improve their performance. For policy-maters this will be enormously helpful. For analysis purpose this will make a world of difference. .
Enough propagation held on micro-credit. But there is no proper investigation on Micro-credit. Time demands Campaign for investigating in the root level to present the information that they already collect on number of clients, number of the poorest among them, number of poorest clients that are women, number of clients that have crossed the poverty line, how many cases broken down the dream of borrowers, what the hard reality of Micro-credit, how many borrowers were really benefited, how many were suppressed, for each of the cases what type of torture they made on the borrowers violating Human rights. This will help donors to select the proper methodology they would like to support. Sorting out these things is very important for the donors, as well as the policymakers.
Let us examine a transaction, suppose you need to borrow US$ 10,000 and you have gone to a Micro-credit Provider. The MCP's first approach would be please become a Project Member and open an account with us first and then apply for loan. They are not interested to discuss about their interest rate. MCPs charge you US$ 300 non-refundable payment for Membership & Account opening. If you are conscious and emphasis to know the interest rate before borrowing, they insist you to become a member and open an account with them. When you take membership and opened the account, they will say you that their interest rate is 10% for each 100 days. For US$ 10,000 you have to return US$ 11,000 with in 100 days. Repayment schedule is US$110 /day X 100days. If you agreed and applied, they will take 10 to 15 days to approve your application. After approval, they will ask you to deposit US$1,000, which cannot be with drawn within the loan period. Poor borrowers cannot comply this condition. So the Maps say you 'no problem, we will adjust it from your disbursement'. For a documentary Micro-credit of US$ 10,000, you will get practically a disbursement of US$ 9,000. So the mater stand that you borrowed US$ 9,000 but you return US$ 11,000 within 100 days at the rate of US$ 110/day.
Some violent borrowers would like to show a simple account as; he borrowed US$ 9,000 but paid US$ 11,000 plus US$ 300 for documentation. So his ultimate payment to the MCPs is US$ 2300, which is an interest rate of 93.277% per annum. He tries to come out from this inhuman exploitation adjusting his blocked amount of US 1,000. He argued it as an uncivilized money lending more than feudal or slavery.
The Maps are not agreed to this complain. Their reply is that for long run Fixed Deposits we pay 1.5% per month to our depositors and we take 2.5% from our creditors. Our business is only at 1% profit. We act for social development and removing the poverty.
But the real fact is MCPs are really exploiting the poor people in the name of elimination. For the above-mentioned transaction, a credit of face value US$10,000 they disburse US$ 9000 and keep blocked US$ 1,000. They earn US$ 1,000 (as Interest)+ US$300 (Documentation & Membership) +US$ 100 (From the blocked amount), total US$ 1,400. For the Blocked amount the pay an interest of US$ 45 to the Creditor for that period. So the net Profit Stands US$ 1,400 - US$ 45 = US$ 1,355. A profit US$ 1,355 investing US$ 9,000 for 100 days means the interest rate is 54.95% per annum.
Let we take it accounts that the open profit margin is 54.95% and go to finding the hidden profits of the MCPs. Everyday the borrower is refunding US$100 of his principal loan amount. But the MCPs don't take it in account to and never calculate in reducing method. If we take this account for each 10 days, the borrower refunds US$1,100 per 10 days but without adjusting the principal amount they reinvest it for rest 90 days at the rate of open interest of 54.95 %. After next 10 days he return more US$ 1,100 and the MCPs through it in the market in same rate for 80 days and the next US$ 1,100 for 70 days and so on. From the creditor of US$ 10,000, they generate more interest of US$775.68 which stands 31.46%, So the MCPs total interest rate stands 54.95% + 31.46% = 86.41 %.
So we can say that the MCPs have a minimum profit margin of 86 %. Struggling against 86% interest rate, how the poor and under poverty level people survive! What's the hell Business there have to coup with this gigantic figure of interest rate?? What is behind their success? How far true their success stories? Is it possible to eliminate poverty with such a Micro-credit? It would not be injustice to call it as a new version of Feudal Moneylenders exploitation! May we not ask the donors and development partner just stoop this nonsense!
What is the profit margin on going Business in under developing countries! From different Studies on Bangladesh we find that the in Trading, the wholesalers profit margin is 1% to 10%, retailers make 15% to 25%, Manufacturer's profit margin is 10% to 15%. There are some exceptional business deals with abnormally high profit. We don't take those exceptional cases in account. The main fact is that there are none any regular business that can generate 86.41 % profit margin except the Micro-credit.
Infect, Micro-credit has become a high profit generating business exploiting the poor community. Thousands of NGOs and Cooperatives have driven in this Business in the name of poverty elimination or social development. Even Conventional Banks are providing bridge Finance to the NGOs for micro credit.
A Survey made on 76 creditors of different districts. In the Question, 'is it possible to remove your poverty with micro-credit?' 61 of them replied "No, never", 7 of them replied "yes", 5 of them replied both and 4 of then has no comments. Beside that we have also findings as follows -
Firstly, the target groups of MCPs are the people under poverty level. They are not conscious about their rights. They have no organized voice. So far they suppressed, they cannot protest. Even they have no chance to go to court for legal action. This is the main potentiality for MCPs success. Among this target group, it is easy to get 100% recover violating Human rights. They lead both physical and mental torture among the borrowers. We have to many examples of Human rights violation by the MCPs. Even we have such example of suicide only for 2000 Taka Micro-credit, which is equivalent of US$27 only.
Secondly, the Target group is illiterate and unemployed. They have no business experience and really have no choice on where to invest. As a result, projects are selected by the MCPs but don't take the liability of failure of the project. Most of the projects are agro based and related with natural calamities so there are many scopes to fail the project, but there is no exemption clause. Their projects have no sustainability. Their non-negotiable mission is to making profit.
Thirdly, In the name of poverty elimination & economic emancipation, people under poverty level are deprived by the MCPs. But the upper class of rural economy, Shopkeepers, Retailer, Compradors, Brokers and rural touts are the beneficiary class of Micro-credit.
Fourthly, Daily laborers become slave to the MCPs within the loan period. MCPs take a part of his wage everyday. To escape from their torture, the Daily labourers & Marginal Farmers are migrating rural to urban area.
Fifthly, Small farmers also have bad experience with MCPs. To survive with MCPs high interest rate, small farmers have a trend to become landless.
Sixthly, MCPs thrown out the rural female community from household to the corps field, garments worker and construction laborer. For same hard working job they are getting half of the wage of a male worker. An ill competition observed in the labour market to employee the female workers. As a result male workers are becoming unemployed. We need to compute the rule of females in GDP when she is in household and also in labour market. This is the time to empowering the women. Lower wage then the male is not at all a sign of empowering the women.
Seventhly, MCPs credit realization procedure is very crude. They give a chance to reschedule the credit. They stats a credit with 86% interest rate per annum but a rescheduled credit charged almost 172%. Moreover they have torture cell for the creditors. Their credit collectors hells the creditors family and social life. There is no excuse or exemption. To realize the credit,
Eighthly, Micro-credit flow has increased the consumption in the rural area. Rural market gets a character of perfect competition and the profit marine in that market is going downward. Due to dark illiteracy most of the creditors spend their credit for their livelihood expenditure other then income generating initiatives. As a result MCPs are realizing their credit by ejecting their homestead.
Ninthly, Micro-credit practice has influenced the rural poor to changing their Profession and finally migrating to the city or nearby towns. This is the sign of break downing a system.
Tenthly, The dangerous finding is that, Micro-credit Operation by the Cooperatives. Eliminating the basic concept of Cooperative, Urban touts are taking Registration form the Department of Cooperative and started Micro-credit Practice as a high Profit Generating Business.
Eleventh, MCPs are becoming as a threat for Commercial Banking and same to the capital market. Due to gigantic interest rate and recovery, savings are flowing to MCPs. In National aspect, savings, investment, employment opportunity and income all this economic activities are hampering the Banking process. MCPs are bricking up the basic Banking methodology.
On above findings, may we take an opportunity to oppose the Micro-credit saying, Micro-credit is not an answer to the poverty. It just helps poverty to continue. It creates the way of exploitation more and more skilled & efficient. Who the economist dares carry an 86% interest for development and growth.