Posts tagged with rural.

Microfinance: where altruism and capitalism collide

Raksha Vasudevan, July 29, 2009 at 11:33 AM

 

Before arriving in Bangladesh, I was familiar with the basics of microfinance: that it involved giving small loans to people who were too poor to qualify for normal loans from regular banks, that the model had been pioneered by Dr. Muhammad Yunus here in Bangladesh over 30 years ago and, that the repayment rates were incredibly high, and overall, the concept was seen as being highly successful in helping people climb out of poverty. 

But after three months spent working for an organization whose core program is in providing microcredit to the rural poor, I've come to learn that the reality of microfinance is more intricate and dense than I'd realized.

But before offering my opinion about the industry (and make no mistake, it's a gargantuan, growing industry with over 30 million borrowers and 175 billion taka (about $2.8 billion Canadian), in loans outstanding in Bangladesh alone), I'll first state my disclaimer: In no way do I believe that a) a single blog post can do justice to the topic, and b) that the amount of time and exposure that I've actually had to the microfinance sector has been enough to give me a thorough understanding of this tricky topic. But luckily, I've had the chance to visit several villages that were populated almost exclusively with microcredit clients and interview some of them. On top of that, I've also been able to pick the brains of field staff and managers with years, sometimes decades, of experience in the field.

The biggest lesson I've learned is that microfinance is at least as much about business as it is about philanthropy. Although the microfinance institutions, or MFIs, take a risk by lending to people with almost no collateral, the high interest rates they charge - sometimes as high as 20% - can have the inverse effect of what's intended: Rather than giving the poor a hand to help them out of poverty, having to pay such high interest can prevent the families from being able to build their own savings, keeping them reliant on loans forever, or at least, for the foreseeable future. The longer they're on loans, the more money the MFI makes. The interest rates seem especially unnecessary when you consider the fact that some of the larger MFIs, such as the Grameen Bank and BRAC, had surpluses amounting to more than a million dollars in recent years. As one Bangladeshi man put it, the MFIs are often seen as doing nothing more than "drinking the people's blood."

There are other criticisms surrounding MFIs, including the fact that they receive lots of money from the government and international aid agencies but portray themselves as self-sustaining, along with the fact that not all poor people have the "entrepreneurial drive" that would allow them to use the loans they receive to build self-sufficient businesses (a key goal of microfinance).

But encouragingly, it appears that better models of microfinancing are emerging. As an example, Food for the Hungry (FH), another international NGO that has operations in Bangladesh, allows the poor to essentially borrow on their own savings. Participants of its program are organized into groups, which then decide how much they want its members to save every week (usually no more than a dollar a week per person). From these savings, the group can then disburse loans to any of its members. This innovative approach has several advantages:

1)      Since it's the members' own money at stake, the group is unlikely to give loans that it doesn't think can be paid back, so the chance of default is low.

2)      The members know that if they default on their loans, they're not just merely an annoyance to a bank that has seemingly bottomless coffers to begin with. More likely, they're taking food out of the hands of their neighbours, relatives or friends. Again, this makes the chance of default quite low.

3)      The group profits from the interest that members pay on the loans. Eventually, the savings pool, supplemented by the profit from interest, can become large enough that either larger loans can be given, or the account can be closed out, providing a significant return for the group members.

4)      Dignity and empowerment, for both clients and staff. Since the organization never touches the money, there's no need for debt collectors to chase down their clients and the self-determining nature of the groups (i.e. the group itself decides how much money to lend and what interest rate to charge) truly empowers the members, because it's exclusively their own money and effort that's allowed them to escape lives of impoverishment.

Despite the criticisms that it's received, I continue to believe that microfinance, while certainly having its fair share of drawbacks and glitches, is a critical part of Bangladesh's development and that the poor of the country are better off with it than without. After all, even if we agree that the MFIs are about business, not philanthropy, no business can survive without demand for its product, and the 30 million borrowers in this country represent a demand that's not going away any time soon.


Tagged with poverty, rural, bangladesh, development, microcredit, Bangladesh, poor, microfinance, business, philanthropy, interest, raksha, vasudevan | Comments (12) |

Welcome to the "concrete jungle"

Raksha Vasudevan and Helen Hsu, May 29, 2009 at 4:25 PM

It's 7 o'clock at night here in Dhaka city and the power's out...for the third time today. Bangladesh currently has about a 2,000-megawatt shortfall between the country's demand and what can be generated by the country's plants. Without the money or resources to upgrade electrical capacity, the government has decided to deal with the shortfall by cutting the power to the country on a rolling basis. Since we live and work in relatively "upper class" neighbourhoods, we usually experience power outages only about three times a day, each time for about an hour. Other parts of the city have their power cut as often as every other hour. Electrical shortages are as much a part of life here as the humidity that wraps around you like a wet towel as soon as you step outside. I've been here now for two weeks, and my  body has acclimatized somewhat: instead of the sweat pouring out of me like a faucet the minute I step outside, I can usually walk for a few minutes before having to mop up the perspiration on my face.

The humidity is a mild annoyance compared to the intense discomfort you feel when you see the wide gap between the wealthy and the poor here. The stark contrasts that exist in this country are completely intriguing to me. The mansions in Gulshan, the richest neighbourhood in town, would rival those you'd find in Beverly Hills, and the inhabitants have the lifestyles to match (think: lots of servants, BMWs, and security guards with rifles). But on the same street, you'll inevitably encounter a desiccated beggar, children with sores on their face and sharp looking ribs, and women who are 30 pounds lighter than they should be.

Dhaka, the capital city and where I'm living, is aptly nicknamed "the concrete jungle" of Southeast Asia. It's crammed with skyscrapers, garment factories and residential buildings, and the number of people that live their lives in this metropolis is truly incredible (Dhaka has one of the highest population densities of any city in the world). The rainbow coloured rickshaws, the hidden side streets with hundreds of vendors selling everything from mops to luggage to live chickens, and even the slums in the middle of "modern" neighbourhoods, provide a welcome relief to the layers upon layers of concrete life.

I and the other AIESEC interns live in a small apartment in an area known as DOHS Baridhara. The "DOHS" stands for Defense Officer Housing Society, meaning that it was built for former members of the army. It's a huge plus for us, because the DOHS neighbourhoods are also the safest ones, since no one wants to cause trouble in an area with former militia. That being said, the only trouble I've had (if you can even call it that) is being the target of a LOT of staring, and understandably so: I look Bengali (I'm from India), but at 5-foot-7, I'm about five inches taller than the average resident, and when I'm not wearing the local shalwar kamiz (a traditional dress worn in South Asia involving loose pajama-like trousers and a long tunic), I tend to really stand out.

The non-governmental organization that I'm working for here - the Bangladesh Association for Social Advancement, also known as BASA - is really impressing me. There are about 300 people in total working for the NGO, with 30 of them working in the head office in Dhaka. Right now, I'm working closely with some of the senior officers in putting together a project proposal on improving the aquaculture practices of rural farmers. I also had the chance to visit one of the slums in the rural areas where BASA has built sanitary toilet facilities for the residents of the slum to use. That was one of the most exciting experiences I've had so far: seeing the enthusiasm of the residents, especially the children, over having such basic facilities. And the sense of gratitude that I felt then, for always having had a decent bathroom to use and safe water to drink, will stay with me for a long time. Another curious contrast here that I must mention: most of the residents of the slum don't have access to clean drinking water, but almost all of them had nicer cell phones than I do! People here are nothing if not connected.

The one other feature about Bangladesh that would be a crime for me not to describe are the people: in spite of the language barrier, never have I met people more friendly and welcoming than I have in this country. Navigating through this frenzied labyrinth of a city, bargaining with the rickshaw drivers, warding off the "beggars" that carry tiny snakes in innocent looking boxes (which they'll open if you don't spare them some change), crossing the roads that have neither traffic signals nor crosswalks  - one person or another has always been there to lend a hand. It's amazing how help just seems to appear here every time I start feeling like a fish out of water.

I'm sure there'll be many ups and downs in the remaining three and a half months that I have left here. Monsoon season is just around the corner, and there'll soon be seven people living in our "mini apartment." But there's a lot to look forward to as well: there are many parts of Dhaka (not to mention Bangladesh) that I've yet to visit, lots of learning to be done at work about micro credit, waste management, legal aid, etc. and I just got invited to a Bengali wedding! Even though it's only been two weeks, I feel so at home here, and I can't wait to get more wrapped up in the culture, the places, and most of all, the people, of Bangladesh. 

Tagged with poverty, wealth, aquaculture, rural, farmers, slums, sanitation, dhaka, outages, bangladesh, power, bengali, raksha, vasudevan | Comments (3) |