Microfinance i&now accepted worldwide as one of the potent tools of poverty alleviation. The awarding of the Nobel Prize to Dr Muhammad Yunus and Grameen Bank has rekindled interest in this form of banking services to the extent that the UN and even the multi-lateral funding institutions are considering it as an effective tool for pov erty reduction. However there has always been a group of strident critics who continue to debunk the claim of the Micro Finance Institutions (MFIs) in this respect. It would therefore be worthwhile to try to analyse this form of service in an impassioned way

One can start by looking at how it works. Obviously the main instrument is microcredit or small loan, which is offered to clients at a fixed service charge to be repaid in equal instalments over a fixed period of time. The loan is collateral-free. Some MFIs stress group liability while others give this loan on an individual basis but who should however be a member of a group. The criteria for membership is simple, a cap on the amount of asset they own makes them equal in each other's eyes. However the products or instruments the MFIs now offer have expanded to include small business/enterprise loans, hardcore poor loans, supplementary loans to mem bers within the same family. Importance is given to savings, and in addition to the mandatory savings, members are offered a variety of other savings products that they can avail of on a voluntary basis.

Some MFIs have instituted insurance schemes at very low premiums to protect the borrowers in the event of sudden death where the outstanding amount including interest is written off. Members are also entitled to taking recourse to a security fund where they can contribute a fixed amount, say, Tk 10 per week where on maturity after eight or ten years they or their nominee in the event of their death are entitled to six times the principal amount, male members get three to four times after four years.

The main critique against this form of credit is the service charge or the rate of interest charged. This usually varies from 12 percent to 16 percent among different MFIs. The principal and the interest are calculated over the period the loan is given, which is to be repaid as a fixed amount on a weekly or monthly basis. The bone of contention lies here.

Critics point out that whereas the service charge or the rate of interest is declared to be around 12 percent to 16 percent, the effective rate comes out to be around 25 percent to 30 percent. This is true, but what one misses in this calculation is the fact that those people who are left out of the institutional banking sector because of their inability to furnish any collateral as well as the hassle of paperwork and the shuttling between the bank branches and their place of abode, MFIs reach these services at the doorstep of the beneficiaries through the field workers. Moreover since the loan is to be paid on a weekly or monthly basis (in some cases of business or enterprise loan), the burden on the member in tolerable. This becomes evident when one looks at the repayment rate of the MFIs, which varies between 90 percent and 100 percent. The lesson here is that the poor who have so long been denied credit are now using this tool to augment their lot. They do so by utilising the credit in income generating activities (IGA) that also contribute to employment generation.

How far microcredit has helped in the reduction of poverty or in other words helped the poor to graduate out of poverty is a matter of debate since credit alone can^

on its own significantly contribute to poverty alleviation. Improvement of infrastructure, availability of adequate health services, access to safe drinking water and sanitation are all contributing factors. What is significant however is that easy access to credit can be the determining catalyst for change in the lives of the poor. Even if as alleged, some of the money is used for consumptive expenditure, the sense of being, of belonging becomes strong, raising one's self-confidence.

Another significant criticism against this form of credit is the allegation that microcredit is making the poor more indebted, that because of the mushroom growth of MFIs, the poor take recourse to multiple loans thus making them worse off than before. On the one hand, there is pressure on the field staff of these organisations to deliver in terms of meeting the target of both loanee and outstanding loan. And on the other hand, the poor get ensnared in perpetual indebtedness where sometimes they have to flee their hearth and homes to escape the burden. Thus the much touted claim of microcredit as a tool of poverty alleviation is put to question. This, on top of the allegation of crass resort to abuse by the institutions to force repayment. That the ultra-poor do not come into the microcredit net is an accepted fact because the pressure on the field workers to ensure repayment rate forces them to enrol as members, those persons who have the ability to repay. Thus the relevant question today is whether microcredit does deliver what it has so far been claimed to do. Or is a rethinking necessary?

However one thing is certain, that microcredit has over the years brought about a massive impact on the socioeconomic condition of the poor and the disempowered. And this is markedly so among the women, who had been and still remain among the most vulnerable in our society. This has been possible to a large extent on the easy access to finance that microcredit has been able to deliver even in the remotest villages in Bangladesh. To the poor such access is in one form

empowerment, and the fact that the majority beneficiaries are women gives them the power to say 'no' to be used (treated) as chattels by the traditional power brokers including the male members of the family. In fact the extent to which microcredit has been able to break the shackles of our rural women can be gauged from a simple observation.

That 20 years back when one used to traverse the rural roads of Bangladesh, one hardly used to see any woman, and if by chance one would accost anyone, she would either hide behind a tree or cover her face by her anchor (sari). Now there is hardly any rural bazaar where one would not find women selling their wares in the market, haggling’with the nun over the price. And this change momentous as it is, has been brought about by simply enabling the women to have access to easy credit that microcredit offers. Thus one can say that microcredit has had a significant impact on the socioeconomic landscape of the country in terms of poverty reduction as well as empowerment.

Another significant aspect that is not brought into calculation is the overwhelming fact that there is over Tk 200 billion liquidity in the economy of the country as cumulative outstanding in the field due to MFI operations that has become the backbone of the rural economy. Such a huge amount of money circulating in the economy and that too in the countryside has become the core driver of the economy in the rural areas. Its total impact is phenomenal. Nevertheless as stated earlier, microcredit has reached a crossroad. If it is to deliver on its purported aim of poverty alleviation then the regulatory and apex bodies have to take a more active role in its operation. And the foremost of it should be to dense some means and formulate regulations to assign specific areas of operations to the MFIs to avoid overlapping that is eating into the vitals of the very foundation of microcredit. The MFIs, I am certain would be willing to share their knowledge and expertise in this regard.

Given that the MFIs are now spread all over the country, this outreach can be uti-

Used to deliver more financial services to the | doorstep of the people. Since the expert- I ence of microcredit has shown that the poor I are credit worthy, the central bank might J consider allowing the MFIs to take deposits,7 thereby encouraging the vast majority of the people to come within the purview of the formal banking practice. This should be able to garner massive cash resources, creating vast liquidity in the market that can be channelled into productive investment Of course, this would entail certain regulatory mechanisms to be put in place to protect the interest of the depositors, but I am certain this could be worked out between the MFIs and thecentral bank.

Since agriculture remains the backbone of our economy, the MEIs because of their outreach can also be used as service providers or outlets for providing financial services to the small and medium farmers ar their doorstep. The central bank has taken the first step by asking the formal banking sector to allocate a part of their fund as agricultural loan. Knowing the hassle and difficulty of the farmers in accessing these loans the central bank can consider making it mandatory for the banks to go into partnership with the MFIs to provide this service. In fact this partnership can be broad- ; ened to include SME loans to be provided and monitored at the borrowers' level through the MFIs.

It is therefore irrefutable that microcredit has and will continue to play a vital role in the socio-economic development especially in poverty alleviation. There are cer- J tain problems that need to be addressed, like for instance the question of overlapping, the channelling of available credit to more economic activities that should require more intensive monitoring and whether MFIs can offer more advisory services to their clients. The MFIs have always innovated to respond to any predicament, now the public bodies need to respond to the demand of the times for this concept to contribute its full potential.

The writer is a former avil servant and diplomat and the deputy president of ASA