The Concept of Microfinance
The concept of microfinance has existed for a long time. A number of developed states along with developing nations specifically in Asia feature a lengthy background associated with microfinance. This thesis offers a comprehensive understanding of the vision of the services linked to microcredit in Bangladesh. Furthermore, an analysis of the country's position, microcredit services that contribute to the significant financial growth indicators, the socio-economic effects of the services, microcredit strategies, and the microfinance organizations key achievements and issues facing microfinance organizations will be discussed. Despite the fact that a lot of scholars, researchers and analysts have presented extensive studies regarding microfinance services, the aim of this research is relatively more modest. Besides the writer's philosophical thought as well as the broad array and depth of the topic, this dissertation deliberates as a comprehensive technical review of the services involved in microfinance and how it has helped the poor across Bangladesh. The illustration of the significance of microcredit along with the general devastating predicaments that followed after the independence of the nation is an essential discourse to enable the readers to have a comprehension of the innovation of microfinance in Bangladesh as well as the fundamental systems associated with Grameen Model. The research additionally presents the main microfinance strategies along with their examples aside from featuring the potential of agency difficulties and damaging selection issues involving the transactions between the creditors and loan seekers in Bangladesh.
Introduction
Since its launch, microfinance has grown to be an economic advancement strategy to profit low-income individuals in rural and urban regions. Bangladesh possesses one of the lengthiest antiquities with regards to microcredit (Faruqee and Badruddoza 2011, p.54). BRAC and Grameen have conducted various experiments and pilot programs within the country that have resulted in the continuous development of microfinance.
Currently, Bangladesh possesses quite a considerable number of well-recognized microfinance institutions (MFIs) ranging from BRAC, the association of social advancement and the Grameen Bank. Consequently, many other MFIs have begun their functionality within the metropolis of Bangladesh. Since December 2008, approximately 4200 institutions had requested to get licenses, whereas 400 MFIs already possessed the permits from microcredit regulatory authority (Faruqee and Badruddoza 2011, p.54). The microfinance industry appears to have become saturated if one has to put the number of MFIs within Bangladesh into consideration.
The general impacts of socio-economic factors have been presented through the learning outcomes from the significance of microfinance. The primary causes of impoverishment were remarkably one-sided syndication of resources, low financial as well as human capitals output development rates, a substantial increase of malnutrition, illiteracy, fertility, rates of unemployment, and non-urban folks depending exclusively on their small land. Furthermore, nearly 50% of the populace was female who had not been taken care of in the socioeconomic advancement that took place in Bangladesh (Bhuiyan, Siwar, Ismail and Talib 2011, p.221). The benefits associated with microfinance were visible in 1976 at the Jobra region by the founder of contemporary microcredit, Dr. Yunus Muhammad, who revealed the method for saving the impoverished state from this form of detrimental circumstance (Khandker 2005, p.275). For that reason, Muhammad Yunus along with his set up Grameen Bank accomplished the 2006 Nobel Peace Prize.
According to the socio-cultural practice of Bangladesh, almost all of these MFIs possess definite plans for women and men. Membership is stringently restricted to individuals, who have got less than half an acreage of land and should not have a form of relationships with a similar household as an additional program associate, or possess same financial resources, as well as reside in a similar community. Studies show that the social and spatial cohesiveness formulated amid persons of the same gender, living in one metropolitan area, and also owning same pecuniary backgrounds are essential aspects in the pure performance of these groupings (Mallick 2012, p.1185).
Grameen Bank utilizes the five-member assemblage, while RD-12 and BRAC (Bangladesh Rural Advancement Committee) make use of cooperatives and village organizations of 50-60 individuals correspondingly from the targeted populace. Both RD-12 and BRAC make use of the Solidarity Groups of 5-7 participants and 4-5 participants to control the repayment, access group performance and credit delivery (Lachman 2011, p.2011). RD-12 learned that in accessing group functionality, small cluster strategy was superior as compared to those of large groups (Faruqee and Badruddoza 2011, p.54).
For the cost savings mobilizations, the entire programs assemblages have every week gatherings and put in their savings. Additionally, they discover exercise and talk about the guidelines of the plan along with other team exercises. Team leaders, as well as a community head, are chosen within the monthly and weekly gatherings correspondingly (Islam, Nguyen and Smyth 2015, p.145). Group leaders are in charge of the discipline of participants and also starts loan plans for the accumulated loan instalments as well as figure out the area head; who will be in charge of looking at loan requests, tracking loans, and carrying out other noneconomic activities.
Female membership is also an aspect of the group-based social improvement design (Salim 2013, p.35). It has proven to be tough to access females separately in non-urban Bangladesh as a result of purdah systems that secludes women to be able to maintain a level of morality and modesty (Chowdhury and Chowdhury 2011, p.86). Women could find it more straightforward to face privacy as a team compared to individuals. Even though team unification works well with males as well, it happens to be precisely efficient with females in Bangladesh, who think it is far easier to go to every week group gatherings, comply with the guidelines and rules of team unification and success, and make minor dealings with the plans. Although some other programs bypassed females since they were regarded as excessive credit threats (due to childbearing as well as related health risks), the focused credit plans encourage women’s involvement (Chowdhury et al. 2013, p.1735). Such concentration to some extent demonstrates the programs focus on fairness and long-lasting economic and social advancement and partially reflects the recognition that loan recovery premiums tend to be increased for females as compared to males (Chowdhury and Chowdhury 2011, p.86).
MFIs have furthermore introduced the economically inadequate people, specifically women, to the formal economic scheme and allowed them to gain access to credit and gather modest savings in monetary resources and consequently minimizing their family poverty (Roodman and Morduch 2014, p.599). Many researchers have demonstrated that microfinance has likewise received a good effect on specific socioeconomic parameters like children’s education, house diet status, and women’s strength. Nonetheless, experts and professionals typically recognize the fact that weakest among the weak have not yet benefited from the microcredit plan in many developing nations partly because the majority of MFIs tend not to provide services and products that can be appealing to this category. Consequently, to improve the entire effect of microfinance on low-income reduction MFIs should offer an array of services to the less fortunate that are continuous and this dissertation seeks to determine the extent of the impact of these services to the economically suffering communities in Bangladesh
The rationale of the Research
Microfinance features a considerable impact towards the lifestyles of millions of needy individuals especially women. Several scholars, as well as non-governmental organisations, have been spending so much time in trying to make microfinance accessible to these financially disabled group that are not taken care of by the traditional economic climate. In the past, it was assumed that the advances associated with microfinance are not essential for every individual, but a lot of communities can benefit from this concept. In this research, the author attempts to existing proof regarding the significant contributions created by microfinance within the obliteration of poverty through the increase of revenue creation ventures, poor people empowerment towards the admittance of advancement services like education and health and education, and vulnerability reduction.
Research Question
Have microfinance initiatives influenced the general savings in Bangladesh and did micro-crediting indeed offer any form of hoards for the impoverished individuals in the nation? Can the approaches associated with microcredit decrease the low-income rates and immiseration in Bangladesh? Does Microfinance services have any challenges and significant success in Bangladesh? What are the positive results as well as the issues connected with microcredit programmes in the country?
Objectives and Aim of the Dissertation
Based on the thesis statement, the primary aim of this investigation is to present statistics for evaluation of trio essential programs of crediting (RD-12, GB, and BRAC) and to show the significance and perspective of micro-crediting for the economically unfortunate individuals in Bangladesh. For that reason, the research tries to explain the microfinancing strategies and techniques that are the crucial components to decrease the intense poverty, the amount of the socio-economic effects of microcredit services across the nation. Furthermore, this research is going to illustrate whether the initiatives have influenced the fundamental monetary advancement indicators.
Chapter Two: Literature Review
Bhuiyan and colleagues (2011) discussed that microfinance is often a type of monetary advancement which has mainly aimed at minimizing poverty through offering financial assistance to the poverty-stricken within the community. A lot of people consider microfinance, to involve loaning a small amount of cash to the unfortunate (Bhuiyan, Siwar, Ismail and Talib 2011, p.225). Micro-crediting possesses a much more comprehensive point of view that also incorporates savings, transactional services, and insurance. This chapter seeks to give an understanding of the microfinance strategies employed in Bangladesh and the sources of poverty throughout the state by reviewing various secondary sources.
The Grameen Model
Raihan, Osmani, and Khalily (2010), suggested that microfinance is not an advancement. Based on their article, several developed nations along with other developing states specifically in Parts of Asia have got a lengthy historical past in micro-financing. Throughout the 18th as well as 19th centuries, in many Countries in Europe, microfinance developed over time as being a kind of free investment for the economically unfortunate. Informal financing and self-support happen to be the pillar of microcredit throughout the European states. The background of microfinance throughout Ireland could be followed back to the Eighteenth century (Faruqee and Badruddoza 2011, p.54). Historically, it is how self-help resulted in legal backing, conductive regulation, and financial innovation, and developing a broad microfinance movement. However, the distressing policies elevated by business-oriented banking led to its downfall. Faruqee and Badruddoza (2011) outlined that the alleged Irish loan finances made an appearance at the beginning of the eighteenth century as a charity institution, in the beginning, they borrowed from contributed sources and provided interest-free financial loans. Monetary intermediation involving borrowers and savers later substituted them. Commercial loans were given an interim time frame and instalments were slated on a weekly time frame, to implement the reimbursement, supervising strategies were put in place
Although Dr. Yunus together with his founded Grameen model had been honoured equally in the Nobel Peace Prize in 2006, their initiatives to set-up an interpersonal and economic advancement from below by giving the very first micro-financing to the less fortunate in Bangladesh was successful. However, the understanding of microcredit has had a rough road for it to reach where it is at the moment (Al Mamun 2012, p.14). The earliest community development and microfinance bank was Shore bank, which was founded in 1974 in Chicago.
Microfinance Methodologies in Bangladesh
According to Muhammad (2015), the advancement of microcredit plans for the poverty-stricken in Bangladesh had been embedded in a unique project that was first attempted by the pioneer of microcredit Muhammad Yunus in 1976. The undertaking was an experiment whether or not the poor people had been creditworthy as well as if the credit could very well be offered without having a real guarantee (Faruqee and Badruddoza 2011, p.20). Down the road, Yunus’ project ended up being backed up with the support of the Bangladesh central bank as well as finance provider IFAD (Muhammad 2015, p.35). The venture grew to become prosperous after nearly seven years of testing, and therefore Yunus founded Grameen Financial institution in 1983. In 1972, BRAC founded in Bangladesh as being a charity institution hoping to assist shift families displaced in the year 1971 freedom warfare versus Pakistan. Abed F.H, the inventor of BRAC, encountered that the alleviation work was insufficient to minimize poverty in the nation considering that he comprehended the roots associated with non-urban low income (Faruqee and Badruddoza 2011, p.32). Consequently, he designed BRAC to be a platform intended for poverty alleviation. Roodman and Morduch (2014) agree with Muhammad (2015) by pointing out that apart from adopting the delivery of the small group strategy of Grameen Bank, RD-12 additionally implemented BRAC’s skill advancement strategy for endorsing efficiency of the needy individuals (Roodman and Morduch 2014, p.600).
Importance of Microfinance in Bangladesh
Khandker and Koolwal (2010) recommended that offering the poverty stricken with admission to commercial services is among one of many approaches to help boost their returns and efficiency. In numerous states, nevertheless, general financial bodies have not managed to offer this service, and hence cooperative plans have come up to fill this breach. They aim to assist the underprivileged become self-reliant and therefore escape being poor (Khandker and Koolwal 2010, p.1124). Most of these agendas make credit available by making use of inter-personal mechanisms, for instance, group-based loaning, to grasp the poor and other clienteles, including men and women, who happen to be denied admittance to official financial establishments. With the ever-growing help from donors and the World Bank, microfinance is developing as a device for minimizing impoverishment and enhancing the afflicted individuals’ entree to financial services in low-income nations (Roodman and Morduch 2014, p.596).
Roodman and Morduch (2014) defined poverty as the outcome of low economic development, high populace growth, as well as a sizeable uneven distribution of assets. The adjacent elements of poverty are joblessness plus the low efficiency of the underprivileged. In another article, Imai, and Azam (2012) suggested that when low income causes lack of employment, minimizing poverty demands the generation of jobs. Furthermore, they outline that poverty is as a result of low productivity along with low earnings, bringing down, poverty calls for investing in physical and human investment to boost workers’ efficiency. In most countries, like Bangladesh, low income may be as a result of insufficient human and physical capital. Therefore, the simplest way to minimize poverty would be to take care of each of those issues: improving productivity through generating employment as well as establishing the human capital.
Imai and Azam (2012) further outlined that the absence of capital and savings make it challenging for a lot of needy individuals that desire employment in the agricultural and industrial segments to be self-employed as well as to also carry out practical income-generating exercises. Offering credit appears to be a method to produce self-reliant options for the impoverished (Imai and Azam 2012, p.650). Nevertheless, the authors stated that due to the indigent deficiency of real guarantee, they had got minimal admittance to financial credit. Informal loan providers perform an essential function in numerous low-income nations. However, they frequently demand substantial rates of interest and hence prevents indigent non-urban families from investing in effective earnings exercises. Furthermore, even though informal groupings, for example, Rotating Credit and Savings Associations, can efficiently fulfil the periodic monetary demands of countryside homes in several communities, they may not be dependable sources of funding for income-generating pursuits (Roodman and Morduch 2014, p.596).
Poverty Sources in Bangladesh
Shahidur R. Khandker (2005) pointed out that Bangladesh has a preponderantly non-urban economic climate. The workforce has been increasing by more than 2% annually, as the agriculture, industrial segments, along with service sectors will allow for a maximum of 1.7% yearly expansion of the labour force. The agricultural industry is responsible for 77% of jobs and is not able to offer other employment due to technological limitations. The present-day urban segment is not big enough to take in the supplemental workforce. The prevalence of poverty is eminent in the country, and it is more significant in the countryside regions as compared to metropolitan areas (Al Mamun 2012, p.14). Despite the fact that low-income rates have dropped in recent times, more than half of the non-urban populace continue to reside under the poverty line. Impoverishment in the nation is the outward exhibition of growing landlessness, illiteracy, high joblessness,and excessive growth of population (Al Mamun 2012, p.14).
A study conducted by Khandker and Samad (2013), showed that over 50% of all non-urban families do not own any land. Moreover, population pressure has minimised the standard dimension of farms consistently within the last few decades (for instance, the typical farm measurement in 1977 dropped from three and a half acres to two and a half acres in 1985). Merely 44% of the dynamic workforce is productively working. Despite the fact that over 90% of the cultivatable land is utilised for the production of food grain, the reduced farming growth rate in the nation (less than 2%) implies that Bangladesh doesn't produce sufficient foods to satisfy its needs and demands ((Khandker and Samad 2013, p.124).
Malnutrition dramatically affects the poor, particularly children and women. The rate of infant mortality is 78%, a thousand live-births higher compared to the standard rate of 72% for nations with low revenue (Davis and Baulch 2011, p.132). Salaries for unqualified work are minimal (approximately one dollar per day for every individual) that they tend not to take care of their fundamental needs. The rates of literacy are likewise reduced (roughly 41 percent for males and 19 percent for females). The intense pressure on land in the country causes a considerable workforce to acquire trivial pursuits in the countryside economic climate to endure. Shahidur R. Khandker (2005) deduced by recommending that tackling immiserisation in Bangladesh means decreasing the pressure induced by population growth on land through developing off-farm work prospects, slowing the growth rate, and plummeting malnutrition, illiteracy, as well as reduced health, that damage the efficiency of the inadequate.
Microfinance’s impact on the poor
In their article, Bhuiyan and colleagues (2011) proposed that microcredit plans can get to the indigent at cost-effective cost and will, therefore, assist the less fortunate become self-reliant. Supporters of microcredit consider improving the poor’s usage of institutional credit through essential ways of finishing low income. The authors believe that such plans may get to the indigent and defeat the difficulties of finance market flaws. In their perspective making use of credit smoothens usage, as well as help, reduce restrictions in production, boosting the earnings and efficiency of the inferior. Empirical research conducted by the authors supports this perspective to some degree: finance market interventions enhance both the production and consumption of the inferior who typically does not have access to credit. Based on proponents of microfinance, when conventional banks and loan companies are not able to fulfil the demands of females along with the impoverished, other establishments ought to be created to satisfy these groups’ need for commercial solutions (Bhuiyan, Siwar, Ismail and Talib 2011, p.225).
Based on a study by Islam, Nguyen and Smyth (2015), micro-crediting in Bangladesh is very essential; it often has a significant part, not just for the financial advancement, but it additionally shows the need to create the agricultural economic marketplaces. It happens to be such an efficient instrument which they can use as a technique for poverty lessening, financial markets, enhancing the established microfinance process and empower the indigent women. Despite the speedy growth of microfinance products and services, non-urban financial markets within Asian countries tend to be ill-prepared with regards to the 21st century. Approximately 90% of some 190 million less fortunate families in the Pacific and Asian state nevertheless have minimal admittance to regular monetary expert services (Islam, Nguyen and Smyth 2015, p.142).
Microfinance can be a necessary component of a low-income reduction program (Raihan, Osmani and Khalily 2017, p. 10). Better access and adequate provision of insurance facilities, credit, and savings, may make it possible for the inferior to ease their consumption, improve the management of their threats, establish their property progressively, establish their target businesses, improve their earnings capacity, and revel in a much better standard of living. Additionally, Microfinance services may also help the enhancement of market promotion, adoption of enhanced technological innovations and resource allocation. Microfinance allows one to encourage development and economic growth (Raihan, Osmani and Khalily 2017, p. 13). Without having a long-lasting admission to institutional microfinance, many poor homes still depend on small informal sources of microcredit, which restricts their capacity to attempt to be involved in as well as take advantage of the development prospects.
Microfinance can offer an ideal way to support as well as empower weak women of all ages, who constitute a substantial percentage of the very poor and put up with poverty (Chowdhury and Chowdhury 2011, p.86). It may also help the progress of the entire economic system through the incorporation of the financial market. Making use of the microfinance expert services by the poor in developing nations such as Bangladesh seems to have substantially lowered poverty levels. In particular, close to 21% of the Grameen Bank debtors along with 11% of the BRAC credit seekers were able to move their loved ones out of poverty in just four years of engagement (Rahman, Luo, Ahmed and Xiaolin 2012, p.1058). Roodman and Morduch additionally got a substantial effect on the level (severeness) of poverty among the many poor. Severe poverty decreased from 32% to 9% amongst Grameen Financial institution members, in addition to from 34 % to 14 % amongst the BRAC contributors.” The considerable development of low-income decrease statistics by the two significant MFIs (BRAC and Grameen) revealed that in case the government needed a poverty-free nation, mass micro-crediting would be vital in Bangladesh (Roodman and Morduch 2014, p.602).
Chapter Three: Research Methodology
Research Philosophy
The research philosophy in this dissertation can be considered as interpretivism and positivism for the reason that the absolute goal is not just to determine the microfinance approaches in Bangladesh, but additionally to discover the way this system assists the indigent to enhance their lifestyle as: earnings, financial savings etc. In so doing, it is going to provide an advantage, particularly when it comes to getting solutions to the questions brought up in the research question.
Research Strategy
The sample of the research was selected based on the random sampling strategy, from one community in Bangladesh and the folks that were already involved with microfinance exercises were interviewed. As a result, the reliability of the evaluation intensely depends on the information given by individuals that were interviewed. The data analysis will seek to find out whether microfinance possesses a positive effect on the quality lifestyle of the indigent. Additionally, it will help determine whether or not microfinance has only aided the poor individuals to come over the low-income boundary and empower them as well.
Research Approach
Gill and Johnson (2010, p.150) outlined that the two fundamental types of research methods include: qualitative and quantitative methods. The two approaches differ mainly with regards to words (non-numeric) and numbers (numeric). Qualitative method is mostly used as a substitute for any other statistic collection approach (for example an interview) or statistical analysis method (for instance classifying data) that provides or utilizes non-numerical data. Meanwhile, quantitative method is mostly used as a substitute for any data gathering styles like statistics or graphs that produces or makes use of numerical information. Therefore, another difference arising from quantitative data, and qualitative data is that qualitative data (Saunders, Lewis and Thornhill 2009, p.123)
It can be challenging to show the effect of microfinance on the individuals of Bangladesh by making use of a few sentences. Whereas a few impacts may be demonstrated merely by mathematical figures such as income and savings, other effects may be portrayed solely by descriptive approaches, such as admission to schooling, business expertise, etc. When one makes a questionnaire, they should endeavour to make it entirely organized to have the majority of the effects of microfinance on the community. The survey tried to incorporate the mathematical questions along with a few non-numerical questions. Therefore, the research will also give attention to the statistical tests performed as well as the numerical data. Hence, the result of this analysis will be contingent to numerical and non-numerical analysis, making use of both qualitative and quantitative methods.
Analytical Technique
The purpose of this analysis is not to construct a new hypothesis, but to investigate the statement of the problem based on scientific exploration as well as primary data. Moreover, in this dissertation, hypotheses will be generated from studies and after that, make use of empirical analysis along with primary data to evaluate the concepts. The conclusion will be constructed with the utilisation of logic. As a result, in line with the research question as well as scientific values, the analytical approach chosen was the deductive technique.
Procedures for the Collection of Data and Sample Selection
The populace of the research encompasses individuals who have been carrying out microfinance pursuits no less than two years and resided in Chittagong region of Bangladesh. The researcher selected the individuals with long practical experience in microfinance exercises since they are knowledgeable and also recognize a lot regarding the advantages and disadvantages concerning its activities so that they would address better to the set of the research questions. The use of an organized questionnaire for gathering the information through interviewing of the consumers was linked to the MFIs. Individuals for the interview had been decided on randomly. To obtain the particulars and the addresses of the interviewees in various locations, assistance was provided through the regional branches of MFIs as well as through the residents of the specific places.
Secondary Sources Collections
Even though the findings of the study are hugely reliant on the primary sources that were collected from the organized interview, it additionally needed some secondary sources to comprehend the theories, definitions of concepts, as well as practical outcomes. There was the use of thesis, journals, articles, several books, and research literature as secondary sources for the study. Online sources were also employed to be secondary sources for the thesis. Considering that the online sources are much less dependable, there was a limitation on the application of those sources to only the web websites of well-known institutions such as Grameen Bank. The majority of the sources used, are reputable and therefore are acceptable just about everywhere. Furthermore, there was also the use of annual reports and handbooks of a few of the MFIs inside Bangladesh. Nevertheless, it is difficult to determine the correct analysis elements for the thesis.
The researcher was required to deal with several references associated with this matter, to get the most suitable materials. Such materials were primarily gathered from the college library while taking advantage of available search device. The researcher had access and explored the databases through the album on the webpage of the Umeå university library. In addition to these, Google Scholars, LIBRIS, and JSTOR were employed to get the ideal analysis material. The keywords utilized when looking for scientific content and literature were; poverty reduction, liquidity and microfinance, microfinance, savings and mobilization microfinance and Bangladesh and microfinance, Muhammad Yunus and microfinance, living standards and microfinance; Solidarity, Group lending, etc.
Validity and Generality of Secondary Sources
It is crucial that the secondary sources that have been used ought to be relevant and need to be of an excellent source of inspiration. Consequently, the research picked up almost all of the researchers that have been peer-reviewed and employed by various other experts for their analysis. The criterion of choice guaranteed the standard of secondary sources. It is crucial to make sure that the sources utilized in the thesis are up-to-date because microfinance is a rapidly developing methodology. New studies, content articles, publications, concepts, and previews, associated with microfinance, turn up frequently.
