Bangladesh’s Largest NGO Admits Role in Microfinance Crisis

Thursday, April 21, 2011

Bangladesh’s largest network of NGOs – BRAC has admitted fuelling the micro-finance debt crisis together with other microfinance institutions by pushing excess loans to the borrowers. Surplus funds in the absence of proper regulation led to the collapse of the microfinance industry.

Dhaka: 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.

Source: OneWorld South Asia (link opens in a new window)