How Far Can Microfinance Take Us to Economic Growth?
A special seminar titled “How Far Can Microfinance Take Us to Economic Growth?” organised by InM, was held at PKSF auditorium, PKSF Bhaban, Agargaon, Sher-E-Bangla Nagar, on 17 April, 2008. Professor Salim Rashid of the University of Illinois at Urbana-Champaign, USA presented the keynote speech.
Dr. Quazi Mesbahuddin Ahmed, Managing Director of PKSF was present as the key comentator. Professor M.A. Baqui Khalily, Executive Director of the Institute of Microfinance chaired the seminar. The event received much attention with attendance of distinguished scholars, high government officials, members of international organisations, policymakers and development practitioners.
In his presentation, professor Rashid pointed out two characteristics of the market for economic growth. The characteristics are – i) there are knowledgeable individuals and every individual understands his/her long term self interest, and ii) individuals act on their self interest. He expressed his concern that in reality these two assumptions are not valid in the case of poor people. Often poor people do not or cannot understand their long term self interest. Poor people not only want to get out of poverty only, but also want to become wealthy.Professor Rashid criticized NGOs for orienting themselves as institutions without self interest. According to him, we cannot have so many disinterested people. Although Bangladesh has led the way of transformation using microfinance, he doubted whether small loans without self interest can push the country to development and economic growth. Finally, he concluded that economic growth and poverty reduction are really two different issues. Microfinance will definitely exist because it works really effectively for empowerment and poverty reduction but not for economic growth. Prof. Rashid offered some suggestions to see microcredit contributing to growth at the desired level.
Dr. Quazi Mesbahuddin Ahmed stated that it is true that microcredit does not work for growth. At the same time microcredit is no longer a micro issue – these days one can borrow as much as Tk. 300,000 through MFIs. His view is, in many cases microcredit really works while in many other cases it does not. So the question is, why? It is not the fault of microcredit; rather the problem is the existence of imperfect institutions. He informed the seminar that, PKSF Partner Organisations (POs) have lower default rate though recently for natural calamities it has risen slightly.
However, it is still not too high and this can be examined deeply, he proposed. He also said that the wholesale way of saying – this part of microfinance is good or that part is bad – is not acceptable. We have had floods, SIDR and we know many people are starving. Food rationing, which is a history in Bangladesh is now becoming a possible future action. He said climate change is a great challenge for us. “And that’s why, if there are many natural disasters, how can you expect growth?” he posed the question as crucial. People criticise that many take microfinance loans and just consume it. But where is the problem with that? They have to take food. It is an emergency need for them and as rational human beings they try to fulfill their hunger first, he opined. At the end, he commented that microcredit for all will not work, if the whole economy itself does not work. Dr. Quazi Mesbahuddin Ahmed also put forward some suggestions to cope with these hindrances.
Professor M. A. Baqui Khalily said that the share of microcredit, in terms of supply of fund in rural credit, is about 65%. Therefore, microfinance today is no longer an issue of giving small credit of taka 3000 or 5000. He also said, microfinance is injecting over Tk. 52 billion every year as credit but its contribution to GDP is not yet assessed. In Africa and some other countries this contribution was assessed but their methodology is under question. He pointed out that microfinance can generate massive employment opportunities. Almost Tk. 250 billion has been disbursed as microfinance loans. There must be a study on how much these loans are really contributing to economic growth, he urged. He pointed out that the structural change which has been initiated by microfinance in the market has to be carefully examined.
Some participants of the seminar also made important comments. One of them said that people are not enthusiastic and demotivated regarding microcredit, we have to investigate whether this statement is true. Microcredit creates voice raising agency in the poor and that’s the great contribution of it. One of the participants expressed dissatisfaction that the discipline in the microcredit field is getting destroyed and it is now diverting from its objective of social development. This is happening because of those who from the very beginning tried to make it commercialised. One of them requested, how PKSF working with diversified fields and programmes and fighting natural disasters and poverty efficiently is. He said that it is splendid.
Based on the keynote speech, comments of the key discussant and the observations made by the participants of the seminar, the following key observations for future policy recommendations were made:
- The ideal growth rate should be at least 7% for Bangladesh, because at this growth rate, a person’s income doubles every 10 years.
- We should emphasise the change and development of thoughts and mentality of poor people. The goal assumed is to get people out of poverty with microfinance and this traditional goal must be changed.
- For successful economic growth through the market, every individual has to understand his/her long run self interest.
- Though micro credit has been a great instrument for social transformation, a market must have support mechanisms so that people do not loose confidence on the system.
- Emphasise socially inclusive growth.
- The economic growth must have to be inclusive of society, humanity, freedom, democracy, empowerment etc.
- We have to always target and emphasise the primary activities. If it is on the secondary or tertiary activities will keep us stagnant as the previous example. We must emphasise the growth centre.