Micro level banking may have strong force to reduce the poverty status in a given society- give a broad explanation of this issue .

i)      Introduction:

What is Micro level Banking?

Micro Level Banking is extension of standard banking facilities to those doing small scale businesses, those living in poverty and those inhabiting rural areas without demanding collateral.

In finance, collateral[1] placement is a visible barrier inhibiting people from accessing funds from concerned institutions. This hinders the enterprising exploits of those living at poverty levels and small scale business people who in most cases do not have properties that can stand as collateral. Micro Level Banking is the only available option for individuals at such level to start their business ideas.

It sounds out of place for the average financially educated to extend loans without collateral but for those at the bottom of the pyramid, the poor and semi poor. Most often, the women who form the fulcrum of the communities are best channels of fund distribution. These people who obtained such small loans are eager to implement their business ideas and maintain their source of funding as there are lesser options available to them. In most cases, the loans demanded by these people are small in nature, thus they can easily repay its interest payments and that of the capital.

In Bangladesh Micro level Banking is known as micro credit policy. And Bangladesh is a living example that the microcredit policy has reduced the poverty status in rural areas of our country with a bank known as Grameen Bank.

 

ii)    What is a bank?

A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits[2] to customers with capital surpluses[3].

iii)  Types of Banks:

• Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks[4]were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term “commercial bank” to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.
• Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners.
• Community development banks: regulated banks that provide financial services and credit to under-served markets or populations.
• Credit unions: not-for-profit cooperatives owned by the depositors and often offering rates more favorable than for-profit banks. Typically, membership is restricted to employees of a particular company, residents of a defined neighborhood, members of a certain labor union or religious organizations, and their immediate families.
• Postal savings banks: savings banks associated with national postal systems.
• Private Banks : banks that manage the assets of high net worth individuals. Historically a minimum of USD 1 million was required to open an account; however, over the last years many private banks have lowered their entry hurdles to USD 250,000 for private investors.
• Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.
• Savings bank[5]: in Europe, savings banks took their roots in the 19th or sometimes even in the 18th century.
• Micro level banking: In recent time micro level banking has become a very popular banking among poor people. It gives loan to poor people without taking any collateral.

So to reduce poverty micro level banking has very strong forces, and it has become very popular banking system. Let’s discuss broadly about micro level banking.

iv) Role of Micro Level Banking in Poverty Eradication:

• Microcredit has recently assumed a certain degree of prominence. It is based on the recognition that the latent capacity of the poor for entrepreneurship would be encouraged with the availability of small-scale loans and would introduce them to the small-enterprise sector. This could allow them to be more self-reliant, create employment opportunities, and, not least, engage women in economically productive activities. Currently, there are estimated to be about 3,000 microfinance institutions in developing countries. These institutions also help create deeper and more widespread financial markets in those countries.

• There has been a growth in the recognition of the importance of empowering all people by increasing their access to all the factors of production, including credit. In addition, the value of the role of non-governmental organizations in development is receiving more attention.

• Informal and small-scale lending arrangements have long existed in many parts of the world, especially in the rural areas, and they still survive. Good examples are schemes in Ghana, Kenya, Malawi and Nigeria, Bangladesh etc. They provide the rural population with access to savings within the local area and with a certain cushion against economic fluctuations, and they encourage a cooperative and community feeling. The groups formed provide joint collateral and serve as instruments for spreading valuable information that is useful for economic and social progress.

• All economies rely upon the financial intermediary function to transfer resources from savers to investors. In market economies, this function is performed by commercial banks and the capital markets. More widespread financial intermediation, as well as increasing depth and variety, is a hallmark of advancing development. But in many developing countries, capital markets are still at a rudimentary stage, and commercial banks are reluctant to lend to the poor largely because of the lack of collateral and high transaction costs. The poor would borrow relatively small amounts, and the processing and supervision of lending to them would consume administrative costs that would be disproportionate to the amount of lending. A study by IFAD[6] has confirmed that complicated loan procedures and paperwork, combined with a lack of accounting experience, limit poor people’s access to formal sources of credit. Other reports cite the fact that commercial lenders in rural areas prefer to deal mainly with large-scale farmers.

• These schemes are characterized by relatively small loans, a few hundred dollars at most. The repayment period is relatively short, about a year or so. Women are a major beneficiary of their activities, and the destination of the funds primarily includes agriculture, distribution, trading, small craft and processing industries. The administrative structure is generally light and the entire process is participatory in nature.

v)     Disadvantage of Micro Level Banking:

High Interest Rate: overall interest rates are relatively high to begin with, so that rates charged by micro lending schemes are quite high when the risk premium[7] is added. Many of these micro-institutions claim a high rate of repayment.

vi)  Micro Credit System:

Microcredit: Loans are micro, or very small in size.

Target users – micro-entrepreneurs and low-income household’s utilization.

The use of funds – for income generation, and enterprise development, but also for community use (health/education) etc.

Terms and conditions – most terms and conditions for microcredit loans are flexible and easy to understand, and suited to the local conditions of the community. So Microcredit programmes extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families

vii)            Grameen Bank :

The word “microcredit” did not exist before the seventies. Because of grameen bank the term microcredit has become a very buzzing word among the people of Bangladseh. Grameen bank started the microcredit banking policy in this country. The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad Yunus, Head of the Rural Economics Program at the University of Chittagong, launched an action research project to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor. The Grameen Bank Project (Grameen means “rural” or “village” in Bangla language) came into operation with the following objectives:

1) Extend banking facilities to poor men and women;

2) Eliminate the exploitation of the poor by money lenders;

3) Create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh;

4) Bring the disadvantaged, mostly the women from the poorest households, within the fold of an organizational format which they can understand and manage by themselves; and

5) Reverse the age-old vicious circle of “low income, low saving & low investment”, into virtuous circle of “low income, injection of credit, investment, more income, more savings, more investment, more income”.

The money poor people take from grameen bank they invest the money into business. They do different types of business and with the profit the pay back their loans. The businesses they invest the money are:

 

 Bamboo Work:

Cow Fattening:

Embroidery:

 

Got Fattening:

Mat Marketing:

 Poultry:

viii)         Story of Rehana, A beneficiary of micro level banking:

Rehana is a daughter of a fisherman; she got married when she was only 13 years old. After 3 years of married life she had 3 children. Her husband suddenly got paralysed by a road accident. Then their struggle life has started and they start to strive for several days. Then her husband started begging for alms from door to door. Suddenly they got to know that grameen bank provides loan to poor people without taking any collaterals. And they went to grameen bank’s branch and take a loan of 25,000 taka and they bought two cattle and the fattened the cattle and sold the cattle after 8 months at 80,000 taka. And they return the capital along with the interest and they took a village phone[8] that was provided by the grameen bank and start the mobile phone business as well. Now their days have been changed and they bought their own land and a house as well.

Rehana is not the one; by the help of micro level banking so many poor people’s life has been changed.

ix)  Conclusion:

Now poor people can take loans from the bank without depositing any collateral. Now because of micro level banking they can participate in the national credit. According to the law of Bangladesh bank[9] every single bank has to have at least two brunches in every district to serve the rural people. So government should extend their help much more to help this poor people. It will boost up the economic condition of a country. Government should encourage other financial institutions to become micro level bankers. In conclusion we can say that micro level banking may have strong forces to reduce poverty status in a given society.

 Reference list:

1)      David Bornstein; The Price of a Dream: The Story of the Grameen Bank and the Idea That Is; Simon & Schuster; 1996

2)      Hafez Ahmed. “Prof Yunus appears in court today”. Newstoday.com.bd. Retreived from:http://www.newstoday.com.bd/index.php?option=details&news_id=17832&date=2011-01-18

3)      Yunus,M.(1998) Grameen Bank : Experiences & Reflections (Hindi Version). Grameen Trust : Dhaka

4)      Yunus,M.(2003) Halving Poverty By 2015- We Can Actually Make It Happen. Grameen

5)      Yunus,M.(2002) Information Technology To Eliminate Global Poverty. October 2002,      Grameen Bank : Dhaka p.35.

6)      Islam,N.,Chowdhury,A.(1989) Evaluation of the Grameen Bank’s Rural Housing Programme. CUS-Dhaka University:Dhaka

7)      Shahidur,K.(1998) Fighting Poverty with Microcredit: Experience in Bangladesh. The University Press Limited:Dhaka

8)      Shahidur,K.,Khan,Z.(1995) Grameen Bank: Performance and Sustainability. The World Bank:Washington,D.C.

align=”left” size=”1″ />