Copenhagen Business School (CBS)

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Copenhagen Business School (CBS)

M.Sc. in Economics and Business Administration – Finance & Strategic Management (FSM) line

Masters Thesis

VISION OF MICRO FINANCING IN BANGLADESH

SUCCESSES AND CHALLENGES

Supervisor: Finn Østrup (Dr. Merc.) Author: Md. Waliul Baten

Submission deadline: October 21^st, 2009

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ACKNOWLEDEMENTS

“This thesis is dedicated to my dear parents, family members, the poor in Bangladesh and the father of microfinance & the Nobel Peace Prize 2006 laureate; Professor Dr. Muhammad Yunus, the institutions where I have developed my capacity and all kinds of assistance received till to date, friends; who always inspired me to accomplish it.”

It is a great honor for me to work on my thesis task and thus I am very glad to accomplish it. Along with my sincerity and motivation, there are a few people and institutions, which really helped me to make this effort to be a successful one.

First of all, I would like to pass my gratitude and thanks to my honorable supervisor, and CBS’s one of the pioneer faculties, dear “Professor Finn Østrup (Dr.merc.)”. My acquired knowledge and competence from his precious advice and feed back on my ideas and tasks helped me every steps to perform this thesis independently. At the same time I am very much grateful to my dear Course Coordinator and CBS’s one of the leading faculties at the Finance department, Professor Niels Christian Nielsen (Ph.D.) for the acceptance of the topic delimitation, which inspired me to perform of this thesis tasks more attentively.

I am indebted to the all authors and scholars equally, whose invaluable contributions helped me to use as theories, references, examples, etc. to perform this thesis tasks.

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EXECUTIVE SUMMARY

This paper provides a sort of knowledge about the vision of microfinance services in Bangladesh regarding- the country situation, microfinance services contributions to the key economic development indicators, importance of microfinance services, the socioeconomic impacts of microfinance services, microfinance methodologies, necessity of microfinance regulatory authority, microfinance institutions key successes and challenges, etc. Although many authors, scholars, have provided comprehensive surveys of microfinance services, my aim is somewhat more modest: this paper deliberates as not a complete technical overview of microfinance services, besides my philosophical thoughts.

By starting with the motivation, I considered a very brief illustration of the present economic performance in Bangladesh concerning the cyclone SIDR (15^th November, 2007) effects in addition to the world economy turmoil situation which have been making difficulties for the poor people in Bangladesh. I have found Bangladesh’s key economic development indicators (GDP, GNP, GDS, and GS etc.) data through World Bank’s WDI, which are not affected by the microfinance programs but these have been progressing positively in general since last two decades. Moreover, the empirical evidences provided by scholars, authors that;

microfinance programs are helping the poor people to increase their GDP and Savings to overcome from the poverty line, which I personally find the similarity what the Nobel Peace Prize 2006 committee exactly recognized microfinance as;

“an important liberating force” and an “ever more important instrument in the struggle against poverty (Rajdeep Sengupta and Craig P. Aubuchon, 2008)¹. The illustration of the importance of microfinance and the overall catastrophic situations just after Bangladesh’s independence, which were needed in order to let the readers know about the Microfinance Innovation in Bangladesh and the key mechanisms of Grameen Model (probably the best microfinance methodology) discovered by the microfinance pioneer Professor Muhammad Yunus. I have also presented the major microfinance methodologies and examples besides illustrating the possibility of agency problems, adverse selection problems, loan defaults; low repayment rates problems, etc between the lenders and borrowers transactions.

Learning outcomes from the importance of microfinance has advanced me to present the overall socioeconomic impacts of microfinance in Bangladesh. The main sources of poverty were extremely unequal distribution of resources, low economic and human capitals productivity growth rates, high increase of fertility, illiteracy, malnutrition and unemployment rates, rural people depended only on

1 “The Microfinance Revolution: An Overview.” Federal Reserve Bank of St. Louis Review, Jan/Feb 2008, 90 (1), pp. 9-30

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their tiny land or landless, etc. Moreover, almost half of the population was female who were not covered into the socioeconomic development perspectives of the country. Blessings of microfinance started in 1976 at the village of Jobra, in Chittagong by the father of modern microfinance, Professor Dr. Muhammad Yunus showed the way how to save the poor nation from such vulnerability situation. As a result, Muhammad Yunus and his established Grameen Bank achieved the Nobel Peace prize of 2006 equally “for their efforts to create economic and social development from below”.

I tried to elaborate an empirical study conducted by Shahidur R. Khandker (1998)² based on three major MFIs (Grameen Bank, BRAC, and RD-12) in Bangladesh in order to asses the socioeconomic impacts of microfinance . The overall study results show that, microfinance programs participation is not only eradicating the poverty from the country but also make the economic and social development in the country. The main mechanisms of the microfinance programs were to develop sustainable credit delivery mechanisms and savings mobilizations that target all the poor in Bangladesh (Shahidur R. Khandker 1998).

Targeted credit also improves the nutritional status of children. The nutritional impact of credit is especially large for girls, and the impact is larger for loans made to women. Microfinance plays a very important role for rural women’s empowerment perspectives, because women have clearly benefited by getting access to the credit; they are able to increase their income generating activities, become owner of nonland assets, etc. As a result these influence their children’s consumption, schooling and thus independent effect on household resource allocation.

Providing the microfinance services especially in the rural poor people in Bangladesh, made possible to destroy the three common myths used to believe in general. Because of collateral free microfinance to the poor people and their credit repayment rates (app. 98% in general) made possible to globally recognized that, (1) The poor always pay back because they are trustworthy and creditworthy; (2) The poor are able to utilize their microfinance loan which help them to make their savings, and (3) Women’s credit repayment rates are higher than men, which represents that the women are not greater credit riskier than men.

The general conclusion of this paper is: the vision of microfinance in Bangladesh is explicit; which is not only alleviates the poverty but also plays as a vital socioeconomic development mechanism, the poor can be covered by savings mobilization and sustainable credit market. “Development from below also serves to advance democracy and human rights (Nobel peace committee, 2006).

Therefore, our long-term vision also can be eradicating the poverty not only from Bangladesh, but also from other developed and underdeveloped countries in the world.

2 “Fighting Poverty with Microcredit: Experience in Bangladesh.”

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Fig. 2.2.2(a): Gross Domestic Savings (% of GDP) of the South Asian countries………13 Fig. 2.2.2 (b): The Gross Savings (% of GDP) of the South Asian countries………13 Fig.2.2.2(c): The Gross National Savings (% of GDP) of Bangladesh………...13 Fig.3: GB’s borrowers overcoming from the Poverty Line measured by the Ten Indicators……...16 Figure 4.2 (a): Program participation among target households……….53 Figure 4.2 (b): Length of program participation………..54 Figure 4.2(c): Distribution of Agricultural landholding among program participants……….54

LIST OF BOXES

Box 1: Grameen Bank’s main objectives and programs………...49 Box 2: BRAC’s some especial sort of values………..52 Box 3: Notice box for the table 10……….56

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ACRONYMS AND ABBREVIATIONS

ADB Asian Development Bank

ASA Association for Social Advancement BBS Bangladesh Bureau of Statistics

BIDS Bangladesh Institute of Development Studies BRAC Bangladesh Rural Advancement Committee BRDB Bangladesh Rural Development Board CDA Community Development Association CGAP Consultative Group to Assist the Poorest CIDA Canadian International Development Agency CPI Consumer Price Index

DCI Development Center International EIU Economist Intelligent Unit

FAO Food and Agriculture Organization GB Grameen Bank

GDP Gross Domestic Product GDS Gross Domestic Savings GM Grameen Model

GNP Gross National Products GNS Gross National Savings GS Gross Savings

IFAD International Fund for Agricultural Development ILO International Labour Organization

IRDP Integrated Rural Development program MDGs Millennium Development Goals

MF Microfinance

MFIs Microfinance Institutions

MIX Microfinance Information Exchange MRA Microcredit Regulatory Authority

MRRU Microfinance Research and Reference Unit MSE Medium and Small-scale Entrepreneurs NGOs Non Governmental Organizations PKSF Palli Karma Sahayyak Foundation RD-12 Rural Development project-12 RDRS Rangpur Dinajpur Rural Service

SAARC South Asian Association for Regional Cooperation UNDP United Nations Development Projects

UNO United Nations Organizations US United States

VERC Village Education Resource Center WDI World Development Indicators

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GLOSSARY

Bakshal One party leadership (Bangladesh Krishok Sromic League)

Byabosa Business

Dacoity Robbery

Rickshaw Three wheeled vehicle pulls a person to carry passengers Sanagstha Organization

Shakti Energy

Thana Police station Upazila Sub-district Unnayon Development

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INTRODUCTION CHAPTER ONE

1.1 MOTIVATION

Microfinance is one of the powerful tools for the poor to fight against poverty in Bangladesh. Since nearly last three decades the NGOs-MFIs have been providing millions of microcredit loans to the poor and have already reduced much poverty in Bangladesh. With these services at least they have achieved some sort of positive social change by improving their food and nutrition security.

In this regard for instance, I am proud of Dr. Muhammad Yunus and his own creation Grameen Bank’s achievement of the Nobel Peace Prize 2006 ”for their effort to create economic and social development from below”. The Norwegian Nobel committee said as, “Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. It is one such means. Development from below also serves to advance democracy and human rights. Yunus has shown himself to be a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries. Grameen Bank has been a source of ideas and model for the many institutions in the field of that have sprung up around the world. Yunus’s long-term vision is to eliminate poverty in the world.

That vision can not be realised by means of alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it must play a major part (The Nobel committee; Oslo, 13^th October, 2006)”³.

On the other hand I am very astonished according to the EIU’s⁴ report - Bangladesh’s so far remarkable resilient economic performance is a mounting price pressure (inflation forecast in 2008 is 8.2% even 8 years’ high, high remittance inflows in the early month of 2007/’08, trade deficit widens to record levels against a back drop of continually high international oil prices, in 2008-‘09 Bangladeshi currency (Taka) is expected to depreciate against the US dollar due to the high inflation, economic growth is set to slow slightly from 6.5% to 6.2% in 2006/’07 and 2007/’08 respectively, as the agricultural sectors tries to overcome from the devastating effects of the recent floods ( want to know more? find appendix for chapter 1: How do natural disasters affect rice production?).

Moreover I am shocked of getting the most recent tornado (on the 15^th Nov 2007) the SIDR⁵

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has killed thousands of villagers and damaged millions of people’s

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5 To know more just visit

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properties in more than 12 districts and many islands in Bangladesh. The consumer baskets for the poor are largely consist of vital foodstuffs, the price of which has risen faster than the average price level. For instance, inflation for small traders, garments workers, rickshaw pullers, day labourers, home workers, etc, was running at 21% year on year in August 2007 (Unnayan Shamunnay, Dhaka - based research organization).The food prices rose by 11% year on year in July, while non-food prices rose by 5%, however the official statistics are likely to understate the magnitude of the recent rise in prices and its impact on the poor (EIU Nov. 2007).

To me, for the most part of recent vulnerable situation in Bangladesh is repeatedly more severe in the rural areas which can be described mainly as Poverty Trap, which is almost unequally distributed across the geographical location in the country. In this connection I find the individuals among the micro- financed people are unable to take reasonable advantage of the few assets they do have, which is still challenging despite the fact that poverty is being reduced through creative microfinance programs. Therefore, Mainly I would like to see whether microfinance really a constraint of key economic development indicators such as GDP growth rates, GDP per capita growth rate, Savings, etc. in Bangladesh. Later on, I will explain microfinance methodologies in order to provide a theoretical understanding of microfinance programs operations in the world today and then I will illustrate more elaborately to see whether microfinance can eradicate the poverty in Bangladesh. Moreover, I would like to discuss the successes and the potential challenges of the microfinance programmes in general.

1.2 KEY QUESTIONS OF THIS THESIS

In light of the motivation of my thesis, I am very much keen to raise some of the key questions; which will be answered later in different chapter’s accordingly. I believe the following pointed questions are sufficient in order to describe the finding areas and facts regarding this thesis performed with respect to my motivation. The relevant questions are as follows:

Has microfinance affected the overall savings in Bangladesh? Does microfinancing really provide any savings for the poor in Bangladesh? Can microfinance really reduce the poverty in Bangladesh? Do we have Microfinance Institutions (MFIs) and Microcredit Regulatory Authority (MRA) in Bangladesh?

What are the successes and the challenges of microfinance programmes in Bangladesh?

1.3 AIM OF THE STUDY

According to the thesis topic, the purpose of the study is to be evidence for vision of microfinancing in Bangladesh for the poor. Therefore, I will try to demonstrate the microfinancing methodologies which are the key mechanisms in order to

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reduce the extreme poverty, how much the socioeconomic impacts on microfinance programs in the country. Moreover, this study will try to demonstrate whether microfinancing in Bangladesh has affected the key economic development indicators.

1.4 LIMITATION OF THE STUDY FOR THIS THESIS

Firstly, since Bangladesh is my native land, therefore I have preferred to use the desk research on line rather than doing a field survey to the individual poor who have benefited from the microfinancing in the country. Consequently illustrating the microfinance methodologies as theories may be a limiting factor in this thesis.

Secondly, the main data I have collected and figures I have produced in this paper are gathered by desk research. Thirdly, the microfinance regulations and other relevant information are based on research on line; therefore, I will limit my writings on Microcredit regulations about microfinance programs in Bangladesh.

1.5 DEFINITION OF KEY CONCEPTS

Microcredit and Microfinance (MF)⁶

The two terms, microcredit and MF are often used interchangeably in the literature; it is crucial to recognize the distinction between the two terms. In a broad sense, microcredit includes the act of providing loans of small amounts often $100 or less to the poor or other borrowers that have been ignored by the commercial banks. According to this definition; microcredit encompasses all lenders including the formal participants (e.g. government’s set up specialized credit cooperatives for the provision of rural credit) and those of a more informal variety (e.g. village money lender or even loan sharks). In contrast, microfinance is the act of providing these same borrowers with financial services, such as savings institutions, insurance policies, etc.Yunus (2007) argues and distinguishes that microcredit in all its previous forms from the specific form of credit adopted at the Grameen Bank, which he calls “Grameen-credit.” Yunus argues that the “most distinctive feature of Grameen-credit is that it is not based on any collateral, or legally enforceable contracts. It is based on ‘trust,’ not on legal procedures and system” (Rajdeep Sengupta and Craig P. January/February 2008). In this paper I mean microcredit term which follows Yunus’s Grameen- credit characteristics.

Main types of sources of microfinance

There are three types of sources of microfinance available which provide microfinance services are as follows:

• Formal institutions, such as rural banks and cooperatives;

• Semiformal institutions (NGOs); and

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• Informal sources such as money lenders and shopkeepers.

Institutional microfinance is defined to include microfinance services provided by both formal and semiformal institutions. Microfinance institutions are defined as institutions whose major business is the provision of microfinance services (ADB report, 2000).

Formal and Semiformal financial institutions, and Informal financial intermediaries

Formal financial institutions are chartered by the government and are subject to banking regulations and supervision. They include public and private banks, insurance firms, and finance companies. When these institutions serve smaller businesses or farmers (as if often the case with public sector financial institutions), there is potential for them to move into the microfinance sector.

Semiformal institutions are not regulated by banking authorities but are usually licensed and supervised by other government agencies. Examples are credit unions and cooperative banks, which are often supervised by a bureau in charge of cooperatives. (NGOs are sometimes considered part of the semiformal sector, because they are often legally registered entities that are subject to some form of supervision or reporting requirements.) These financial institutions, which vary greatly in size, typically serve midrange clients associated by a profession or geographic location and emphasize deposit mobilization (Joanna Ledgerwood, 1998).

Informal financial intermediaries operate outside the structure of government regulation and supervision. They include local moneylenders, pawnbrokers, self- help groups, and NGOs, as well as the savings of family members who contribute to the micro-enterprise. Often they do not comply with common bookkeeping standards and are not reflected in official statistics on the depth and breadth of the national financial sector. Knowing where and how these financial sources operate helps determine what services are in demand.

Sources of poverty in Bangladesh

Shahidur R. Khandker (1998) describes as; Bangladesh is a predominantly rural economy. The labour force has been growing by 2.4 percent a year, while the agriculture, industry, and service sectors can accommodate no more than 1.7 percent annual growth of the labour force. Agriculture provides 78 percent of employment and is unable to provide additional employment because of technical constraints. The modern urban sector is too small to absorb additional labour. The incidence of poverty is high in Bangladesh, and it is higher in rural areas than in urban areas (Rahman and Hossain 1995). Although poverty has fallen in recent years (Ravallion and Sen 1995), more than 50 percent of the rural population still lives below the poverty line. Poverty in Bangladesh is the manifestation of increasing landlessness, high unemployment, low literacy, and

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high population growth. More than half of all rural households are landless, and population pressure has reduced the average size of farms continuously over the past several decades (for example, the average farm size fell from 3.5 acres in 1977 to 2.4 acres in 1984). Only 45 percent of the active labour force is gainfully employed. Although more than 90 percent of cultivable land is used for food grain production, the low agricultural growth rate in Bangladesh (less than 2 percent) means that the country does not produce enough to meet its requirements. Malnutrition is serious among the poor, especially among women and children. The infant mortality rate is 78 per 1000-live births-higher than the average rate of 72 for low-income countries. Wages for unskilled labour are so low (about $ 1 a day per person) that they do not cover even basic needs.

Literacy rates are also low (about 41 percent for men and 19 percent for women).

The extreme pressure on land in Bangladesh forces a large labour force to find marginal activities within the rural economy to survive. Shahidur R. Khandker (1998) concluded by suggesting like this; arresting poverty in Bangladesh means reducing the population pressure on land by creating off-farm employment opportunities, slowing population growth, and reducing illiteracy, malnutrition, and poor health, which hurt the productivity of the poor.

1.6 CHAPTERS ORGANIZATION

Chapter One: Introduction

In order to give the basic idea of this thesis task extent to the readers, chapter one introduces with the motivation by presenting a framework. Besides the aim of the study, key questions and limitations of the study of this paper, key concepts and definitions are discussed as well.

Chapter Two: Bangladesh, its key economic development indicators and importance of microfinance

In this chapter firstly, starts with an overview of the country followed by a brief description of the land, history, economy, population, education, socioeconomic development, etc. Secondly, the chapter focuses some key economic development indicators in Bangladesh in order to give a brief description whether microfinance is a constraint or it contributes Bangladesh’s economic development. Moreover, it will provide the evidence that, microfinance does not make any kind of negative effect on the savings. Thirdly, the chapter provides some empirical evidences of renowned economists’ and analysts’ a brief description; which will support to understand about the importance of microfinancing in Bangladesh.

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Chapter Three: Microfinance innovation in Bangladesh, the Grameen Model and microfinance methodologies

The main purpose of writing this chapter is to present microfinance as an innovation in Bangladesh, which was totally invented and started by the father of modern microfinance; professor Muhammad Yunus. Here I have also elaborated about the catastrophic situation in Bangladesh just after the independence, which shares with Yunus’s successful innovative Grameen microfinance model.

Furthermore, I have enriched this chapter by collecting major microfinance methodologies, which are actually applied into the poor societies or poor communities in order to eradicate the poverty not only in Bangladesh but also dozens of developed and underdeveloped countries as the basic social mechanism. Additionally, the suitable examples are provided relevant with the particular microfinance methodology where fitted.

Chapter Four: Major MFIs, Socioeconomic impacts, & MF Regulatory Authority in Bangladesh

In this chapter I have given a brief overview of major MFIs in Bangladesh, which have huge impacts on socioeconomic perspectives in Bangladesh. Here I tried to elaborate one empirical survey conducted by Shahidur R. Khandker (1998)⁷, whose results proved that microfinance is such a tool that can reduce the poverty in Bangladesh very effectively. Moreover, how does the microfinance change the overall vulnerable situation in rural Bangladesh and help the poor people overcome from the Poverty Line also presented. From this illustration the vision of microfinance in Bangladesh will explicit. Besides the MFIs; necessity of Microfinance Regulatory Authority’s rolls and responsibilities is described in a brief. This will also provide the transparency and performance of MFIs in Bangladesh.

Chapter Five: In this chapter I have tried to point out the key successes of MFIs and possible major challenges of MFIs facing now a days.

Chapter Six: This is the final concluding remarks where I have tried to summarize the overall illustrations and findings in the earlier chapters relevant with my thesis topic. Then I find the justification of microfinance programs must exists in Bangladesh.

Appendix: I have organized the entire appendix according to the particular chapter’s name and the headings of that particular appendix used for.

7 “Fighting Poverty with Microcredit, Experience in Bangladesh.” Published for the World Bank, Oxford University Press.

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BANGLADESH, KEY ECONOMIC DEVELOPMENT INDICATORS, AND IMPORTANCE OF MICROFINANCE

CHAPTER TWO

2.1 COUNTRY IN GENERAL

Bangladesh is one of the largest deltas in the world with a total area of 147,570 sq. km. (roughly the size of England and Wales) and one of the densely populated (156,050,883; July 2009 est., country comparison to the world is 8)⁸ and one of the poorest countries in the world. It achieved independence and become sovereign and a unique communal harmony country in 1971 against Pakistan. More than 98% people speak in Bengali besides English is the second language and is used extensively in commerce, media and education. More than 75% of the people live in the rural areas, however urbanisation been rapid in the last two decades (Bangladesh Bureau of Statistics, 2006 report)⁹.

Dhaka is the largest and the capital city of Bangladesh; besides the other major cities are Barisal, Chittagong, Khulna, Rajshahi, Sylhet. Bangladesh is called a land of rivers which is almost totally a fertile alluvial plain formed by the main rivers the Padma (Ganges), the Jamuna, the Meghna, the Bramhaputra, the Surma and the Karnafuli, etc and their hundreds of tributaries are crisscrossed in the country. The countryside is flat with no great mountains or deserts, and bordered by India to the north-east and west, Myanmar to the south-east, and the Bay of Bengal to the south.

History¹⁰: The origin of Bangladesh dates back to the Pundra civilization of the 3rd century BC. However, the modern history of the region can be traced back to 1199 when Bengal fell to Muslim forces from western India and was subjugated to the sultanate of Delhi. The country as we know it today came into being in 1971 after East Pakistan's glorious and bloody nine months battle for independence under the leadership of Bangabandhu Sheikh Mujibur Rahman (Bangladesh Bank, 2008).

Economy: Bangladesh’s economy is mainly feudal agrarian base, which structural transformation has rapidly undergone towards manufacturing and services. The agriculture sectors’ contribution to the GDP has decreased from 50 percent in 1972-73 to around 20 percent in 1999-2000. The agricultural sector is, however, still the main employment provider. Rice is the staple crop; with paddy grounds counting almost 70% the entire agricultural land.

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Industrial production growth has averaged more than 6% over the last 5 years.

The export sector has been the engine of industrial growth, with ready-made garments leading the way, having grown at an average of 30% over the last 5 years. Primary products constitute less than 10 percent of the country’s exports;

the bulk of exports are manufactured/processed products, ready-made garments and knit wears in particular (Bangladesh Bank, 2008).

Climate: Bangladesh’s climate is sub-tropical; generally the temperature fluctuates from a daytime low of 18⁰C during the cold season to a maximum of 40⁰C during the summer. The climate is one of the wettest in the world and in general the annual rainfall varies between 200cm to 400 cm in the most places and the areas near the hills receive 5,080 mm (200 inch). Most rain falls during the monsoon (June-September) and little during the dry season (November- February). There are mainly four seasons exists e.g. the Winter (December- February), the Summer (March-May), the Monsoon (June-September) and the Autumn (October-November) even though so called six seasons¹¹exist according to the Bengali calendar. The most rain occurs during the Monsoon season and the less occurs during the winter.

Land and people¹²: Bangladesh is mainly composed of the combined delta of the Ganges, Brahmaputra, and Meghna rivers, except the area of and around Chittagong, which is a mountainous region located along the Myanmar border.

Most of the land of the country is low-lying and alluvial region with approximately 300ft (90 metre) above the sea level. Bangladesh is located with numerous streams, distributaries, and tidal creeks, forming an intricate network of waterways that also constitute the country’s chief transportation. Along the southern coast in the Sundarbans, a mangrove swamp area with numerous low islands, which is now being considered as one of the world’s heritages of the United Nations. The least densely populated areas are in the Sundarbans jungle and the Chittagong Hill Tracts. Similar to neighbouring India, more than half of the population lives in the agrarian rural villages. But urbanization is proceeding rapidly and the capital Dhaka is one of the fastest growing cities in the world.

Other major urban centres include Chittagong and Khulna (World Gazetter,”Bangladesh: largest cities and towns and statistics of their population”).Nearly 88% of Bangladeshis are Muslims, while Hindus make up 11% of the population (Bangladesh Bank-Bangladesh in brief, 2008).

Social Development¹³

11 The remaining two seasons are the Rainy season and the Late Autumn exists in Bangladesh in my knowledge.

: Bangladesh has achieved significant progress in population growth diminishing, mass literacy, public health and self employment support for rural poor. Female education is free between class 1 and class 8 and the primary education is compulsory. Bangladeshi government’s strong

12 Text of this section is collected from the Masters Thesis; Arifujjaman Khan and Anisur Rahman, fall 2007 ,USBE, Department of Business Admin.; available a

13 Findings of this section is taken from The Bangladesh Bank

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commitment to gender equity reflects by entering three out of four girls into the compulsory primary education.

More than 80% of the Bangladeshi children are vaccinated against the six ‘killer’

diseases and thus the country’s infant mortality rate has perhaps decreased significantly. The fertility rate in Bangladesh has been declined very sharply, for instance; because of social awareness and development it has seen a marked reduction in its fertility rate, from 6.2, thirty years ago, to 3.2(UNDP figures 2003).¹⁴

Microfinance innovation and the NGOs limitless guidance to the penniless women and landless households have brought the income generating activities for the poor in Bangladesh. The government’s initiation of safety net programs has been helping the poor to improve from their poorest condition to a level of survival position effectively. Bangladesh plays very important role in the international organizations and the regional forums especially the UNO, the SAARC, the Commonwealth, etc.

Ready- made garments sector in Bangladesh has been providing jobs for more than 1 million women and increasing rate of women participation in poverty alleviation programs have helped them to create an awareness of women's issues in the country at all levels.

Education system structure¹⁵: The educational expenditure is 2.7% of GDP (2005 est.) placed 151 among the country comparison to the world¹⁶. Education in Bangladesh has three major stages; Primary, Secondary and Higher educations. Primary education is a 5-year cycle while Secondary education is a 7- year one with three sub stages: 3 years’ of Junior Secondary, 2 years’ of Secondary and 2 years’ of Higher Secondary. The entry age for primary is 6 years. The Junior, Secondary and Higher stages are designed for age groups 11- 13, 14-15 and 16-17 years respectively. Higher Secondary is followed by Graduate level education in general, Technical, Engineering, Agriculture, Business studies, and Medical streams requiring 5-6 years to obtain a Masters degree.

In the general education stream, Higher Secondary is followed by college or university level education through the Pass/Honours Graduate courses (4 years).

The Masters degree is one year’s duration for holders of (Pass) Bachelor degree.

Higher education in the technical area also starts after Higher Secondary level.

Engineering, Agriculture, Business, Medical and Information & Communication technology are the major technical and technological education areas. In each of the courses of study, except for medical education, a 5- year course of study is required for the first degree.

14 Arifujjaman Khan and Anisur Rahman (2007), Masters Thesis, fall 2007.

15Text of this section is collected from Bangladesh Ministry of Education of which website available at

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GDP annual Grow th rate(%)

0 2 4 6 8

1991 1993 1995 1997 1999 2001 2003 2005 Years

GDP growth (p.a. %)

2.2 KEY ECONOMIC DEVELOPMENT INDICATORS

2.2.1 GDP growth

Bangladesh’s economy has been experiencing both the macro economic firmness as well as strong economic growth due to the transition to a democratic rule in the country in early1990s. During the late 1980s Bangladesh’s deep Macro-economic crisis, a sequential stabilization measures were launched in the Bangladesh economy which mainly restored the macro economic stability in the early 1990s.

Figure 2.2.1(a) (see table1) demonstrates that; the GDP annual growth rate starts from 3 percent in 1991, 5 percent both in 1992 and 1993. Then it dropped to 4 percent in 1994. After that again it gained a stable growth rate of 5 percent between1995 and 1999. Followed by from the year 2000 to 2006; the GDP growth rates were almost increasing from 5 percent to 7 percent nevertheless it dropped to 4 percent in 2002.

Fig 2.2.1(a)¹⁷

: GDP annual growth rate (p.a.) in Bangladesh

The following figure 2.2.1(b) (see table 2) displays the GDP per capita annual growth rate in 1991 it was only 1 per cent and the following years by and large growth rates are almost amazing. In 2006 it reached to 5 percent; indicating a great potential achievement of the on going development of Bangladesh. This means a lot; in general more people are earning more than that of last decades.

Table 1¹⁸ Year

: Bangladesh’s GDP growth (%) from 1991 to 2006 GDP growth

rate

Year GDP growth rate

1991 3 1995 5 1999 5 2003 5

1992 5 1996 5 2000 6 2004 6

1993 5 1997 5 2001 5 2005 6

1994 4 1998 5 2002 4 2006 7

17 I have created this figure based on data table 1

18 I have produced this table by collecting data from the WDI, available at

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As a result it is helping the poor to defeat their poverty by reducing the income inequality and their vulnerability. In this regard I adjoin Sadiq Ahmed’s (2006)¹⁹

Comparative Analysis on South Asia’s development performance in terms of GDP growth indicator. A portion of his table 2.2 of GDP growth per capita during1960-2003 among the South Asian countries in his report makes relevant with my viewpoint; hence it is presented in my report as follows as table 3.

Fig 2.2.1(b)²⁰: GDP per capita annual growth rate in Bangladesh

GDP per capita annual grow th rate in Bangladesh

0 1 2 3 4 5 6

1991 1993 1995 1997 1999 2001 2003 2005

Years

Annual Growth rate (%)

GDP per capita grow th (p.a.%) in Bangladesh

Table 2²¹: Bangladesh’s GDP par capita growth (%) from 1991 to 2006 Year GDP growth

rate (p.cap)*

Year GDP growth rate (p.cap)

Note:

P.cap. =>

Per capita

1991 1 1995 3 1999 3 2003 3

1992 3 1996 2 2000 4 2004 4

1993 2 1997 3 2001 3 2005 4

1994 2 1998 3 2002 2 2006 5

Sadiq Ahmed explains as growth in South Asia started climbing in the 1980s with further acceleration in 2000-3. Not surprisingly, India led the way in this growth acceleration. Within South Asia, while India dominated the region’s growth outcome because of its size (80 percent of South Asia’s population and 80 percent of total GDP), with the exception of Nepal, per capita GDP growth was broadly based across the region when seen from a long-term perspective, and average, long-term, per capita GDP growth ranged from 2.0 to 2.8 percent in Bangladesh, India, Pakistan, and Sri Lanka. During1990s, the growth faltered in Pakistan, but was robust in the other south Asian Countries. India grew the fastest, followed by Sri Lanka and Bangladesh.

19Data source: The World Bank Central database based on 1995 US $.

20 I have created this figure based on data table 2.

21 I have produced this table by collecting data from the WDI, available at

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As Sadiq Ahmed (2006) says,” Within South Asia, differences in per capita income expansion appear less striking; this is because all the major countries in the region, including Nepal, experienced positive growth in per capita incomes”.

Table 3²²

(% per year in 1995 US dollars)

: Per Capita GDP Growth rate, South Asian Countries, 1960-2003 Country 1980-

90

1990- 2000

2000- 3

1990- 2003

1960- 2003

Source:

World Bank Central database.

** refers to 1972-2003 as Sadiq Ahmed mentioned.

Bangladesh 1.1 3.0 3.2 3.1 2.0**

India 3.6 3.6 4.3 3.8 2.5

Nepal 2.4 2.6 0.3 2.5 1.3

Pakistan 3.5 1.4 1.3 1.4 2.5

Sri Lanka 3.1 3.9 1.3 3.3 2.8

So the implication of this per capita growth rates signify us about the income levels have developed a lot for the individual countries in the SAARC²³ region.

Consequently the South Asian rising share of global income indicates us about the regions progress besides making relative to the rest of the world. So, what I have told before is true that; Bangladesh’s macro economy started develop into stable in the early 1990s; because it gained momentum. However, important differences are apparent in growth experiences between countries and over time, Bangladesh’s GDP per capita growth rates (see table 2) showing eventually a positive sign of increasing the income level over time. For this reason, I can see that microfinance is not a constraint for increasing the per capita income level but generates to increase the income for the poor in Bangladesh.

2.2.2 Savings

The World Bank’s WDI²⁴

22 Data of this table is taken from Sadiq Ahmed (2006), table 2.2, Publisher: The World Bank.

data demonstrates Bangladesh’s a relative improvement of both Gross Domestic Savings (GDS) and Gross Savings (GS) among the SAARC countries between 1991 and 2006. The statistics proves that both the GDS and the GS rates of Bangladesh have a dramatic progress during that period. Firstly, both the GDS and the GS rates of Bangladesh between 1991 and 1996 were relatively one of the lowest (see figures 2.2.2(a) & 2.2.2(b) and tables 4 & 5 respectively) among the SAARC countries; the fact was sluggish growth rates. Secondly In contrast, having a look at both of the figures during the period 1997-’06; Bangladesh’s GDS rate as well as the GS rates are nearly in full swing;

and thus overtook other countries except India and Nepal until 2006. For instance, Bangladesh stands relatively the second highest in terms of GDS rate (see fig.2.2.2 (a)) just behind of India and exceeded Pakistan and Sri Lanka by 2003. Thirdly, the GS rate of Bangladesh reached up to the third top level (see fig. 2.2.2(b)) having behind of India and Nepal respectively since 2005; but it left behind Pakistan and Sri Lanka since 1996, which demonstrate an impressive improvement of Bangladesh’s economy among the SAARC member countries.

23 Members: Bangladesh, India, Pakistan, Nepal, Sri Lanka, Bhutan, Maldives, and Afghanistan (new)

in this data- Bhutan, Maldives,

and Afghanistan are not included due to irregularity and mismatch of the data.

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GDS (% of GDP) of the South Asian countries

0 5 10 15 20 25 30 35

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year

Gross Domestic savings rate

Bangladesh India Nepal Pakistan Sri Lanka

Gross National Savings

23 24 25 26 27 28 29 30

2003-04 2004-05 2005-06 2006-07 Year

GNS (% of GDP)

GNS (% GDP) Linear (GNS (% GDP)) Gr os s Savings (% GDP) of the South As ian Countr ie s

0 5 10 15 20 25 30 35 40

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Ye ar

Gross Savings

Nepal Pakistan Sri Lanka Bangladesh India

Fig. 2.2.2(a)²⁵: Gross Domestic Savings (% of GDP) of the South Asian countries

Fig. 2.2.2 (b)²⁶: The Gross Savings (% of GDP) of the South Asian countries

Fig.2.2.2(c)²⁷: The Gross National Savings (% of GDP) of Bangladesh

27 I have created this figure based on data table 6.

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The figure 2.2.2 (c) (see table 6) displays the Gross National Savings (GNS) of

Bangladesh between 2003-4 and 2006-7. It is obvious from the figure 2.2.2(c) that; the GNS of Bangladesh has been increasing very robustly from 2003-4 till the subsequent years until 2006-7. For instance in 2003-4 Bangladesh’s GNS was 25.44 percent of GDP and by virtue of linearly increasing; the GNS of Bangladesh reached at 29.15 percent of GDP in 2006-7 although it is a provisional rate.

Table 4²⁸: GDS (% of GDP) of the SAARC Table 5 countries

29: GS (% of GDP) of the SAARC countries.

Year Banglades h India Nepal Pakistan Sri Lanka Banglades h India Nepal Pakistan Sri Lanka

1991 11 22 10 17 14 16 22 16 26 17

1992 13 23 11 17 15 20 23 16 25 20

1993 13 21 14 15 16 20 22 20 21 21

1994 14 23 15 17 15 21 24 18 22 20

1995 13 25 15 16 15 21 27 22 21 20

1996 12 21 14 14 15 20 23 21 18 19

1997 15 21 14 13 17 22 23 22 18 22

1998 17 20 14 17 19 24 21 23 21 24

1999 17 24 14 14 19 25 26 27 17 24

2000 18 23 15 16 17 27 26 33 19 17

2001 17 23 15 16 16 25 26 35 19 21

2002 18 24 12 17 14 29 27 33 20 20

2003 18 25 12 18 16 30 28 32 23 22

2004 19 30 13 18 16 31 32 32 22 22

2005 18 32 12 14 15 30 34 33 21 20

2006 18 33 11 11 16 33 36 35 17 21

Table 6³⁰: Gross National Savings (GNS) (% of GDP) of Bangladesh

Year GNS (% of GDP) Year GNS (% of GDP)

2003-04 25.44 2005-06 27.67

2004-05 25.84 2006-07 (Provisional 29.15

Now question arise; are the poor in Bangladesh really able to save? Dowla and Barua (2006)³¹

28I have produced this table by collecting data from the WDI, available at

describe savings in the proper cultural context as: In Bangladesh the majority of the people live in rural areas and household savings constitutes the largest component of total savings in the country. As a result, any discussion of savings in Bangladesh must be couched mainly in terms of savings in rural areas. Moreover, there is an urgent need to study rural savings in the absence of

29I have produced this table by collecting data from the WDI, available at

30I have produced this table by collecting data from the BBS, available at

31 “The Poor always Pay Back: The Grameen II Story.” Published in the USA by Kumarian Press, Inc.

1294 Blue Hills Avenue, Bloomfield, CT 06002 USA.

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adequate formal banks in these areas. Several surveys have estimated the size of savings in these areas. As part of the Rural Finance Project of Bangladesh Bank (the central bank), Maloney and Ahmed (1998) conducted a survey of 300 households’ savings as did the people themselves (cash savings) in rural Bangladesh. The survey shows that the poor save between 2% and 12% of their income; with the moderately poor saving an average of 12% to 14%. The survey found that buying land was cited as the most important reason for saving, followed by providing family security against unforeseen contingencies. The education and marriage of children along with the purchase of agricultural inputs were other factors found to influence savings. R.I. Rahman (1998a) conducted a survey of 370 households in two villages to estimate the rural households’

demand for liquid savings services. The average savings rate was 9% (16.6% in one village and -5.5% in another village); savings was defined as the difference between estimated income and consumption expenditures of the household. It revealed that, a sizable portion of savings was directly invested in asset build-up.

Female respondents suggested that the purchase of various assets such as livestock and land, and the future needs of the family and children are the major incentives for the savings. The survey also revealed some demand for long-term savings. The brief surveys reported here provide an introduction to the salient feature of savings in rural Bangladesh. They show that households in Bangladesh rarely save for life cycle events such as retirement; instead people expect their children to take care of them in old age. The savings, which are small relative to income, are used frequently to close the gap between consumption and uncertain income (Rutherford, 2002). The survey was unable to capture the level of savings that would have resulted if MFIs were available to collect savings.

Another question upturns, whether microfinancing in Bangladesh is a constraint for the economic development? Strictly speaking, microfinancing is not a constraint for the economic development in Bangladesh. As Harper, M. (2003)³² says, “Domestic Savings provide the assets for the economy’s investment in future production. Without them, the economy cannot grow unless there are alternative sources of investment.” Hubka, A.; R. (2005)³³says as“Microfinance is a credit methodology, which employs effective collateral substitute for short-term and working capital loans to micro-entrepreneurs”. Fallavier, P. (1998)³⁴ said “the level of countries poverty has long been linked with measures of its economic development. Little consideration was given to the social reorganization of the natural resources (e.g. empowerment vs. alienation of people, sustainable vs.

depletion of the environment)”. And (Khan, Penn, F. (2005)³⁵

32 p.25’; cited in the masters Thesis by- Arifujjaman Khan and Anisur Rahman (Fall 2007) p.31, USBE.

stated that; “The economies with positive growth rate of GNP were measured by their poverty mitigation. This gratitude emphasized on the achievement of wealth and technology as a path for development and assumed that improved lives for all

33 p.1; cited in the Masters Thesis by- Arifujjaman Khan and Anisur Rahman (Fall 2007) p.1, USBE.

34 pp.15-18, cited in the Masters Thesis by- Arifujjaman Khan and Anisur Rahman (Fall 2007) p.1, USBE.

35 P.1 cited in the Masters Thesis by- Arifujjaman Khan and Anisur Rahman (Fall 2007) p.1, USBE.

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Percentage of GB's borrowers' above the Poverty Line

0 10 20 30 40 50 60 70

1995 2000 2005 2010

Year

Percent above the Poverty Line

would be the natural consequence”. In this connection I provide an evidence of Grameen Bank’s contribution in terms of GDP rising in Bangladesh as follows:

Dowla and Barua (2006) describes³⁶ as “since the Grameen Bank operates throughout the country with large numbers of borrowers, it should affect economic transactions in the whole economy. One study attempted to compute the impact of Grameen Bank on Bangladesh’s GDP. Dr. Mohiuddin Alamgir, who was the director of the Policy and the Planning Division of the United Nations International Fund for Agricultural Development between 1983 and 1995, claimed that Grameen Bank raised the GDP of Bangladesh by as much as 1.10- 1.50 % between 1994 and 1996. Grameen’s more important contribution lies in its impact on improving social welfare and reducing poverty, which might ultimately have the greatest effect on GDP in the long run. A further question arise, can the poor really come out from the Poverty Line according to their savings? In order to answer this question, I provide an evidence of Grameen Bank’s borrowers and theirs’ conquer of Poverty Line according to the bank’s ten indicators is :

Fig: 3³⁷GB’s borrowers overcoming from the Poverty Line measured by the Ten Indicators

From the above figure 3 (see the table 7), it is apparent that the slope proficient of the Grameen borrowers above the Poverty Line is very sharp, indicating that the poor in Bangladesh through Grameen microfinance are really overcoming from the poverty because they can really make their savings from the microfinance services. This is a vindication that microfinancing in Bangladesh

Table 7³⁸ Year

: The percentage of borrowers moving out of poverty on the basis of the bank’s ten indicators:

Percent above the poverty line

Year Percent above the poverty line

1997 15.1 2000 40.0 2003 51.1

1998 20.4 2001 42.0 2004 55.0

1999 24.1 2002 46.5 2005 58.4

Source: Monitoring and Evaluation Department, Grameen Bank

36 Available in their book, P.52

37 I have created this figure based on the table 7

38 I have produced table 7 by collecting data from Dowla & Barua (2006), p.43.

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obviously not the constraint for the economic development indicators, in contrast;

it is significantly narrowing the income distribution scenario of Bangladesh economy by supporting the Poor’s GDP rising as well as marginal savings rising through microfinance. Consequently poor are coming out from the poverty in Bangladesh. It is worth mentioning here that; according to the GB’s recent internal survey 68³⁹ percent of Grameen borrowers’ families have crossed the Poverty Line, the remaining are moving steadily towards the Poverty Line from below.

2.3 IMPORTANCE OF MICROFINANCE IN BANGLADESH

Shahidur R. Khandker (1998) describes as, providing the poor with access to financial services is one of many ways to help increase their incomes and productivity. In many countries, however, traditional financial institutions have failed to provide this service (Adams, Graham, and Von Pischke 1984;

Braverman and Guasch 1986, 1989; Hoff and Stiglitz 1990; World Bank 1975, 1993) and cooperative programs have been developed to fill this gap. Their purpose is to help the poor become self-employed and thus escape poverty.

Many of these programs provide credit using social mechanisms, such as group- based lending, to reach the poor and other clients, including women, who lack access to formal financial institutions (Huppi and Feder 1990; Von Pischke, Adams, and Donald 1983; Yaron 1994). With increasing assistance from the World Bank and other donors, microfinance is emerging as an instrument for reducing poverty and improving the Poor’s access to financial services in low- income countries (World Bank 1990; Binswanger and Landell-Mills 1995).

Shahidur R. Khandker (1998) also pointed out by illustrating as; Poverty is often the result of low economic growth, high population growth, and extremely unequal distribution of resources. The proximate determinants of poverty are unemployment and the low productivity of the poor. When poverty results from unemployment, reducing poverty requires creating jobs; when poverty results from low productivity and low income, reducing poverty requires investing in human and physical capital to increase workers’ productivity. In many countries, such as Bangladesh, poverty is caused by lack of both physical and human capital. Consequently, the best way to reduce poverty is to deal with both problems: increasing productivity by creating employment and developing human capital. Lack of savings and capital make it difficult for many poor people who want jobs in the farm and non-farm sectors to become self-employed and to undertake productive employment-generating activities. Providing credit seems to be a way to generate self-employment opportunities for the poor. But because the poor lack physical collateral, they have almost no access to institutional credit. Informal lenders play an important role in many low-income countries (Adams and Fitchett 1992; Ghate 1992), but they often charge high interest rates, inhibiting poor rural households from investing in productive income-

39 GB at a Glance, July, 2009 available at

Copenhagen Business School (CBS)