Academic journal article Theoretical and Empirical Researches in Urban Management

Sustainability Issues of Interest-Free Micro-Finance Institutions in Rural Development and Poverty Alleviation. the Bangladesh Perspective

Academic journal article Theoretical and Empirical Researches in Urban Management

Sustainability Issues of Interest-Free Micro-Finance Institutions in Rural Development and Poverty Alleviation. the Bangladesh Perspective

Article excerpt

1. Background

Over the last decade, Bangladesh has been performed fairly well in terms of macroeconomic stability in general and economic growth in particular. Market oriented economic reforms and deregulations in early 1990s led to a more stable macroeconomic environment compared with that in 1970s and 1980s. The Gross Domestic Product (GDP) growth rate improved steadily during the 1990s. The average annual GDP growth was 5.5 % in 2000, 5.96% in 2005 and rose further 6.63% from 2006. In the year 2007, this growth fell to 6% (BBS, 2006, Bangladesh Quarterly Economic Update, 2007). However, despite the recent macro economic achievements of the country, poverty is still pervasive and endemic in Bangladesh. The disparity between the rich and poor is also growing. Still about 40% of the population lives below the poverty line (World Fact Book, 2008). In the history of Bangladesh, poverty has been rampant and presently this country is third in terms of number of poor following India and China (Awal, n.d) (1). The disparity between the rich and poor is also growing. The PRSP (NAPA, 2005) states that Bangladesh has one of the most vulnerable economies, characterized by extremely high population density, low resource base, and high incidence of natural disasters. These have implications for long-term savings, investment, and growth.

Alleviation of poverty has been the central policy objective since the 1960s and after the emergence of independent Bangladesh, the issue has continued to occupy the focal point of every successive development plans. Bangladesh also has been exposed to numerous poverty eradication plans and programs both by the government and by the non-government organizations (NGOs) as well (Rahman and Razzaque, 2000). A significant aspect of traditional MFIs and NGOs micro credit program is the dependence on foreign grants, especially from IDA, USAID, OXFAM and to certain extent from government. It is also held that most of traditional/secular NGOs / MFIs are not able to operate at break level without subsidies from outside sources and hence are not able to provide less cost effective credit/investment program. The interest rates on loans charged by traditional NGos including Grameen Bank are high by any standard (20-35%), and reports of poor borrowers having to dispose of whatever assets they have to pay the usurious interest are not uncommon (Rahman, 1999). It is also alleged that micro-lending initiatives of Interest -based MFIs have a self-perpetuating character and the borrower is seldom rid of his/her indebtedness (Bhuyan, 2006). In this consequence, it is crystal clear that "financial sustainability" of MFIs plays a vital role to provide less cost-effective lending/investment facilities to the needy poor in any region like Bangladesh.

2. Rationale of the Study

In the 1990s micro-finance has captured the imagination of option leaders, government and donor agencies as a key strategy for poverty reduction. Supporters have argued that micro-finance institution (MFIs) can not only have a major impact in the fight against poverty but can do so on a sustainable basis (Paul and Conroy, 2000). In Bangladesh, micro credit mainly has been treated as an important development instrument since the inception of Grameen Bank as a pioneer micro lending model. Being inspired by the success of the Grameen Model in the field of micro finance, many government and non-government MFIs and NGOs have come foreword to alleviate the sufferings of the poor and the distressed people with their micro finance program following the GB Model in to- to or with slight modifications (Chowdhury, 2007). However, one of the serious limitations of these traditional MFIs and NGOs including GB is their high interest rate (Rahman, 1999, Bhuyan, 2006). Borrowers has to bear share of such interest are not able to pay such interest, which gradually leads to remain poor people in the vicious cycle of poverty rather than improving their minimum living standard. …

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