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Is microcredit a trap for the poor of Bangladesh?

Around 20 million people, most of them women, have turned to banks and institutions offering microcredit in Bangladesh. Microfinance offers small loans to those who do not have access to traditional banking credit and provides a lifeline for many when they need extra help. Microfinance institutions (MFIs) have also begun to offer somewhere to deposit small sums, since often the poor have nowhere safe to store any saved money.

It is hard for those in the West to understand how people live on less than two dollars per day. The poor face not only the difficulty of surviving on a low income but the insecurity of not knowing whether each payment for goods or labour will last until the next money comes in. Rich people can dip into their savings or borrow money, but until MFIs, the poor had nowhere to turn. Generally, MFIs are seen as a valuable service to the poor. The Bill and Melinda Gates Foundation announced grants in January of 38 million dollars to 18 MFIs in South Asia, Latin America and Africa to encourage them to extend their savings offerings.

However, some voice doubts about MFIs, noting that their interest rates start at around 15 per cent and can quickly rise to anything from 40 to 100 per cent. Finance experts are also concerned that MFIs are lending recklessly to people who are too poor to repay the loans. And generally, the MFIs require repayments from the first week after a loan is taken out, not giving enough time for borrowers to establish any new income-earning enterprise. Some borrowers end up in a cycle of debt because they approach several different loan companies and have little understanding of how long it will take them to repay all their loans.

In north east Bangladesh, Joba Rani is a farmer in the village of Jamlabaj. She borrowed from an MFI to invest in cows for her farm, but when early floods destroyed her crops in April, Joba was left unable to pay her loan instalments. Most MFI’s continue to expect regular payments and Joba had to sell all her cows to pay the money she owed. In Bangladesh, other families are getting into debt through loans from MFIs. If they are unable to sell off livestock, some send their children out to work to help make the repayments. Villagers also complain of being harassed by debt collectors.

Not all MFIs are blind to the issues facing their customers. Some reschedule loan payments when borrowers are hit by natural disasters. But many do not. After the floods which hit Bangladesh, many MFIs have continued to try and collect repayments, even accepting aid supplies or emergency relief money. The chairman of an organisation which monitors MFIs has now warned, that for some poor families in Bangladesh, microcredits have become “a death trap”.

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