can small credit bring hope? a case study on...

The Global Journal of Finance and Economics, Vol. 10, No. 2, (2013) : 205-214

1 Manager, Kazi and Kazi Tea Estate Limited, Panchagarh, Bangladesh, E-mail: [email protected] Program Officer, Gram Bangla Unnayan Committee, Dhaka, Bangladesh, E-mail: [email protected] Senior Research Fellow, Research and Evaluation Division, BRAC, Dhaka, Bangladesh, E-mail:

[email protected] Team Leader, Microfinance Program, BRAC, Dhaka, Bangladesh, E-mail: [email protected] Senior Assistant Chief, Industry and Energy Division, Oil. Gas and Natural Resource Wing, Planning

Commission, Government of Bangladesh, Dhaka, Bangladesh, E-mail: [email protected]

CAN SMALL CREDIT BRING HOPE? A CASE STUDYON THE AGRIBUSINESS PROGRAM OF

BRAC IN BANGLADESH

Md Sazzad Hossain1, Ishraat Saira Wahid2, Kazi Tanvir Mahmud3

A. K. M. Sazzad Hossain4 and Tahmina Taslim5

ABSTRACT

BRAC provided microcredit facility to the rural poor in order to improve their living-standardthrough accelerating agribusiness activities. The prime objective of the study was to assess theimpact of microcredit on the living-standard of poor households in terms of total householdincome, expenditure and saving. Primary data were collected from the households of Gazipurdistrict of Bangladesh that received micro credit initiated by BRAC. Using simple randomsampling technique 660 households were selected as sample for this study. The study showedthat amount loan received by the borrowers did not have any significant influence in improvingtheir household income.

Keywords: BRAC, Microcredit, Agribusiness, Poverty, Bangladesh

INTRODUCTION

The rural economy of Bangladesh is pre-dominantly based on agriculture Mahmud et al., 2007).The development of the agriculture sector contributes to self-sufficiency in food, createsopportunities for rural income, employment generation and export activities which pledge directimpact to countries Gross Domestic Product (GDP). In the fiscal year 2011/12, agriculturesector contributed 19.41% estimated GDP in the Economy of Bangladesh (Bangladesh EconomicReview 2013; 2013). It is evident that agriculture sector plays and integral part in Bangladesheconomy by earning foreign exchange. Bangladesh has earned about 226 million US$ (duringJuly 2012 to February 2013) by exporting agricultural products (Bangladesh Economic Review2013, 2013). It is noted that a large number of the population was involved in the agriculturalsector. For example, it shows that about 47.5% of the total labor force was engaged in this

206 Md Sazzad Hossain, Ishraat Saira Wahid, Kazi Tanvir Mahmud & etc.

sector (Bangladesh Economic Review 2013; 2013). It is worthwhile to mention that socioeconomic status of Bangladeshi farmers is quite poor. They suffer low income, hunger, andlack of resources and without basic education. In fact, a major portion of the population ofBangladesh is stricken by poverty. As per the latest Household Income & Expenditure Survey,2010 indicates that poverty exists about 31 at the national level and the poverty rate was higheramong the rural population in comparison to the urban population (Bangladesh Economic Review2013, 2013). There are various causes for poverty in Bangladesh. For instance, small size ofcultivated land, unfair tenancy arrangement, unstable employment opportunity, lack of accessto financial capital, lack of infrastructural facilities and absence of safety nets can be identifiedas major causes of poverty in the rural areas of Bangladesh (Mahmud et al., 2012). It is unfortunatebut true that such situation is undesirable for any developing country. The Government ofBangladesh (GoB) has taken the initiatives to alleviate poverty by developing & implementingrural development activities. It is important to realize that without the development of ruralpeople’s socioeconomic status, it is not possible to achieve any significant economic developmentof Bangladesh. For this reason, GoB has addressed the issues of increasing the overall livingstandard of the poor by supporting various poverty alleviation programs which are operatingunder government and non-government organization (NGOs) supervision.

Microcredit concept has been introduced as powerful tools to combat poverty. Microcreditis the facility which provides credit to the poor without collateral requirement to engage poorpeople to income generating activities (IGAs). Failure of traditional financial institutions toextend credit facilities to the poor is the most important reasons for perpetuation of poverty(Yunus, 2000). Since poor people have limited access to the institutional credit facilities inrural areas, GoB took necessary steps to support the NGOs to expand credit facilities throughmicrocredit program in the rural areas in Bangladesh to help out the poor people.

When it comes to rural Bangladesh, male plays the dominant role in the context of decisionmaking and also have access to the productive resources comparing to their female counterparts(Kabeer 2001). Conversely, BRAC has given importance to provide credit facilities to womenborrowers who make up half the population in Bangladesh. Besides, BRAC is one of the leadingNGO’s in Bangladesh which is pioneer in alleviate poverty.

In 1972, BRAC has begun its journey aiming to provide relief and rehabilitation services toeffected citizen after liberation war. Later on BRAC has extended its work to a varied range ofareas related to poverty alleviation through microcredit for agricultural and non agriculturalsectors, informal education for adults and children, primary healthcare sectors, womendevelopment, legal rights, social awareness, environmental pollution etc.

BRAC has three types of credit facilities. For example, (a) Poverty Alleviation Loan knownas Dabi loan (b) Enterprise level Loan known as Unnoti Loan and (c) Micro enterprise Leadingand Assistance Loan known as Progoti Loan. Until now BRAC has provided micro credit facilitiesto a large number of population covering 460 Upazilas (lowest administrative unit). Furthermore,borrower’s repayment rate was highly satisfactory in terms of the loan. For example, it wasestimated in that in 2012, the total disbursement of loans and the total repayment were 1042.20crore Taka; 9689.74 crore Taka respectively. It is to be noted that that most of the borrowers ofBRAC are female. It was observed that in 2012, the total number of male borrowers was 4,55,596

Can Small Credit Bring Hope? A Case Study on the Agribusiness Program... 207

and the total number of female borrowers was 53,80,265 in 2012 (Bangladesh Economic Review2013; 2013).

It was observed in the study that although borrowers household income was increased dueto BRAC’s microcredit program but the effect was moderate (Mahmud, 2010). In fact, Sustainablerural development depends on agricultural production and small-scale agribusiness activitiesby the rural borrowers Mahmud, 2010). BRAC’s target was to accelerating agribusiness activitiesin the rural area by providing credit facilities to the rural poor. Assumption was based upon thatBRAC’s credit facilities would improve the borrowers’ household income (generated fromagribusiness) In this context, this study has taken the effort to find out the impact of BRAC’smicrocredit program on the household income who has availed the loan for agribusiness.

LITERATURE REVIEW

Mahmud et al. (2010) carried out a research on the borrowers whom were engaged in fisheryactivities in Bangladesh. The borrowers took loans from the project called AgriculturalDiversification and Intensification Project (ADIP) of the Department of Agricultural Extension(DAE), Bangladesh. They have examined that the effect of microcredit on the household incomeof the fishermen. For this purpose, the researcher used Weighted Least Square (WLS) techniquein order to measure the impact of credit on their household income. The outcome showed thatthe microcredit program failed to create any significant difference on the livingstandard of theborrowers. The major causes of failure was indicated for short term loan period (two years) andthe insufficient loan amount borrowed which was provided by ADIP program. Mahmud (2011)evaluated four microcredit projects in Bangladesh which was operated by major NGO’s likeBRAC, Proshika, PMUK and ADIP respectively. He evaluated the effect of microcredit programon the living standard of the landless and marginal borrowers in terms of their saving, expenditureand household income. As a tool Mahmud used Weighted Two Stage Least Square (WTSLS)technique to overcome the heteroscedasticity problem. Consequently the author found out thatthe credit program had increased the household income, borrowers compulsory savings andfood-expenditure but unable to create any significant effect on total expenditure of the householdincome. In addition, the researcher indicated that the magnitude of the credit effect on theoutcome was insignificant. Doocy et al. (2005) conducted a study on microcredit borrowers inEthiopia. The authors examined the effect of the microcredit program based on the borrowers’snutritional status. The result was positive where the borrowers and their family membersnutritional status had increased due to participating in the microcredit. Dowla and Alamgir(2003) did a study to assess borrower’ savings based in Buru Tangail in Bangladesh. This timethey have used descriptive analysis to examine the saving behavior of the borrowers. The outcomeshows microcredit program had a positive effect in increasing borrowers saving attitude. Duongand Izumida (2002) also conducted a study where borrowers from Vietnam assessed based onthe impact of credit on household production activities. On the process, the researchers usedWLS rather than Ordinary Least Square (OLS) to solve the heteroscedasticity problem. Alsothey acknowledged the farm area and a number of dependants both are major influencing factorsto determine household production. Bayes (2001) in Bangladesh evaluated the telecommunicationrole within the context of rural development under the Grameen Bank telecommunicationprogram. In this study it identified that the credit program did benefited the poor more than


non-poor. The author also mentioned that Grameen Bank’s management of telecommunicationshelped significantly to expand access to vital information input for all sections of the populationand reduced inequality. In Latif’s (2001) study, again in the context of Bangladesh used theOLS technique to examine the microcredit effect on borrowers saving behavior. The studyreveled that saving-income ration was significantly higher for the participants than the non-participants. Also it was noted that income and land ownership both were significant factors indetermining household saving. Khandakar (2000) conducted a study to evaluate the effect ofcredit in the context of voluntary savings of the borrowers in Bangladesh. In this study, theauthor used the conditional demand equation and found out that credit program had increasedborrowers savings. He also indicated that after joining the microcredit program, female borrowerswere in the advantageous position compared to the male borrowers in terms of saving. In thesame year, Ahmed et al. (2000) examined the impact of BRAC’s Integrated Rural DevelopmentProgram (IRDP) on gender equity and health seeking behavior. In this study the researchersused the Logit model to evaluate the impact of IRDP on the health seeking behavior. It wasnoted that the prevalence of reported morbidity was low among BRAC households comparedto the non-member household. Hashemi et al., (1996) studied the microcredit program of BRACand Grameen Bank. In this research, they examined the effect of credit on women’sempowerment. Their descriptive analysis showed that both the programs increased borrowerspurchasing power, mobility, enhanced economic security and ability to take household decisions,political and legal awareness.

Based on the above evidences, it illustrates that number of research on microcredit werecarried out in Bangladesh and other countries in the world. The authors paid attention to bothon the qualitative and quantitative aspects of living standard of the borrowers. In addition,they focused on the impact of microcredit programs on various ends such as savingexpenditure, household income, health care, nutritional status, employment generation etc. Onthe other hand less attention was paid in agribusiness activities operated by the rural womenborrowers.

BRAC took step forward to improve the living standard among the borrowers throughaccelerating agribusiness activities. It was assumed that BRAC’s program would add to householdincome. In this paper, an attempt was made to examine the effectiveness of BRAC’s creditprogram on the household income of the borrowers generated from agribusiness activities.

CONCEPTUAL FRAMEWORK

Borrowers can take a loan from the microcredit providers without providing collateral. Theamount of credit, they receive from the providers’ increases their financial ability to investmore into income generating activities. Microcredit program also provides opportunity to generateemployment for the poor in the locality. By participating in income generating activities undermicrocredit program, poor borrowers may have more earnings from activities that directly addto their income. This increased income would ultimately increase their purchasing ability. Morepurchasing ability would enable them to spend more on food, thus, leading them to high qualitystandard of living. The conceptual framework of microcredit program in alleviating poverty isshown in Figure 1.


Besides income, there are other factors which are related to well-being of the borrowers. Itis important to enhance human capital as it is deeply related to the well-being of the borrowers.Therefore, the microcredit program provides training to the borrowers, hoping that trainingfacilities will enhance their level of skills in performing income-generating activities. In addition,factors like household’s asset will increase the ability of the borrowers to invest in incomegenerating activities. Household incomes also help in increasing their risk bearing ability.Therefore, it is essential to open avenues to create more income generating activities for theborrowers. Insufficient rural infrastructure is one of the major obstacles for development ofBangladesh. Rural poor have very limited access to infrastructural facility and this hamperstheir economic activities. Initiatives to establish rural infrastructure (such as markets, roads,cold-storage etc) under the microcredit program may help them to accelerate their economicactivity. Access to infrastructure facility and its proper utilization will increase the ability ofrural poor in pursuing their income generating activities (IGAs).

Figure 1: Conceptual Framework to Alleviate Poverty

Note: Conceptual framework was adopted and modified from Mahmud 2010; Mahmud 2011; and Mahmud et al.,2012.


METHODOLOGY

Primary data were collected from the borrowers who participated in the BRAC program in lastthree years. A total of 660 borrowers were selected as sample from the total borrowers of 1800by considering 4% error at the 99% confidence level in the district of Gazipur. Sample wereselected using the Simple Random Sampling (SRS) technique since are comprehensiveborrowers’ list was available for this study. The sampling frames were developed based on thefollowing criteria:

(i) Monthly income of the household should not be higher than 16,000 Taka.

(ii) Borrowers must permanent residence of the village.

(iii) Borrowers’ age should be within the range of 18 to 60 years.

(iv) Borrowers’ who did not participate in any other develop program in last three years.

(v) Borrowers’ who joined in the program within the last three years.

(vi) Only Female borrowers were considered.

Survey was conducted in July to August during 2013 in the two Upazillas of Gazipurdistrict in Bangladesh. Borrowers were asked to provide the information mainly on theirdemographic status, economic status, credit management and their opinion about the microcredit program.

Several estimation techniques were used by various authors such as Ordinary Least Square(OLS), Weighted Least Square (WLS), Two Stage Least Square (TSLS), Weighted Two StageLeast Square (WTSLS), and Logit model in order to measure the impact of development projectson the living-standard of the beneficiaries. For WLS has the advantage over OLS in solvingheteroscedasticity problem (Mahmud et al. 2010; Mahmud, 2010). TSLS and WTSL considerendogenous variable in estimating simultaneous equations (Mahmud, 2010).

In this study heteroscidasticity problem was detected which was solved by white method.Heteroscidasticity is a serious problem which should be solved if detected (Mahmud, 2010).Model can be specified as:

Household’s income model:

Y = �0 + �

1 X

1+ �

2 X

2 + �

3 X

3 + �

4 X

4 + �

5 X

5 + �

6 X

6+ �

7 X

7 + �

8 X

8 + � (1)

Where,

Y = Total income of the household in 2012 (Taka)

X1 = Age of the borrowers ( Year)

X2 = Total land possessed by the household in 2012 ( Decimal)

X3 = Total value of the asset of the household in 2012 (Taka)

X4 = Total saving of the household in 2012 (Taka)

X5 = Distance of rural market from borrowers’ house (Kilometer)

X6 = Distance of local BRAC branch office from borrowers’ house (Kilometer)


X7 = Total amount of loan repaid by household in 2012 (Taka)

X8 = Total amount of loan received by household in 2012 (Taka)

�0 =

Constant

�i =

Coefficients of the variables to be estimated

� = error term for the equation

RESULTS AND DISCUSSIONS

As earlier mentioned that most of the household under the study were poor. One of the majorcauses of their poverty was having low level of asset. Due to lack of asset poor farm householdsdifficulties in pursuing their IGAs properly forcing them to have low level of production andincome. Household asset may play an vital role in improving households’ investment ability,negotiation and risk bearing ability. Moreover, it creates a higher probability for the poor tohave getting higher amount of loans and also improve their repayment capability. Thus, it canbe logically assumed that the households having more asset base (which includes biologicaland physical assets)would be in advantages position in earning income as compared to householdswhich owning fewer assets. This study findings show that value of the household asset waspositively and significantly related with the dependent variable “household income”. It indicatesthat household income would increase as the value of asset increases.

Rural market infrastructural facilities are poor in Bangladesh. The sampled householdsof this study are living in the areas with poor marketing facilities because of the lack ruralmarket facilities in their locality. They very often face obstacle in getting proper price oftheir outputs. Moreover farm households also face difficulties in purchasing necessaryagricultural inputs and equipments on time which may adversely affect their agriculturalproduction activities leading to low level of income. Thus it is important to establish ruralmarkets as near as possible to the borrowers so that their free and frequent access to themarkets can be enhanced. The study findings show that distance of the rural markets from theborrowers’ house was significantly and negatively related to the dependent variable. It indicatesthat household income would decrease as the distance of rural market from borrowers’ houseincrease.

Most NGOs put emphasize not only paying the loan they also provide other supports suchas skill development training, awareness raising , make access to institutions and so on. Theyalso provide many types support to its borrowers so that they can handle their IGAs activitiesproperly such as input in lower price, market facilities, creating employment opportunities andhelps rural people to reduce their dependency on rural money lenders. A person who maintainsfrequent contacts to local NGOs in his locality he is in advantage position in receiving moderntechnologies, more networking facilities , receiving more investment abilities and risk bearingabilities than a person who has less access to the NGOs. It is important to set up branches asclose as possible to the houses of rural people so that necessary supports can be provided to thepoor promptly and efficiently. This study shows that the distance of branch office from theborrowers’ households was negatively and significantly related to the dependent variables. Itindicates that household income would decrease as the distance of house of borrowers from theBRAC branches increases.


It was mentioned in this study that sample borrowers have lack of financial ability to pursuetheir economic activities. Formal credit facilities would create an opportunity for the poorhousehold who invest on IGAs properly yielding higher production and returns. Moreovercredit facilities assist poor to face risk and uncertainties. Therefore credit was provided to thepoor from BRAC with the expectation that borrowers would utilize this fund on the productivepurposes which in terms improve their living standards in terms of household income. Thisstudy shows that amount of credit received by the borrowers was positively and significantlyrelated to the dependent variable. It indicates that providing more credit facilities to the borrowerswould increase their household income more.

CONCLUSION AND IMPLICATIONS

BRAC provided the credit facility with the expectation that credit would improve their livingstandard of poor household who took loans from BRAC micro credit program. This studyshowed that credit received by the BRAC borrowers have failed to create significant impact onhousehold income. Small loan size, diversion of loan to non productive activities, lack of trainingon credit management might be thought the major causes of such failure. However the magnitudeof the co efficient was positive which indicate providing adequate credit facilities along withother technical and infrastructural support would create an opportunity to have a greater impactson the livelihoods of borrowers in terms of household income. Moreover it was observed thatfactors like household asset, distance of rural market, distance of BRAC branch office were thekey determinant of household income. The policy maker should focus on the following issuesfor better performance of micro credit program in future.

Steps should be taken necessary inputs as grant from government and donor agencies sothat the poor can use these inputs for their production activities which will help them to enhancetheir asset base. Price of the necessary inputs and other goods should stable. Creating rural jobopportunities in the rural areas would assist the poor borrowers in enhancing their asset holdingcapacity by increasing their income, investment and risk bearing ability.

Steps should be taken to enhance the patriarchal norms of the society so that women accessand control to the asset can be increased.

Table 1Determinants of Household Income

Variable Coefficient t-value Level ofsignificance

Age of the Borrowers 1651.50 1.72 0.09Total land possessed by household 59.89 1.14 0.25Total value of the asset 0.27 3.98 0.00Total saving of the Household 1.29 1.28 0.20Distance of rural market -390.25 -3.19 0.00Distance of BRAC branch office -736.57 -3.56 0.00Total loan repaid 0.12 0.42 0.67Loan taken by borrower 0.64 1.77 0.07

Source: Survey, 2013


Steps should be taken to develop rural markets as close as possible to the borrowers’household so that easy access can be ensured. Both Government and NGOs work as partner toimprove the rural market facilities such as improving processing unit, storage facilities and skilltraining on preserving the quality of the products.

Adequate branch office of NGOs should establish so that poor borrowers can get adequateservice and technical support easily. Awareness campaign should strengthen on NGOs activities,social and political issues in the rural areas. Access the rural poor women also should encourageby reducing gender disparity. Monitoring and follow up should provide as a whole to enhancethe capacity of the local staff of NGOs and participatory training could help the key point toenhance the capacity. NGOs should launch their programs based on the demand of the borrowers.

Acknowledgements

We are thankful to all the borrowers and staffs of BRAC microcredit program for their support duringsurvey period. Our special thanks go to both Professor Dr. W. M. Jaim and Dr. Nepal of RED, BRAC fortheir kind suggestions and moral supports. We are indebted to Mr. David Hilton, CIRDAP, Dhaka,Bangladesh for his assistance at the stage of data analysis.

References

Bangladesh Economic Review 2013. (2013), Finance Division, Ministry of Finance. Government of thePeople’s Republic of Bangladesh.

Bayes, A. (2001), Infrastructure and Rural Development: Insights From a Grameen Bank Village PhoneInitiative in Bangladesh. Agricultural Economics, 25, 261-272.

Doocy, S., S. Teferra., D. Norell., and G. Burnham. (2005), Credit Program Outcomes: Coping Capacityand Nutritional Status in the Food Insecure Context of Ethiopia. Social Science and Medicine, 60,2371–2382.

Dowla, A., and D. Alamgir. (2003), From Microcredit to Microfinance: Evolution of Savings Products byMFIs in Bangladesh. Journal of International Development, 15, 969-988.

Duong, P. B., and Y. Izumida. (2002), Rural Development Finance in Vietnam: A MicroeconometricAnalysis of Household Surveys. World Development, 30 (2), 319–335.

Kabeer, N. (2001), Conflicts over Credit: Re-Evaluating the Empowerment Potential of Loans to Womenin Rural Bangladesh. World Development, 29(1), 63-84.

Khandker, S. R., and R. R. Faruqee. (2001), The Impact of Farm Credit in Pakistan (World Bank ResearchPolicy Working Paper No-2653). Washington, D.C.: World Bank.

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Mahmud, K. T. (2010), Does Microcredit Really Matter To Women Borrowers of Bangladesh? A Case ofBRAC’s Agribusiness Program. The Global Journal of Finance and Economics, 7 (2), 111-121.

Mahmud, K. T., Z. A., Mohammed, M. Sambasivan, and S. I. Khan. (2010), Opinion of Fishermen towardsTheir Well-being under Agricultural Diversification and Intensification Project (ADIP) in Bangladesh.International Journal of Economics and Management, 4 (1), 45-60.


Mahmud, K.T., G. M. S. Kabir., M. T. Islam., and D. Hilton.(2012). Impact of Fishery Training Programon the Living Standard of the Fishers: A Case Study of Community Based Fishery ManagementProject in Bangladesh. Asia-Pacific Journal of Rural Development, 23-34.

Yunus, M. (2000), How Donor Funds Could Better Reach and Support Grassroots Microcredit Programs:Working Towards the Microcredit Summit’s Goal and Core Themes. The Quarterly Journal of theBangladesh Institute of Development Studies, 26 (2&3), 1-14.

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