Microcredit interest rates in rural Bangladesh declining

Microcredit-interest rates in the rural areas are declining due to increasing competition, driven by the presence of a substantial number of non-governmental organisations (NGOs), experts and economists said on Thursday.

They noted that NGO-led microfinance institutions have played a crucial role in boosting the rural economy, with many villages now having five to six active NGOs, significantly curbing reliance on high-interest loans from traditional moneylenders.

These observations were made at a seminar titled "Microfinance Competition in the Presence of Moneylenders: Theory and Evidence," organised by the Bangladesh Institute of Development Studies (BIDS).

Professor Shyamal Chowdhury, Rajiv Gandhi Chair of South Asian Economics at the Arndt-Corden Department of Economics, Crawford School of Public Policy, and Director of the Australia South Asia Research Centre (ASARC) at the Australian National University, delivered the keynote speech at the event, held at the BIDS conference room in Dhaka.

The keynote highlighted that microfinance activities have led to a 33 per cent decline in borrowing from village moneylenders (Mohajon), who typically charge high interest rates.

The entry of new NGOs into rural areas has further contributed to this trend, reducing interest rates by up to 25 per cent.

When Professor Dr Muhammad Yunus founded Grameen Bank, his vision was to eliminate people's dependence on moneylenders, who charge exorbitant interest rates, said Professor Shyamal Chowdhury.

He said that with the expansion of NGOs into rural areas, borrowing from moneylenders has steadily declined.

Presenting the result of a survey conducted in 150 villages across four districts in North Bengal and Sylhet, he said that despite the presence of numerous banks, moneylenders still operate in these areas, providing 20-30 per cent of loans.

Meanwhile, around 50 per cent of villagers borrow from NGOs, while less than 5 per cent rely on banks, as formal banking services have yet to reach a widespread level in these rural communities, he added.

He explained that the existence of moneylenders in the market is driven by demand for their loans.

As long as people seek quick credit, moneylenders will continue to operate, despite charging interest rates as high as 145 per cent-several times higher than the 24-28 per cent rates offered by NGOs.

Many borrowers, especially in emergencies like sudden illness, still rely on moneylenders due to the slow response of banks, he said. "While NGOs are more accessible, villagers often seek hospital care before NGO representatives arrive. If they have a credit card, they can manage the expense, but without one, they are compelled to borrow from NGOs," he said.

Sajjad Zahir, executive director of the Economic Research Group, spoke among others at the event moderated by Dr Kazi Iqbal, the Research Director of BIDS.

[email protected]