Repayment system impedes microcredit expansion: Study

FE Report | Published: March 19, 2018 10:46:33 | Updated: March 21, 2018 09:48:06

Representational image (The World Bank)

The growth of microcredit in developing countries like Bangladesh has been showing a slower pace in recent times as many borrowers find it difficult to expand their business due to the existing repayment system, a study reveals.

Despite a rapid expansion of microfinance institutions (MFIs) throughout the developing world, recent studies have observed a downtrend in such financing, according to the study.

Selim Gulesci, Assistant Professor of Economics at Bocconi University in Italy, presented the findings of the study titled 'Contractual Flexibility and Selection into Borrowing: Evidence from Bangladesh' at a conference on Sunday.

The 'Development Economics Conference' was organised by BRAC Institute of Governance and Development (BIGD) under BRAC University and International Growth Centre (IGC) at the BRAC Centre Inn auditorium in the city's Mohakhali.

Presided over by IGC country director in Bangladesh and also BIGD executive director Dr Sultan Hafeez Rahman, the conference was addressed by Health Services directorate general Dr Abul Kalam Azad, Bangladesh Bank chief economist Dr Faisal Ahmed, BRAC vice chairperson Dr A Mushtaque Raza Chowdhury and Bangladesh Employers' Federation (BEF) president Kamran T Rahman.

Mentioning access to credit an important engine of firm growth, Mr Gulesci said demand for microfinance remains low because borrowers fail to see substantial increases in terms of business growth after taking the loan.

Borrowers find the existing repayment system of the MFIs a roadblock to expansion of their respective business activities, he said.

He said the inflexible nature of the standard microcredit contract may improve repayment behaviour but can also discourage profitable investments that require more flexible terms.

Suggesting the MFIs, Gulesci said if lenders offer microcredit to its existing clients with a grace period (at least two months) including it in the lending portfolio, different types of borrowers would take loans and improve their enterprises substantially.

In a separate presentation titled 'Disputes, Institutions and Access to Justice: Overview of Dispute Resolution in Rural Bangladesh', Martin Mattsson from Yale University, USA said land disputes are responsible for more than half of the total dispute burden in rural areas and these are particularly difficult to resolve.

Mentioning that most of the disputes are resolved in an informal Dispute Resolution Mechanisms (DRM) known as 'shalish', he said this DRM often lacks both the credibility and enforcement power to resolve more serious disputes.

He said institutional change like expansion of the Village Court system can improve people's access to a timely, reliable and affordable DRM.

Presenting the findings of 'Social and Political Roots of Misallocation: State Ownership in China', Jaya Wen, a Yale University graduate, said the Chinese government faces trade-offs between two of its central goals, high growth and social stability.

She said this trade-off is a key reason for the persistence of state-owned enterprises (SoEs), and thus also a large driver of misallocation in the Chinese economy.

SoEs increase stability at the cost of full output efficiency, and document the specific mechanisms by which SoEs perform their policy role.

Employment in SoEs exhibits less volatility, buffers idiosyncratic shocks, and targets destabilising groups. Each of these behaviours harms output efficiency but may be, in a broader sense, politically efficient, she added.

Commenting on the study, BEF president said SoEs in Bangladesh definitely don't help in increasing productivity in the industries.

Jute sector can be the perfect example of it as most of the state-owned jute industries are incurring consecutive losses and lack of accountability is responsible for that, he added.


Share if you like