Micro-credit: Financial literacy a must among borrowers

Sarwar Md Saifullah Khaled | Published: March 02, 2019 21:25:19 | Updated: March 23, 2019 12:51:56

The concept of microfinance as a successful poverty alleviation method gained popularity around 1904. More than 100 years later, it is now being used as an effective mechanism to cut poverty for marginalised people. Bangladesh has made commendable progress in alleviating poverty and hunger in the country as it has been maintaining satisfactory economic growth over the past two decades since 1991. It needs to ensure equal economic opportunities for all to ensure sustainable development for the country.

Many people in the country still cannot utilise their talents, skills and capabilities to better their economic conditions due to their financial hardships. Microfinance is helping some of these people to become more self-sufficient.

As the microfinance market matured in Bangladesh in recent years, this has led to increased competition among major and minor Micro Finance Institutions (MFIs). It has been observed that many borrowers are involved in overlapping of loans in case of repayment.

This is why economists and bankers stress the need for improving financial literacy that can educate and generate awareness among the low-income people about financial activities. Most of the poor people in rural and urban areas do not have adequate knowledge about financial services, which eventually discourages them from engaging in economic activities. They end up using the funds for non-productive purposes. So when the time comes for repayment, they cannot pay the instalments even.

While poor people have more choices thanks to the growing number of MFIs to borrow money from, the number of borrowers who take multiple loans from various MFIs has also been increasing. The practice of overlapping is on the rise also for enterprise loans. As a result, the segment of heavily indebted people is increasing in Bangladesh. This is posing a threat to MFIs and the microfinance industry as well.

Financial literacy on the part of the rural and urban low-income people is essential for them to be conscious about the perpetual debt-trap that can harm them to the extent of losing whatever resources they have in their possession for repaying loans. It is alleged that micro-credit receivers often have to sell their assets to repay loans or become fugitives out of the fear of micro-credit providers when they fail to repay loans. Financial literacy can help these people avoid such miserable consequences after taking micro-credit loans from MFIs.      

Financial literacy can play an important role in mobilising economic activities. Internationally, the concept of financial literacy had spread across the world to ensure financial stability following the global financial crisis. Developing and developed nations have been working on financial literacy since then.

Some experts maintain that overlapping of loans can in some cases help borrowers repay their loans and boost their economic activities. On the other hand, some experts are concerned about that overlapping is perpetuating the poverty situation of the borrowers.   

Hence, expanding the financial inclusion and financial literacy programmes can play a vital role in building a sustainable financial system by bringing all people to mainstream economy. The Bangladesh Bank has long been laying emphasis on the financial inclusion and financial literacy programmes to involve the general population in financial services in order to help achieve the national goal of poverty alleviation and inclusive development of the country.

It is necessary to impart financial literacy among the poor people in rural and urban areas. This can encourage them to be involved in various financial activities.

Prof. Sarwar Md. Saifullah Khaled is a retired Professor of Economics, BCS General Education Cadre.



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