BRAC and Microfinance

One of the most high profile, and controversial, poverty alleviation tools in BRAC’s toolbox is microfinance. Simply put, proponents of this method argue that without access to capital, poor communities will never be able to break out of the poverty trap. Since the standard  commercial bank will not lend to anyone who cannot produce adequate collateral, and their nearest branch is often hundreds of kilometres away anyway, the only solution is to bring the bank to impoverished rural communities. Detractors argue that the high interest rates charged by microfinance lenders (BRAC says theirs are between 18 and 60) are exploiting those who can least afford to be exploited and the often uneducated lendees have no idea what they getting themselves into. In extreme cases people who are unable to pay back  their loans might resort to suicide.

A typical BRAC field office. Not as flashy as the main headquarters in Dhaka, but cost effective and functional.

I realized just how contentious the topic of microfinance was in Bangladesh when I walked in to a small office in the Dhaka airport arrival hall to purchase my visa. I presented my invitation letter from BRAC to the officer on duty, naively expecting a display of gratitude for coming to do research on development in his country. “BRAC” he scowled, “they’re the next Grameen Bank. All they do is exploit the poor.” For the next five minutes I received a one sided lecture on the evils of charging rural villagers exorbitantly high interest rates and was even beginning to wonder if my visa request would be denied and I would find myself heading back to Kuala Lumpur on the same AirAsia plane that I just gotten off of. In the end I received the right stamp in my passport and after confirming with my new friend that, no, he had never talked to a microfinance recipient himself, I decided to press on with my expedition.

One of the signs of any well run organization is an up to date tracking board.

BRAC got into the microfinance business in 1974, long before the term was a household name. In 2010 it loaned over US $620 million to 5.45 million borrowers, 92.5% of whom were female. It also had 8 million depositors who held over $282 million in deposits. Almost 22,000 personnel administer the program. By any measure, BRAC microfinance is big business. What is more remarkable is how an organization which lists over $1 billion in assets is ultimately dependent on rural village women sitting on old rice sacks and placing tattered currency in a wicker tray.

At this point I should clearly state that the reader will not find the answer to whether microfinance is a net positive or negative in terms of poverty reduction in this post. A survey of the academic literature on the topic reveals lots of debate and little consensus. This author visited two separate village organization meetings where local women were meeting with BRAC representatives to make payments on existing loans. On both occasions  (indeed for the entire three weeks that were  spent visiting BRAC projects all over northern Bangladesh) the site was selected by BRAC and it is therefore difficult to determine how representative the locations were (although neither was there any obvious sign that any of the sites were potemkin villages or otherwise out of the ordinary). The other interns in my group and I were also able to interview several of the women who had received loans about their experience. While we tried to distance ourselves from BRAC both physically (moving across the village to do the interviews) and psychologically (by explaining we were students doing research) it was obvious to everyone involved that we had arrived, and would soon depart, in a BRAC van.

This is microfinance as it usually portrayed: women from a local village organization meeting to disburse new loans and pay up on old ones.

Despite all of these limitations, the overall opinion of microfinance amongst the recipients was almost universally positive. Because the villages were “off the grid” by almost every measure, it was clear that the government and commercial banks were unlikely to be stopping by and offering their services any time soon. The only agency which had come to these remote locals was BRAC. As for the loans, there seemed to be no shortage of stories about milk cows and other small enterprises which had been purchased with microfinace loans. There were no complaints about not being able to repay loans. However, when queried about what interest rates they were paying, some women had trouble answering the question (although a similar answer could probably be expected from many graduate students in regards to the credit cards in their wallet). Another trend that was observed was women in the village organization who continued to take out loans long after it seemed that they should have “graduated” from the program. It is possible that the social benefits accrued from joining the group actually are counter productive in that they make it difficult to break away at an appropriate juncture.

Less frequently witnessed, but arguably just as important, is the BRAC employee on the other side of the circle who is making sure individual accounts (yellow books) match the central database (green and white printout). I wish my banker made house calls!

Microfinance is a controversial topic and will remain so for the foreseeable future. More research is needed and will surely be carried out, not least by BRAC itself. In the mean time I invite everyone interested in the topic to read up on it and more importantly, get out there and observe actual microfinance practices first hand. What you find might surprise you. At the very least you’ll have a good story to tell your friends.

The writer would like to thank Professor Caroline Brassard for several conversations about research methods which helped to shape this post.