Microfinance in Bangladesh from the worlds largest NGO
I feel really lucky to have had the opportunity to go to Bangladesh and be part of a BRAC microfinance meeting. It was a peak into a world that is so different from my own. All across rural Bangladesh the woman and children of the village gather with BRAC officials to learn about the process of getting a microloan from BRAC. Every meeting was filled with the vibrant colors worn by the woman of the village and smiling and ever curious children.
BRAC operates in these small villages across Bangladesh offering microloans to small groups of residents (mainly woman) in a village. They use the loans to start a business or make investments or in some cases just buy much need supplies like home improvements, mosquito nets or food.
The lack of modern infrastructure means that BRAC has had to develop banking procedures and operations to serve these rural villages. Here is how they do it. BRAC finds a group of women in a small village that are all willing to take loans at the same time. Then the group meets once a week with a BRAC loan officer that comes to their village. At the weekly meeting all the loan recipients pay back a small portion of the loan. Paying on a weekly basis helps some of the families make the payments as they don’t need to save up a large chunk of cash for a monthly payment.
But there is a catch. If one of the loan recipients cannot pay the others in their village have to pay for them. With all the loan recipients chipping in to pay for someone who cannot it doesn’t cause to much of a financial burden on any one person.
BRAC’s approach seems to be working. The lack of banking infrastructure means the rural Bangladeshi’s are desperate for financial services. While BRAC may charge an effective interest rate of around 25% it is much less than the local money lenders who have been know to charge up to the outrageous 200%. Since rural Bangladeshi’s don’t have much in the way of collateral BRAC has essentially switched modern collateral for a cultural collateral where part of your incentive to pay back the loan is the fact that your neighbors will have to pay if you don’t. While cultural collateral is a completely foreign idea in the US it’s hard to argue with BRAC’s methods when you witness the needs of the poor in Bangladesh.