Prime Minister Sheikh Hasina was in New York recently to address the 66th session of the UN General Assembly. During her stay, she sat down for an interview with the WP. One of the topics discussed during the course of the interview was the impact of microcredit in Bangladesh. In December of last year, the Prime Minister very famously accused microfinanciers in Bangladesh of “sucking blood from the poor.” When the Post asked her to elaborate she stated, “We found that it [microcredit] was not helping people and it was not reducing the poverty level. Rather, they were nursing poverty.” When asked to explain how precisely microcredit was doing so, she answered with the following rhetorical question: “Tell me one thing. If I give you $20,000 can you pay 40 percent interest every week?”
It is unfortunate that the Prime Minister did not provide more details on the current state of microfinance in Bangladesh and its exact role in increasing poverty. It is obvious that she believes microfinanciers are charging exorbitant rates that are pushing the poor further into poverty. But the reader can’t help but wonder how accurately this 40% rate characterizes actual microcredit rates. Is this a purely hypothetical rate that the Premier cited to convey the spirit of the injustice rather than the actual cost? Is this the average rate charged? Is she accusing Grameen Bank of charging this rate? Given Hasina’s recent criticisms about that particular institution and actions against its founder, this last query does not seem so far-fetched.
Before looking into how closely (if at all) the 40% rate reflects current microlending in Bangladesh, it is worth looking into how these interest rates are calculated. Microcredit institutions charge a ‘flat-rate interest’ -interest is calculated on the total amount of the loan, and then the principal and interest are divided into equal installments to be paid by the borrower over a fixed number of payments. The simplicity of this method is appealing; the borrower only needs to remember how much to pay, which is the same amount throughout, without any complicated calculations to worry about. However, one problem with this method is that since the interest is calculated on the total loan amount, instead of only on the unpaid portion of the loan, it understates the true interest cost that the borrower faces. The ‘declining balance’ method of calculating interest yields a much higher rate, and as a rule of thumb the declining balance interest rate is generally twice that of the flat rate.
This confusion over rates, and its potential misuse by microcredit lenders, is no doubt one of the factors contributing to the Prime Minister’s negative opinion. The Microcredit Regulatory Authority (MRA) of Bangladesh has a document on its website clarifying this issue, and cited this problem as a reason for the imposition last year of a 27% ceiling (on a declining balance basis) on interest rates for microcredit loans. When it announced the cap on interest rates, the MRA claimed microcredit interest rates varied from 20% to 51%, but did not mention what percentage of borrowers were affected by the higher end of the spectrum. A report published in November 2010 (based on data submitted by microcredit institutions for the year ended June 2009) provided more information. Although the report itself does not contain details on interest rates, it cites results from a previous survey of microlenders. Of all the institutions surveyed, 75% of them charged a rate that was between 28% and 30%, with most institutions charging 29%.
Grameen Bank has been under a lot of negative attention for most of this year because of the allegations made against it in the Norwegian documentary and the Bangladeshi government’s investigations into Dr. Yunus’ actions. Grameen has therefore taken pains to provide as much information as possible about its lending practices to counter any possible misinformation. According to its website (Item 14), Grameen charges an 11 flat interest rate, a figure that has been independently corroborated.
Providing a figure without context, as the Prime Minister and government bodies have done, does little to support the government’s claim that microfinanciers are part of the poverty trap. It serves instead to obfuscate the reality of the situation and cast aspersions on what, elsewhere, have been valid concerns.