Informal Credit Transactions of Micro-Credit Borrowers in Rural Bangladesh
Sinha, S. & Matin, I.
Journal: IDS Bulletin, 29(4): 66-81
Publication Date: 1998
Published by: IDS - Institute of Development Studies at the University of Sussex
Document Type: Journal Article
Are micro-credit schemes likely to initiate a virtuous cycle of increased income through increased saving and investment?
Based on detailed study of informal credit transactions in a village in Northern Bangladesh. Empirical research establishes that: - even with increased outreach, MFI credit is unable to substitute for the informal sector
- informal lenders are preferred for their local and timely access, speedy disbursement and flexible repayment
- MFI-member households borrow as much from informal sources as non- members of comparable groups
- target-group households resort to extensive cross-financing of their loans, using both informal loans and MFI loans for their current consumption needs and debt-servicing
- initiation of a virtuous cycle depends on the household?s human and physical resources, the MFI lending technology, economic opportunities within and around the village and the macro-economic policy environment
Concludes there is an urgent need to redesign the MFI lending technology to make it sensitive to household initial conditions. Inflexible systems cannot meet the needs of borrowers at opposite ends of the economic scale. MFIs should mimic the informal sector when lending to poorer households by accounting for seasonality and providing repayment flexibility and recommend a ceiling on the total loan size per household.
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