Informal Credit Transactions of Micro-Credit Borrowers in Rural Bangladesh

Abstract

summary Through a detailed study of informal credit transactions in a village in northern Bangladesh, the research empirically establishes that increased access to credit from micro-finance institutions (MFIs) in Bangladesh has been unable to substitute for the higher-cost informal credit sources. The reason for this is that MFI lending technology is insensitive to variations in household conditions. Most MFIs put all households on a treadmill of continuously increasing loan size and insist on a fixed repayment schedule. While an easily accessible loan may seem attractive to a cash-starved poor household, its resource profile and the wider economic and policy environment impose limits on the marginal return to capital. Credit escalation under these circumstances increases the likelihood of cross-financing to sustain the MFI's line of credit. Target-group households, in particular, resort to extensive cross-financing of their loans. It is argued that cross-financing can have a deleterious effect on the household economy in the long-run if households continuously manage loan repayment without having the ability to repay. It is suggested that MFI lending technology be redesigned to be sensitive to household initial conditions. Only then can MFIs seriously compete with the informal lenders.