By: Veronika Skryl
An article from “The Bangladesh Today”, entitled “Microcredit Programmes turn many women self-employed”, discusses how Microfinance Institutions in Bangladesh promote skill-based education in order to make it possible for Bangladeshi women to run successful businesses. 3,500 women were given loans as well a three-month long requisite training in such fundamental fields as sewing, boutique, embroidery, food processing, modern packaging, and shopping bag preparation. Also, 374 voluntary women organizations received grants that will be aimed at improving the quality of life of the participating females. The District Women Affairs Office is establishing a project titled “Women-Skill Based Training for Livelihood” that will focus on underprivileged Bangladeshi women, especially divorcee, widows and highly financially dependent females.
According to the article, the effect of the program on the disadvantaged Bangladeshi women is significant: experience in the specific income-generating fields together with financial support resulted in the establishment of numerous successful tailoring, and boutique houses operated by the trainees. Moreover, Shefali Boutique and Mohona Mohila Kolyan Samity’s Mohona Boutiques alone transformed at least 175 women into financially independent individuals and self-reliant members of the society.
The article explains the effects of the policy of the Microfinance Institutions (MFIs) in Bangladesh offering intensive training and financial support to disadvantaged women. Microfinance programs in poor countries share certain characteristics: targeting (especially women), and ability to solve moral hazard and adverse selection. Informal microlending that involves joint liability can be characterized by lower interest rates, as well as an increased probability of repayment in comparison to the individual bank loans. The article mentions the specific group of people that participate in the project: widows, divorced and self-reliant women. Therefore, the program is highly targeted to underprivileged females that require financial support and cannot provide for themselves. In general, various Microcredit Institutions tend to target women because they are assumed to be trustworthy and such an intervention can change the balance of power in the household. The microloan programs mentioned above include a combination of small-scale financial support and requisite training, that help solve various problems and build a successful business. While microloans can be considered common for MFIs, individual training is an innovative feature. Therefore, this work will be based on the statement that specialized training is a new key element of the microfinance programs in Bangladesh that results in better outcomes and increased effectiveness. Since the programs include intensive training, loans and grants, it would be reasonable to discuss the effects of each component accordingly.
A three-month training offered by the MFIs in Bangladesh is the main element that can make those programs more successful than any other microfinance project. Intensive training can be highly effective due to its ability to increase the overall probability of the business being successful, and higher revenue when the business succeeds.
The first statement suggests that those women who have the requisite training and experience in a specific field, are more likely to run a profitable business due to their experience in that industry, ways of solving the possible problems and understanding of the needs of their target audience. Therefore, there is a higher probability of their newly established companies being well-organized and professionally supervised. Consequently, the output and revenue of such businesses are likely to be more substantial compared to the same indices for the companies run by people who did not have an opportunity to participate in the training. If a person gains experience in a specific sphere, he is expected to produce high-quality products that can be sold at a higher price. Thus, the overall revenue of the company is likely to be higher than if the employer did not have the necessary experience. Output yR is expected to be higher, and the social welfare will also increase under the condition that the costs remain constant or increase at a slower rate than the output.
Another component of the microcredit programs that can potentially solve adverse selection and moral hazard is microloans that are offered to the participating females. Most MFIs in Bangladesh offer group loans what implies joint liability (Chakravarty). Being mutually responsible for repaying the loan makes all the members of the group more likely to honestly pay back the necessary amount. It is important to consider the fact, that the programs are implemented in small Bangladesh communities where people know each other and can tell who is a trustworthy citizen and who is not. Therefore, the MFIs have a better access to informal information about the potential borrowers, what makes it easier to correctly predict how they will behave and what projects they will invest in. Besides, the trained women would be more likely to invest in “safe” projects due to the financial support offered by the MFIs. A loss of respect within the community, as well as the inability to borrow in the future make the borrowers less susceptible to default. In addition, the boutique houses operated by the trained participants are controlled by the District Women Affairs Office. This type of constant supervision decreases the likelihood of dishonesty since the profitability of the businesses is monitored. Thus, the problems of Ex-Ante and Ex-Post Moral Hazard are resolved.
It is widely known that MFIs have more access to informal information on the people within a community which helps to make better predictions of who is a good or a bad potential borrower. Besides, joint liability which implies shared responsibility for repayment generates positive assortative matching and induces people to choose responsible and safe borrowers to pair with. Therefore, microcredit schemes help solve Adverse Selection by helping people sort themselves and making it harder for risky borrowers to enter the market.
The last element to consider are grants that do not only directly increase the welfare of the participating women, but also increase the probability of repaying the loans. Additionally, numerous low-income households get into the “debt traps” which are a cycle of re-borrowing due to the inability to repay. A grant can help avoid such a problem, since it can cover a certain amount of payment and thus, the necessity of getting another loan to repay the current one no longer exists. However, grants cannot cover all the payments, thus there is a need for more long-lasting methods of solving the problem.
Summary and Recommendations
Even though offering intensive training to a target group is an innovative feature of the programs presented in the article, there is a potential for further advancements with the goal of making the programs even more effective. The training offered to the Bangladeshi women only involves a narrow range of activities, like sewing, embroidery, food processing, etc. However, being a business owner requires a specific skill set, that involves at least some understanding of accounting and bookkeeping. Therefore, it may be beneficial for the women to additionally participate in the rule-of-thumb training that gives a basic understanding on how to manage accounts of a company. This type of financial literacy training is elementary and simple in comparison to a standard accounting program that involves double-entry accounting, and management of capital (Drexler). Rule-of-thumb practices involve physical rules of keeping money in separate drawers in contrast to managing complicated financial accounts. A study of the effectiveness of those two types of training by Drexler demonstrates that the rule-of-thumb method has more significant effects compared to standard accounting, especially for people with the lowest human capital with limited knowledge of accounting or business administration.
Considering all that was mentioned above, it would be reasonable to conclude that the implementation of the microfinance programs in Bangladesh yields substantial results. Bangladeshi women that participated in the project have become self-reliant individuals and have launched successful boutique houses. Nevertheless, there is a possibility to make the programs even more effective. The main suggestion is to apply the rule-of-thumb training that can give the necessary knowledge of the essential accounting techniques required for business management.
- Chakravarty, Sugato, and Abu Zafar M. Shahriar. “Bank-Borrower Relationships and Transition from Joint Liability to Individual Liability Loans in Microcredit.” 2012, www.frbatlanta.org/-/media/documents/news/conferences/2012/intl-development/Sugato.pdf.
- Drexler, Alejandro, et al. “Keeping it Simple: Financial Literacy and Rules of Thumb.” American Economic Journal: Applied Economics. 2014, https://pubs.aeaweb.org/doi/pdfplus/10.1257/app.6.2.1
- “Microcredit Programmes Turn Many Women Self-Employed.” The Bangladesh Today, http://thebangladeshtoday.com/2017/07/microcredit-programmes-turn-many-women-self-employed/