A Reflection on Economics of Microcredit Borrowing in Rural Bangladesh

There is no room for denying the critical importance of microcredit for economic emancipation of rural poor in Bangladesh or any such other country. In analyzing the effectiveness of microcredit program the microcredit providers (NGOs) use accounting profit of the borrowers’ enterprises ignoring implicit costs on the plea that the opportunity cost of labor is near zero in those countries. This plea is certainly not tenable. In this research we use the principle of economic profit taking into account the implicit cost of family labor. From the results of this pilot study we get the reflection that a bulk of the microcredit is borrowed for non productive purposes. As high as 24% of borrowers used the credit exclusively for consumption and debt repayment purposes, and therefore demand for payment of interest from them is nonsensical. Only 48 % of the borrowers used the credits entirely for investment purposes. However, they are faced with very low-return investment opportunities in rural areas. About 68% of them on average had an impressive 83% net return on investment available for payment of interest and dividend. But in case of as high as 32% of them average return on investment was not enough even to cover the most minimum or tolerance level of wages for family labors. In their cases any payment of interest for capital has to be at the expense of the sacrifice of this subsistence level wages of the family labors. They are trapped in a vicious circle of loans. In the absence of a built in mechanism for debt relief they have no scope to be freed from this bondage of debt. An Islamic microcredit model based on Mudarabah principle (whereby the lender and borrower share the business surplus/profit on an agreed ratio, but in case of loss the lender alone bears the loss) may be a better alternative for them. There are indications that it requires an investment of around Tk 12,000 for creating job opportunity for one rural labor for the whole year.