MICROCAPITAL STORY: In Bangladesh, Rising Food Prices Affecting Loan Repayments in Microfinance Programs

Originally reported by Bangladesh’s The Financial Express, it appears that an increasing number of MFI clients in Bangladesh are not utilizing disbursed microloans to support planned microenterprises, instead using loans to cover the rising cost of food. A product of the 2008 world food shortage, in many countries rapid increases in food prices have not been accompanied by a comparable increase in wages, causing MFI clients to fill their budgetary gaps with microloan funds.

“We disburse credit to small borrowers to invest in different income generating activities like poultry, dairy, agriculture and small business. But they are spending a major portion of their loan to purchase rice over the last few months,” said a field officer of nonprofit microlender BRAC, one of Bangladesh’s largest MFIs.

Humayan Kabir, a senior official at a nonprofit MFI in the Mohanpur-Shataphul region, said their loan disbursement and recovery rates have fallen over the last few months due to higher food prices.

“The borrowers are most of the time spending the credit to procure rice which has been affecting the main vision of our micro-credit programmes,” he said.

Selima Akhter, a micro-credit borrower in Bangladesh’s Mohanpur Upazila of Rajshahi district, told The Financial Express, “I have borrowed [USD 102] from the BRAC to set up a small poultry farm at my home. But I have spent [USD 22] from the credit to purchase rice as I had no money to procure food before getting the loan.”

“Over the last six months we (family members) did not have regular income, which forced us to borrow money from the NGO to purchase food. We do not know how we would repay the loan,” she said.

Dr. Baqui Khalil, Executive Director of Bangladeshi think tank Institute of Micro-Finance has urged NGO microlenders to accommodate the food crisis by scrapping their traditional loan operations and introducing medium-to-long-term credit programs like ‘disaster loans’ and seasonal loans.

The 2008 world food shortage – spawned by a combination of droughts, soaring fuel prices, and increased consumer demand – has caused dramatic increases in prices of some of the world’s most basic food commodities. Developed and undeveloped countries around the world have experienced the effects. The food prices in Bangladesh have increased an average of 60 per cent since the beginning of 2007 putting the poor and lower income groups into hardships. The price of rice alone has risen 30 percent since December 2007.

The microfinance sector in Bangladesh is one of the world’s largest. As of 2005, the sector served 14.3 million borrowers, 86 percent of this was served by the four largest lenders: Grameen Bank, BRAC, ASA, and Pro shika.

By Ryan Benson, Research Assistant

Additional Resources:

BRAC: Home

Symbiotics: Bangladesh – Microcredit Borrowers Spending Major Portion of Loan to Buy Food

Microfinance Gateway: Microfinance and the Poor – an overview of the sector in Bangladesh

Credit and Development Forum in Development: Bangladesh Microfinance Country Profile

Institute of Microfinance: Home

ASA: Home