The idea of microcredit is something for which Bangladesh can deservedly claim the intellectual property right. Not only is Bangladesh's model of microcredit now being replicated worldwide; it has found its place of pride in standard economic textbooks. Microcredit has now outreached well over one-third of all rural households in Bangladesh. Perhaps, no other single poverty intervention programme ever reached such wide coverage anywhere in the world. This is, therefore, an opportune time to take stock of the achievements of microcredit programmes, their future potential and the constraints and challenges that lie ahead.

Contrary to the view held by many, microcredit in Bangladesh is not based on static ideas; rather it represents an evolving and dynamic system that can respond to the changing and varied needs of the poor. Economists have built elegant models of microcredit to show how group behaviour built on trust and peer pressure can make the poor people creditworthy. Yet there is no single theoretical explanation as to why microcredit has worked so well in Bangladesh, while other institutional arrangements like cooperatives have not. In physics, no one has yet theoretically proved that aeroplanes can fly, but this does not deter aeronautical engineers from improvising on aircraft design. Likewise, microcredit is also a learning-by-doing process, ready to incorporate new innovations and learned from experience. We now know that the poor people have almost universal, but varying types of need for credit. We also know that both group solidarity and loan repayment are habit forming. A near hundred percent repayment rate of microcredit has now become part of the society's behavioural norm, which allows increasing flexibility in designing the microcredit programmes.
The flexibility in programme design can help overcome some of the factors constraining the effectiveness of microcredit. For example, because of the system of loan repayment in weekly instalments, such repayment has to be often made out of family income other than that generated by the use of borrowed funds. This can sometimes be a burden on the borrowers and it limits their ability to borrow larger amounts. Also, since the entire amount of credit has to be repaid in a year (besides being repaid in weekly instalments), the use of microcredit is generally limited to activities that mostly need working capital and have a short turnover period. That excludes relatively larger-scale activities needing fixed investments and having a longer break-even period. There are now instances of relaxing the discipline of weekly repayment in order to accommodate the seasonality in economic activities and the time-lags between investments and cash flows.

The one-year repayment period is also not bonding in many cases. Experiments are also underway in the leasing of machinery and equipment so as to enable the borrowers to engage in more productive activities. Even the requirement of group responsibility has been successfully waived in some cases, particularly involving relatively larger loan sizes. It should be mentioned, however, that the basic microcredit model of the original Grameen type still remains the mainstay of the system. The fact that variations around this basic model are now possible is largely because of the loan repayment norms that have already got well established. Countries without such established norms would perhaps do better by sticking to the basic model to start with.

There are certain issues of popular debates surrounding microcredit that need careful scrutiny. One can think of at least three most frequently asked questions:

Is the interest rate of microcredit too high?

The effective annual interest rate of microcredit (calculated on the basis of the repayment schedule and the annual flat rate of interest that is charged) usually varies from 20 to 30 percent. While this is higher than the commercial banks lending rates these are about the rates that the moneylenders sometimes charge monthly, not annually. In fact, considering the enormous effort needed in mobilizing the large numbers of poor borrowers and making financial services available at their doorsteps, it should strike as surprising how the microcredit programmes can keep the interest rate so close to that of commercial banks and still remain sustainable. Indeed, it indicates a great deal of operational efficiency achieved by these programmes. It should also be remembered that the cost of microcredit programmes mainly consists of employee salaries. That is hardly any cost from the society's point of view, given the large reservoir of unemployed educated youth. On the other hand, the high cost of financial intermediation in the formal banking system is largely due to large portfolios of bad loans representing real loss to society (in the form of funds misused and badly invested).

Can microcredit programmes attain full commercial viability and self-reliance'?

They perhaps can, but only if, like commercial banks, they can mobilise deposits from the general public. The time has come to think about allowing some of the mature microcredit institutions to convert themselves into deposit banks under an appropriate legal framework. The experience so far demonstrates that there is huge untapped potential of channelling rural savings into productive uses. Already, nearly one-fourth of the revolving funds of the microcredit programmes come from the savings of their members. It is true that without having access to public deposits, these programmes need startup funds as grants or concessional loans, but that is because the lending rates of commercial banks are too high. Perhaps, the question of commercial viability is overplayed by those who cannot deny the benefit of microcredit and yet find it hard to reconcile with the fact that, being targeted and having access to subsidized funding, the system does represent a deviation from the orthodoxy of financial liberalization.

Can microcredit remove poverty?

The additional family income generated by microcredit may be small, but it often makes the difference between survival and destitution. The increased coping capacity of the borrowers at times of stress is well documented. There is also evidence that microcredit can help the poor families to break out of the poverty cycle through accumulation of assets and improvement of human capital; but there is a need to better understand these longer term impacts. Creating self-employment opportunities is one way of attacking poverty-a process that has been greatly enhanced by the expansion of microcredit programmes. But its overall impact on poverty can still be limited if there is not enough growth in other parts of the economy that generate wage employment and raise labour productivity, such as through crop diversification and up-scaling of enterprises.

At the level of research, one debated issue is whether the rapid expansion of microcredit has led to an overcrowding in activities like petty trading in which microcredit proliferates. The question posed is whether these activities represent additional employment and income-earning opportunities, or are simply a mechanism for sharing the given opportunities. Research findings so far suggest that the former aspect dominates the latter. This is borne out by the findings on the village-level impact of microcredit-that in these villages thereis a beneficial impact on the non-participating households as well. It is noteworthy that the microcredit programmes have adjusted over the years to expand the market opportunities for the borrowers by various means namely, (a) allowing financing of male activities; (b) increasing the size of loans, thus allowing the borrowers to go into more income-elastic products and services; (c) relaxing in practice the membership eligibility criteria, thus broadening the range of income-earning activities pursued by the borrowers; and (d) providing marketing outlets for production activities which can be carried out in homestead-based units but have economies of scale in marketing. The examples of the latter are handicraft products marketed by Aarong of BRAC and the handloom cloth called Grameen Check marketed by Grameen Bank.

In Bangladesh's financial system, there is a "missing middle" between microcredit and formal banking, so that small-scale enterprises are the most credit-starved part of our economy. Microcredit programmes are now being extended to provide larger loans to the progressive borrowers who have the demonstrated ability to go into scaled up microenterprises, and the initial results are quite encouraging. The coming years will perhaps see considerable deepening of microcredit in this direction along with simultaneous efforts to outreach the poorest of the poor. The conversion of some microcredit institutions into rural deposit banks, as mentioned earlier, will help mobilise the funds required for such a deepening of the microcredit programmes. However, the limitations of converting small borrowers into micro-entrepreneurs need also to be recognised. A World Bank. survey for evaluating Microfinance-II project of PKSF found that only 10 percent of microcredit members were even willing to take much larger loans. Managerial capability related to education and also own equity participation needed for scaled up enterprises may provide the entry barrier for such a transition. Thus, while efforts to fill in the "missing middle" of the financial system are welcome, it will be always important to draw a borderline between formal banking and microcredit in order to preserve the essential role of the latter, namely, to provide collateral-free loans to the poor to help them escape the poverty trap.

While the impact of microcredit is mainly assessed in terms of the income gains for the borrowing households, the less perceptible beneficial impact on various aspects of human development is no less important. The positive impact of microcredit on healthcare practices, family planning and schooling behaviour is now well recorded. The impact seems to work, at least in part, through female empowerment and a greater role of women in household decision-making. Bangladesh has made spectacular progress, particularly during the last decade or so, in such social development indicators as child mortality rates, birth control and school enrolment, specially for girls. This has also been a period of very rapid growth in the coverage of microcredit. Bangladesh belongs to a regional belt stretching across northern Africa, the Middle East, Pakistan and northern India which is particularly characterised by patriarchal family structures along with female seclusion and deprivation. That makes these achievements, and the possible role of microcredit therein, all the more noteworthy. In fact, the extent of the contribution of the microcredit movement to social capital formation is perhaps yet to be fully comprehended.

Wahiduddin Mahmud is chairman of PKSF and Professor of Economics, University of Dhaka. Soon after Dr. Yunus and Grameen Bank were awarded the Nobel Peace Prize, Wahiduddin Mahmdud organized a mass reception in Dhaka in honour of the Nobel Laureate.