State of informal finance in rural Bangladesh

Experts are of the opinion that due to the inadequacy of institutional lenders to provide the necessary funds for conducting economic activities of different professional classes in rural areas, there has been an opportunity to develop informal money markets. Although the formal rural financing process is somewhat regulated, the informal part of the rural financial market has long been conducting money and fund transactions without any legal or formal control.

In Bangladesh the sources of informal rural finance are, professional moneylender, agricultural lenders or payers, business agent, relatives and friends and various self-employed professional associations and service groups, beneficial wealthy individuals, shopkeeper, market-mediator and institution owner.

Although the informal credit market exists in both urban and rural areas, it is largely considered to be a part of the rural financial market. The poor people of the village can get this type of loan straightforwardly. As a result, farmers and people from the local poor and marginalized professional groups meet their capital needs by taking informal loans from friends or relatives and professional moneylenders.

Although the institutional credit system has developed rapidly in Bangladesh, the dominance of non-formal credit in the field of rural finance has not diminished as much as in the past. Even today, the bulk of the total loans disbursed in rural Bangladesh come from various informal sources.

According to a survey about 90 per cent of the people in the rural areas of Bangladesh are in debt in one way or another. Around 60 per cent to 70 per cent of them borrow from friends and relatives, neighbours, local rich people or families, shop owners, foremen, brokers, traders or storekeepers, moneylenders, associations made up of people of various professions, youth associations, women's organizations, etc. Part of these various sources known as rural non-performing loans are relatives and friends 26 per cent, neighbours 21 per cent, local rich 18per cent, professional (investment) moneylenders 15 per cent, goldsmiths 1 per cent, shop owners / intermediaries (traders, foremen, stockists, etc.) 14 per cent, sharecroppers 7 per cent.

A significant portion of loans taken from informal sources do not have to pay interest on the money. However, the liability as interest is recovered in different ways such as debt, grain loan, mortgage loan, dadan, kamala loan, khaikhalasi, lagit or pattan, kot, rehan, poshani, saf-kabla, repayment, etc. Various types of loans have to pay interest on crops, property or part of it and manual labour. Debts or loans are usually taken from friends, relatives, neighbours and well-wishers do not have to pay interest. The amount of the loan is usually small and there is no document or collateral for it. The loan and the recovery of the loan - both are resolved on the basis of simple faith. If Dadan is taken, it has to be repaid with interest on the crop produced and in this case the price of the crop is taken at a lower rate than the market price. The paddy-loan also has to be repaid at interest-actually with the predetermined amount of paddy.

Many times, the borrower pays any part of the loan or interest by doing manual labour on the land or elsewhere as per lender’s needs. In the case of cot and khaikhalasi loans, the land is considered as collateral and the lender has been occupying the land temporarily since the lending, acquiring ownership of its plantations and crops. The loan with interest can also be repaid with the profit that the lender gets from the cultivation of the land and then the borrower gets the land back. However, due to continued indebtedness, such land is often permanently transferred to the lender.

In case of investment, the borrower gives his land to the borrower for possession for one year in return for the loan. When taking a loan through repayment, clearance, etc., the lender and the borrower execute documents on the possession, ownership, etc. of the specified land as collateral. Informal loans are used for both investment and investment purposes.

Informal loans are often used for consumer purposes such as food, clothing, medical care and other household expenses and expenses for weddings, special occasions, etc. And the things that are used for investment or capital are purchase of agricultural inputs and equipment, purchase of livestock, running small business, education and training of children, etc. The use of informal credit in rice business, cloth business, jute business or timber business etc. has been practiced almost unchanged for a long time.

The amount of institutional loans has increased significantly as the activities of NGO-MFIs have spread widely in the rural areas of Bangladesh. At present, more than one thousand NGOs are giving microfinance to the people in rural areas. Although, in the last 15-20 years, institutional credit has expanded considerably, non-formal credit still remains significant in rural areas. Loans are easily available from informal sources. As there is no formality in its allocation and release, it can be used immediately in case of need and there is no processing cost. However, the interest rates of these loans are high enough and loans are often spent in unproductive sectors. Sometimes the lenders take advantage of the ignorance, simplicity and helplessness of the borrowers, unjustly seize their assets and accelerate the process of destitution. Thus, the government should formulate proper policies and take appropriate steps to regulate the informal rural finance in Bangladesh.

The writer is Research Consultant, Human Development Research Centre (HDRC), Dhaka