Finance and Development CSEAS, Koichi Fujita Kyoto University Japan

Informal Finance Informal finance: individual lenders Relatives and Friends Landlords and rich farmers Advance of wage payment Traders Green rice sales Professional moneylenders Goldsmith, Mahajan Informal finance: group ROSCA (Rotational Saving and Credit Association) Ko (Japan), Arisan (Indonesia), Samity (Bangladesh) Different types of ROSCA

Coping with Capitalism: Establishment of Cooperatives UK ‘Rochdale Pioneers’ Cooperative’ (1844) Origin of consumers’ cooperatives Rochdale Principles 1. Democratic Control (One Man, One Vote) 2. Distribution of the surplus to the members in proportion to their transactions 3. Limited Interest on Capital 4. Political and Religious Neutrality 5. Cash Trading 6. Promotion of Education

Continued Germany Raiffeisen-type Agricultural Cooperative Credit Union (1862) ‘One for all, all for one’ Japan Hotoku Society by S. Ninomiya (1843) ‘Agricultural Cooperatives Act’ (1900) India National Cooperative Union of India (1929) R. Tagore ( ) was also influenced by the cooperative movement.

Cooperative Movement Japan Multi-purpose Agricultural Cooperative (Nokyo) 1. Marketing of agricultural products 2. Supply of agricultural inputs 3. Finance (savings and loan) 4. Insurance 5. Technology dissemination 6. Shop-keeping of consumer goods 7. Pressure group to the government 8. Others: gas station, funeral business, etc. Three-tiered structure: village/town/city, prefecture (46), national

Continued Bangladesh Comilla-type cooperatives Comilla Model for Rural Development by BARD (Bangladesh Academy for Rural Development) by Akter Hamid Khan 1. Two-tiered farmers’ cooperatives: village, thana (upazila) 2. Thana Irrigation Programme 3. Thana Training Center 4. Rural Works Programme → IRDP (Integrated Rural development Programme) since 1972 BRDB (Bangladesh Rural Development Board) since 1983 KSS, MSS, BSS

Development Finance Government support to finance for development Establishment of special financial institutions Such as Agricultural Development Bank (BKB in Bangladesh) Land Bank (Industrial) Development Bank Export Promotion Bank Cooperative Bank Experience of failure 1. Low repayment rate Intentional non-repayment among powerful borrowers 2. Monopoly by powerful men such as landlords and rich farmers

New School of Development Finance Ohio State University, USA Professor Adams and others They got power after the 1980s The 1980s: The era of ‘structural adjustment’ by IMF/World Bank Salient features 1. Emphasis on demand side rather than supply side Saving mobilization, before loan disbursement 2. Liberalization of regulation on interest rate So as to let ‘market’ works To mobilize more savings by raising interest rate 3. Non-targeted loan Not for specific purposes Not exclude consumption loan

The Rise of the Microfinance The Grammen Bank Professor Yunus, Chittagong University Shocked by the miserable famine in 1974 Personal experiments of lending small money to the poor without collateral Expanded the experimental areas by obtaining fund from Bangladesh Bank, IFAD (International Fund for Agricultural Development), etc Establishment of the Grameen Bank in 1983 Rapid expansion of the activities of the bank Factors of success: institutional innovations 1. Mobile banking 2. Group lending: group responsibility (weak)

Continued Factors of success: institutional innovations 3. Repayment system by small installments 4. Targeting the women Some problems 1. Repayment starts from the next week after loan disbursement Not suitable for agriculture and other activities 2. Exclusion of the hard-core poor 3. High drop-out rate 4. Multiple debts from more than one NGOs The Grameen II The repayment rate sharply declined during and after the 1988 flood Reform of the whole system on lending, repayment, savings and so on

How we should consider the ‘flood of microfinance’ in Bangladesh? (1) The ‘true’ mechanism of poverty alleviation by microfinance Illusion of self-employed micro-enterprises Survey by the author in 1992 in Tangail More than half of the loan is used for ‘production purposes’ Many cases were observed that the loan is used for sub-lending (including land mortgage) to other villagers Many borrowers were making repayment not by the income or profit from small business which was supported by microfinance loan, but from the regular income of male members (husband or son) of her household. Regular loan repayment made male household members to work harder and long hours to earn more money. In this sense, the loan can be used for any purposes, and if it is used productively, it can contribute to escape from poverty.

How we should consider the ‘flood of microfinance’ in Bangladesh? (2) Microfinance cannot lead the economic development Rather, when thee is an overall economic development it can help poor people to get more trickle-down effect of the economic development. The source of economic development is the private investment in rural/ urban areas which creates more employment. Development of rural infrastructure Is indispensable In order to encourage more private investment in rural/urban areas, infrastructure development through public investment is utmost necessary. There are complementarities between private and public investment. So the balanced investment of both private and public is important.

Other Types of Microfinance India SHG (Self-Help Group) A women’s group consisting persons makes a saving and credit association, which is supported by some NGOs. They gather one day in a month and give some fixed saving (for example, 50 Rp.) and a member of the group will borrow the money for six months with an interest rate of 2 per cent per month. NGOs monitor their activities for a year, for example, and find it good, the women’s group can now borrow money from Banks. The half of the loan is given as a subsidy to the borrower by the Government. Thailand/Laos A village (mubaan/baan) organize one saving and credit group. They collect savings (with a certain minimum amount) from members and some members can borrow money for four months at an interest rate of 3-4 per cent per month.

END