Informal credit transactions of micro-credit borrowers in rural Bangladesh

Through a detailed study of informal credit transactions in a village in no rthern Bangladesh, the research empirically establishes that increased acce ss to credit from micro-finance institutions (MFIs) in Bangladesh has been unable to substitute for the higher-cost informal credit sources. The reaso n for this is that MFI lending technology is insensitive to variations in h ousehold conditions. Most MFIs put all households on a treadmill of continu ously increasing loan size and insist on a fixed repayment schedule. While an easily accessible loan may seem attractive to a cash-starved poor househ old, its resource profile and the wider economic and policy environment imp ose limits on the marginal, return to capital. Credit escalation under thes e circumstances increases the likelihood of cross-financing to sustain the MFI's line of credit. Target-group households, in particular, resort to ext ensive cross-financing of their loans. II is argued that cross-financing ca n have a deleterious effect on the household economy in the long-run if hou seholds continuously manage loan repayment without having the ability to re pay. II is suggested that MFI lending technology be redesigned to be sensit ive to household initial conditions. Only then can MFIs seriously compete w ith the informal lenders.