microfinance in bangladesh: red and green lights

Microfinance in BangladeshRed & Green Lights

S. BadruddozaResearch Associate

Institute of Microfinance (InM)

October 31, 2011University of Dhaka

Citation:S. Badruddoza, “Microfinance in Bangladesh: Red and Green Lights” (paper presented at the Department of International Relations, University of Dhaka, Dhaka, October 31, 2011).

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Contents

By the end of this presentation you will know-1. What is microfinance2. Evolution & trends of microfinance in Bangladesh3. Impact of microfinance programs4. Future directions

Microfinance in Bangladesh | Badruddoza

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1. What is microfinance?• Microfinance services are retail financial services that are relatively

small in relation to the income of a typical individual. Specifically, the average outstanding balance of microfinance products is no greater than 250% of the average income per person. (MixMarket)

• The provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. (Wikipedia)

• Microfinance is the provision of financial services such as loans, savings, insurance, and training to people living in poverty. (Opportunity International)

• microfinance is which low-income households have access to a affordable financial services offered by retail providers to finance income-producing activities, build assets, stabilize consumption, and protect against risks. These services include savings, credit, insurance, remittances, and payments others. (Microfinance Gateway)


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2. Evolution & Trends• Microfinance existed in this country in one form or another

for a long time. Collaterals for the poor were mainly social status/essential assets

• Prof. Muhammad Yunus made the breakthrough with his action research in Jobra village of Chittagong in 1976 and then in Tangail in 1979

• Established Grameen Bank in 1983• “Grameencredit” is collateral-free, pro-women credit system• Today Grameen Bank is predominantly (90%) owned by the

rural poor whom it serves with 2,565 branches (July, 2011)• Prof. Yunus & the bank received Nobel peace prize in 2006


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2. Evolution & Trends (contd.)• Sir Fazle Hasan Abed established BRAC in 1972 for relief &

rehabilitation operations following liberation war. It began community development in 1973 & microfinance in 1974. BRAC has many “credit-plus” programs on health, education, legal services and skill development. It has 2,648 branches.

• ASA was founded by Md. Shafiqual Haque Choudhury in 1978 & was registered in 1979. It has 3,183 branches. ASA is the most efficient in operation. All these 3 MFIs perform international operations and occupy three fourth of the industry.

• Some other large MFIs are Proshika, BURO, TMSS, SSS, Shakti, Uddipan, PMUK, JCF. Specialized institutions, Government & commercial banks also retails microcredit.


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2. Evolution & Trends (contd.)• Major players in the field:1. Palli Karma-Sahayak Foundation (PKSF) was established in

1990. It implements its programs through its 250 member institutions with whole-sale microfinance & training.

2. Microcredit Regulatory Authority (MRA) was established in 2006 for licensing & monitoring microfinance institutions. It has given licenses to about 550 MFIs so far.

3. Institute of Microfinance (InM) was also established in 2006 as an independent research & training organization. It does not have microfinance program.


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2. Evolution & Trends (contd.)


Source: Khandker & Badruddoza 2011

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2. Evolution & Trends (Current Scenario)



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2. Evolution & Trends (current scenario)


OER: Operating Expense Ratio, FCR: Financial Cost RatioSource: Sinha 2011

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Reported Trends of Bangladeshi Microfinance Sector (1996-2009)

Year Reported MFIs Active members Outstanding borrowers

Cumulative disbursement* Net savings

1996 351 6,006,419 3,120,555 27,837.24 2,390.72

2000 585 11,021,663 7,988,831 125,607.61 8,866.02

2005 690 18,793,990 13,941,823 431,230.50 20,343.67

2009 745 35,707,896 27,053,663 1,731,465.46 131,306.45

* Figures under cumulative disbursement and net savings are in Million BDTSource: Bangladesh Microfinance Statistics (CDF, 1996-2006; InM & CDF, 2007-2009)

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3. Impact of Microfinance Program


• To some, microfinance seems not pro-poor because it does not help them go out of poverty. Moreover, it leads to over-indebtedness. Thus the poor demotes to ultra-poor and some of them even commit suicide. Political leaders and media have immensely focused on the failures of microfinance in recent times.

• People who support microfinance show numerous points where microfinance has succeeded. To say the least, microfinance has positive impact on women empowerment, consumption smoothing, and to some extent, in building assets.

• The following table summarizes all major quantitative impact studies [Faruqee & Badruddoza, 2011].

Impact of microfinance on household income/expenditureSource Name of organization

studiedIncome or expenditure per

annum (BDT) Participants Control (non-participants) % difference

Hossain 1984 GB Income, per capita 1762 1346 30.9

Hossain 1988 GB Income, per capita 3524 2523 39.7

BIDS 1990 BRDB Income, per household 6204 4260 45.6

BIDS 1990 BRAC-RDP Income, per household 2844 1560 82.3

IMEC 1995 Proshika Income, per household 22,244 17,482 27.2

Rahman 1996 PKSF Expenditure, per household 26,390 23,802 10.9

Khandker 1998 BRAC Expenditure, per capita 5180 4202 23.8

Khandker 1998 GB Expenditure, per capita 5050 4335 16.5

Khandker 1998 RD-12 Expenditure, per capita 4931 4279 15.2

Halder 1998 BRAC Expenditure, per capita 8244 6480 27.2

BIDS 1999 PKSF Expenditure, per capita 36,528 33,732 8.3

IMEC 1999 Proshika Income, per household 48,635 43,584 11.6

Zohir 2001 PKSF Wage income, per capita 5858 5559 5.3

Hossain 2002 GB Income, per household 18134 14204 27.7

Khandker 2003 GB, BRAC, RD-12 Expenditure, per capita 3923 3838 2.2

Rahman, Atiur 2005 PKSF Annual Income, per household 58109 38968 49.1

Khalily 2010 PRIME-2 of PKSF Annual income, per household 53394 48505 10.1

Rabbani 2011 PRIME-3 of PKSF Annual Income, per household 61530 45680 (benchmark) 34.7

Khalily 2011 FSVGD & UP of PKSF Monthly Income, per household 5224 4463 (early dropouts) 17.0

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3. Impact of Microfinance Program (contd.)


• Poverty impact of microfinance has been studied several times.

• Khandker et. al. (1998): 5% of Grameen participants lifted out of poverty, the figure is 1% per annum in rural areas.

• Zohir et. al. (2001): 4.7% in 3 years among borrowers of PKSF Partner Organizations.

• Hossain & Bayes (2009): 7% in 1987-2007• Bangladesh has 10 percentages point decrease in poverty rate

in last decade. Osmani et. al. (2011) estimated the contribution of microfinance into this reduction as 4%; remittance, education of the household head & employment opportunity were estimated 4.8%, 20.3% & 16.2% respectively

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Other Socio-economic impact of microfinance• Access to finance & breaking mahajans’ circles (Khalily, 2011)• Helps mitigating seasonal hunger & shocks (Rabbani, 2010)• Promotes employment & productivity (Rahman & Khandker

1994)• Facilitates savings & builds up asset (Khandker, 2000)• Empowers women (Pitt, Khandker & Cartwright, 2006)• Fertility transition & contraceptive use (Hashemi, Schuler &

Riley, 1997)• Self-employment, favorable agricultural contract (Pitt, 2000)• Migration (Ahsan, 2007)• Rural power structure (Rahman, 2002)

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Adverse effect of microfinance program:• Little or no impact (Morduch, 1998)

but reestablished by Pitt (1999)• Works mainly on moderate poor, no long run impact

(Zaman, 1999)• Some borrowers benefitted but a lot struggling, over-

indebtedness and asset loss (Ahmad, 2011)

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4. Future Directions


Problems (Solutions): Red (Green) Lights• High interest rate (MRA set a ceiling of 27% declining)• Overlapping (not leading to over-indebtedness, Khalily et. al.

2010)• Strict repayment schedule (MRA’s 50 weeks, technology?)• Diversion of credit use (skill development needed)• Product diversion & credit-plus programs (who will provide?)• Social or commercial (increase efficiency?)• Exogenous factors: Infrastructure, information & insecurity

issues• What if there is no microfinance?

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To know more…


Institute of Microfinance (InM)2/1, block-D, Lalmatia, Dhaka. (Head Office)PKSF building, Agargaon, Dhaka. (Project Office)[email protected]

http://www.inm.org.bd/

http://www.inm.org.bd/

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Thank you!


Microfinance in Bangladesh | Badruddoza 25

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microfinance in bangladesh: red and green lights

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