role of capital market versus role of microfinance in bangladesh
TRANSCRIPT
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
1/22
1
1.1 Introduction
This Study focuses on the role of financial markets in the credit disbursement programs and
the state of microfinance sector in Bangladesh. Although financial markets are the key source
of funds, poor people hardly have access to these markets because of their poor
creditworthiness. To serve these people, microfinance sector is doing its best. The sector has
undergone tremendous transformation in all aspects over the last more than three decades
following pioneering works of the Grameen Bank. The very visible changes are outreach andportfolio size, proliferation of microfinance through a large number of microfinance
institutions, diversification of services, new regulatory regime, contribution in rural
development, and recognition of microfinance and as a major contributor in poverty
reduction. The methodology of Bangladeshi microfinance model has been replicated with or
without variations in many countries and recognized as an excellent tool for poverty
reduction. That has also brought international recognition in the form of Nobel Prize for
Peace for Professor Mohammed Yunus and the Grameen Bank.
However, the sector is facing many challenges regarding institutional capacity, quality and
diversity of services, fallout from political and macroeconomic factors and so forth. Above
all, Bangladesh still remains a poor country with millions of her population living below the
poverty line and facing many related challenges of livelihood and vulnerability. The country
report discusses on all these issues to give an opportunity to the readers interested in
microfinance, poverty reduction and development in general to reflect upon the status and
future direction of the sector.
The overall savings performance of Bangladesh is promising compared to the developed and
most of the developing countries. In 2008 the gross domestic savings of Bangladesh in
percentage of GDP was reached to 35.9% when it was 37.8% for Malaysia, 34.1% for
Thailand, 18.4% for Indonesia, 25.7% for Japan, 37.9% for India and 16.9% for Sri Lanka
(source: www.tradingeconomics.com ). Bangladesh has improved in this period in terms of
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
2/22
2
savings compared to the other countries. This increase in savings can be highly attributable to
the increase awareness created by the Micro Finance Institutions (MFIs), commercial banks,
co-operative societies and other specialized financing institutes.
1.2 Economy of Bangladesh
The economy of Bangladesh is a rapidly developing market-based economy. Its per capita
income in 2010 was est. US$1,700 (adjusted by purchasing power parity). According to the
International Monetary Fund, Bangladesh ranked as the 43rd largest economy in the world in
2010 in PPP terms and 57th largest in nominal terms, among the Next Eleven or N-11 of
Goldman Sachs and D-8 economies, with a gross domestic product of US$269.3 billion in
PPP terms and US$104.9 billion in nominal terms. The economy has grown at the rate of 6-
7% per annum over the past few years. More than half of the GDP is generated by the service
sector; while nearly half of Bangladeshis are employed in the agriculture sector. Other goods
produced are textiles, jute, fish, vegetables, fruit, leather and leather goods, ceramics, ready-
made goods.
This is a chart of trend of gross domestic product of Bangladesh at market prices estimated by
the International Monetary Fund with figures in millions of Bangladeshi Taka. However, this
reflects only the formal sector of the economy.
Year Gross Domestic Product US Dollar Exchange Inflation Index
(2000=100)
Per Capita Income
(as % of USA)
1980 250,300 16.10 Taka 20 1.79
1985 597,318 31.00 Taka 36 1.19
1990 1,054,234 35.79 Taka 58 1.16
1995 1,594,210 40.27 Taka 78 1.12
2000 2,453,160 52.14 Taka 100 0.97
2005 3,913,334 63.92 Taka 126 0.95
2008 5,003,438 68.65 Taka 147
http://en.wikipedia.org/wiki/Economyhttp://en.wikipedia.org/wiki/Bangladeshhttp://en.wikipedia.org/wiki/Developing_countryhttp://en.wikipedia.org/wiki/Market_economyhttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capitahttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capitahttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29http://en.wikipedia.org/wiki/Next_Elevenhttp://en.wikipedia.org/wiki/Next_Elevenhttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/Developing_8_Countrieshttp://www.imf.org/external/pubs/ft/weo/2006/01/data/dbcselm.cfm?G=2001http://www.imf.org/external/pubs/ft/weo/2006/01/data/dbcselm.cfm?G=2001http://en.wikipedia.org/wiki/Developing_8_Countrieshttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/Next_Elevenhttp://en.wikipedia.org/wiki/Next_Elevenhttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29http://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capitahttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capitahttp://en.wikipedia.org/wiki/Market_economyhttp://en.wikipedia.org/wiki/Developing_countryhttp://en.wikipedia.org/wiki/Bangladeshhttp://en.wikipedia.org/wiki/Economy -
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
3/22
3
1.3 Sources of Credit in Bangladesh:
Financial support may be provided by a variety of financial intermediaries. A distinction ismade between formal and informal providers of financial services, which is based primarily
on whether there is a legal infrastructure that provides recourse to lenders and protection to
depositor. The following table gives an overview of this distinction
Tier Definition Institutions Principal clients
Formal banks
Licensed by central bank
Commercial & development
banks
Large businesses
Government
Specialized non-
bank financial
institutions
(NBFIs)
Rural banks
Post Bank
Savings & loan companies
Deposit-taking microfinance
banks
Large rural
enterprises
Salaried workers
Small & medium
enterprises
Semi-formal Legally registered, but notlicensed as financial institution
by central bank
Credit unionsMicrofinance NGOs
MicroenterprisesEntrepreneurial poor
Informal Not legally registered at
national level (though may
belong to a registered
association)
Savings (susu) collectors
Savings & credit
associations, susu groups
Moneylenders
Self-employed
Poor
1.4 Access to finance for poor people in Bangladesh:
Poor people need financial services for the same reasons as everyone else - to save small
amounts of money in a secure manner, to invest in their home or business, to meet large
expenditures, to insure against risk and to transfer money. In fact, poor people throughout the
world and across many cultures and economies save in many ways and for a variety of
http://en.wikipedia.org/wiki/Financial_intermediaryhttp://en.wikipedia.org/wiki/Financial_intermediary -
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
4/22
4
purposes. They save for household emergencies, to manage irregular income streams, for
social and religious obligations and for long-term investment opportunities. Moreover,
confidence in the financial system is generally lacking because of low stability and high
inflation figures. Micro-enterprises, as well as smes, identify an economic opportunity and
are in a position to capitalize on that opportunity. They need investment and working capital
to start or expand their business activity. The demand for financial services in this part of the
society is huge.
1.5 Microfinance as Poverty Reducing Tool
The success of microcredit Bangladesh has led to using it as a major tool in national poverty
reduction strategy by both the government and non-governmental organizations. The
popularity of microfinance has made it the core activities of hundreds of microfinance
institutions in Bangladesh The case of microfinance in Bangladesh is a good example of non-
government organization led operations where the government directly and indirectly
provided major policy and material support to make it probably the largest microfinance
sector in the world.
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
5/22
5
2.1 Definition: Microcredit versus Microfinance
The term microfinance is relatively new in Bangladesh. A more popular and practical term
has been microcredit, which emphasizes the main focus of the various financial institutionsinvolved, although small savings has always been a part of microcredit operations. Gradually,
in response to demand, other services such as savings, insurance (life and non-life) and
remittance services have been developed or being piloted and are now being bundled together
under the term microfinance. Another important feature has been the focus on the poor. These
focuses very much remain but the MFIs offer services to non-poor such as small farmers and
microentrepreneurs. Therefore, the scope and target beneficiaries have evolved over time
since the establishment of the Grameen Bank in 1983. In 2009 the term microfinance
includes many financial products for both the poor and the near-poor.
The Grameen methodology has enjoyed explosive growth and given hope to millions of poor
women and men seeking to generate income in order to rise out of poverty. Indeed the
microfinance management system has solved many of the structural problems of targeting
and delivering financial services to millions of poor people.
The microcredit program in Bangladesh rightly began by targeting the rural poor, especially
women, as a development intervention strategy. Microcredit serves not only to meet financial
needs but also contributes to other social and institutional development issues such as
womens empowerment, bringing the rural poor into an institutional service network, and
reducing the dependency on informal money lenders. The management system of
microfinance programs has evolved over time but commonly have the following features:
Women are the main recipients of microfinance services though many MFIs now have male
members/clients;
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
6/22
6
Group-based lending methodology is the main system of delivery of microfinance services,
although commercial banks and a number of MFIs offer loans to individual clients. In early
1980s, especially in Grameen Bank, groups not only meant a collection of members for
administrative purposes but also meant group liability. In case of loan default by a member,
the group would take responsibility for the repayment of the defaulted loan. But now the
group-based system provides just a low-cost management structure, without any
responsibility of repayment; that is the responsibility of the individual borrower. However,
groups do serve another practical purpose, as a filter for screening individuals for
membership;
The microfinance sector in Bangladesh is now dominated by NGOs offering microfinance
services, collectively known as NGO-MFIs, which offer financial services as private not-for-
profit businesses but strive to achieve institutional and financial viability as soon as possible;
MFIs are diversifying into other target segments, including near-poor groups, by developing
new financial products along with the traditional management system. This diversification
strategy is not only helping portfolio growth and outreach but also transforming NGO-MFIs
as permanent financial service providers for both the poor and the near-poor, amongst both
the rural and urban populations. NGO-MFIs have now become a new class of financial
institution in Bangladesh financial markets.
Three categories of institutions offer micro-financial services: banks; non-bank government
departments and agencies; and non-profit NGO-MFIs (in addition to Grameen Bank). The
analysis and discussion below covers all three categories although the last category, the focus
of this report, is the most dynamic and flourishing. The schematic table below gives the target
market for each type of institutions:
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
7/22
7
1.4 Role of Microfinance in poverty alleviation in Bangladesh
Almost 90 percent of the population of developing countries lack access to capital from
formal financial institution. But poor people need to access capital to alleviate the poverty.
Generally poor people exist in poverty because of low savings result in low capital
accumulation that is needed for production that ultimately fall in low per capital income. The
vicious cycle of poverty is shown below.
Figure: the vicious cycle of poverty
To address this issue one question arise that how microfinance reduce poverty or developed
the economy in developing and least developed countries.
In this case microfinance promotes savings by forming group of people that result in capital
accumulation. After that the member of microfinance get loan on the basis of savings to set
up small enterprise or any other productive investment that increase the productivity. Income
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
8/22
8
has been rise and when the income rise families can improve their nutrition and send their
children to school (Robinson, 2002), this is the fundamental of economic development.
Loan provided by microfinance institution in developing countries for a variety of purpose.
Loans are provided for buying agricultural production such seeds, agricultural tools,
fertilizers etc. In addition to this loans are provided for a variety of non-crop activities such as
weaving, basket making, leasing firm, poultry farming, cattle fattening, dairy cow rising,
pottery manufacture etc. These loans actually provided various activities that differ villages
and countries. These loans that are not possible to get from formal financial institution
provide a source of income for diverse activities by the borrower of low income group. The
borrowers then can create their own life to maintain the family nutrition, education or family
development that ultimately reduce poverty and develop economy.
Empirical evidence on the interaction between financial development and poverty reduction
has been inconclusive due to mixed findings. Some earlier studies have shown that financial
development can contribute to poverty reduction in a number of ways (eg; Odhiambo, 2009).
First, financial development can improve opportunities for the poor to access formal finance
by addressing the causes of financial market failures, such as information asymmetry and the
high fixed cost of lending to small borrowers (Stiglitze, 1998; Jalilian and Kirkpatrick, 2001).
Second, financial sector development enables the poor to draw down accumulated savings or
to borrow money to start microenterprises, which eventually leads to wider access to financial
services; higher employment and higher incomes; and thereby reduces poverty (DFID 2004).
Third, financial development may trickle down to the poor through its influence on economic
growth.
This is because of the implied positive relationship between financial development and
economic growth. The trickle-down theory has been widely supported by studies such as
Ravallion and Datt (2002), Mellor (1999), Dollar and Kraay (2002), Fan et al. (2000) and
among others. Some studies have attempted to test empirically the inter-temporal causal
relationship between financial development and poverty reduction but the findings have been
largely inconclusive. Those studies include Odhiambo (2009), Jeanneney and Kpodar (2005),
Quartey (2005), Honohan (2004), Banerjee and Newman (1993), Clarke et al. (2002), Stiglitz
(2000), Arestis and Caner (2005), Arestis and Caner (2009), Dollar and Kraay (2002),
Honohan (2004), Beck et al., (2007) and Honohan and Beck (2007), among others.
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
9/22
9
Financial development supports economic growth and so has an indirect impact on the living
standards of the poor. Clark et al. (2002) support that there is a negative relationship between
financial sector development and income inequality rather than an inverted u-shaped
relationship. Odhiambo (2009) examines the causal relationship between finance, growth and
poverty reduction in South Africa using a tri-variate causality model and finds that both
financial development and economic growth Granger cause poverty reduction. Quartey
(2005) examines the relationship between financial development, savings mobilization, and
poverty reduction in Ghana, and finds that although financial sector development does not
Granger-cause savings mobilization in Ghana, it induces poverty reduction. Jalilian and
Kirkpatrick (2001) test econometrically the relationship between financial development and
poverty through the growth channel.
They conclude that a one-unit change in financial development leads to a 0.4% change in the
growth rate of the incomes of the poor. The same authors, Jalilian and Kirkpatrick (2005),
while examining the causal relationship between financial development and poverty
reduction in developing countries, find that financial sector development contributes to
poverty reduction through a growth-enhancing effect up to a certain threshold level of
economic development. Some studies have also examined the inverse association between
financial sector development and headcount poverty (Honohan 2004).
According to these studies, a 10- percentage point increase in the ratio of private credit to
GDP should reduce poverty rations by 2.5-3 percentage points. Beck et al. (2004), while
using data on 52 developing and developed countries to assess the relationship between
financial development and income distribution, find that the income of the poorest 20% of the
population grows faster than the average GDP per capita in countries with higher financial
development. Arestis and Caner (2005) report that the growth channel is not the only channel
through which financial development can affect poverty, but that there are two further
channels, namely the financial crises channel and the access to credit and financial services
channel. Even more recently, Arestis and Caner (2009) suggest a further channel the
income share of labor channel.
In a related study, Honohan and Beck (2007) suggest that financial depth is indeed conducive
to poverty reduction, so that deep financial systems also seem to have a lower incidence of
poverty than others at the same level of national income. A more recent study by Jeanneney
and Kpodar (2008) is concerned with standard financial liberalization being directly effective
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
10/22
10
in reducing poverty, as is the more indirect effect via economic growth. Financial
development promotes financial instability; moreover the poor do not benefit from the greater
availability of credit. Ultimately, though, the authors argue that the benefits outweigh the cost
for the poor, although no real explanation is provided.
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
11/22
11
3.1 Formal Financial Institutions (Banks)
The formal banking sector comprises four categories of organizations: the state-owned banks
(nationalized commercial banks (NCBs)) namely Sonali, Agrani, Janata, and Rupali Banks;
six specialized banks including BASIC and Bangladesh Development Bank Limited (BDBL);
private banks; and foreign (commercial) banks. Following the success of Grameen Bank the
four NCBs and BDBL started to offer retail microcredit by replicating group-based
management technology, in addition to their individual small loans for agricultural as well as
other purposes. Invariably all such group-based programs managed directly by the bank staff
members have collapsed with huge default of loans.
Currently NCBs have largely abandoned lending to group-based small loan programs but
have maintained their original individual loan operations. In addition, two of them (Sonali
and Agrani Banks) and also one of the specialised banks, BASIC Bank, have opted for
wholesale lending to NGO-MFIs. Interest rates vary between 10- 15%, a lot higher than
PKSF loans to NGO-MFIs. BKB and RAKUB follow individual lending techniques for their
own operations and lend to groups organized by NGOs/projects. Private Banks, with the
exception of Islami Bank Bangladesh Ltd (IBBL) which has a large and profitable retail
Grameen styled loan operations with more than 589,000 clients in addition to its normal
individual banking operations, opted for wholesale lending to MFIs.
Foreign banks offer small loans to individual borrowers mainly in urban centres. The
following paragraphs provide information on the status of small loan programs of banks.
Small loans (up to BDT 500,000) are available from two types of formal financial
institutions: commercial banks and two specialized banks, BDBL. Before the emergence of
the vibrant MFI sector, these banks were the main sources of small loans, especially for
agriculture and trade. Recently a number of private commercial banks have also entered in
this segment in urban centers. Table 3.11 below provides summary of borrower and loan
outstanding information classified in terms of size of loans.
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
12/22
12
The following key inferences may be drawn from the status, trends, and performance of small
loans (farm and non-farm) from banks:
a) The highest number of clients belongs to BDT 5,000 to 50,000 category representing 88%
of borrowers and 55% of loan outstanding. Although the total number of clients is high (8.3
million), a significant number of them, especially those from the NCBs and specialized
banks, are believed to be inactive due to high loan default.
b) Of the total small clients, 91% comes from NCBs and the specialized banks. This has been
due to their wide branch networks in rural areas and mandate for disbursing agricultural
credit to small holders. Private Banks are insignificant operators in this small business
segment, limiting themselves in urban centers to serve large clients.
c) Agricultural credits top the list of outstanding loans followed by trade. There are two other
formal institutions, BSBL and BRDB (state-owned), which are also active in this sector. But
the disturbing issue is the very low rate of recovery of agricultural credits.
d) All formal banks require collateral to receive loans, especially for loans more than BDT
50,000. One of the main reasons for emergence of MFIs in Bangladesh is the dismal failure
of NCBs, BKB and RAKUB to reach the poor who need small loans but cannot offer
physical collateral.
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
13/22
13
3.2 Bank Performance in terms of deposit mobilization:
amount in crore
Year Deposit GDP Bank
Branches
Interest Rate Inflation
Rate
Jun-90 22780 51,888.20 5539 6.5 8%
Jun-91 24650 53,618.90 5621 6.25 8.30%
Jun-92 26570 56,022.90 5698 6.75 4.60%
Jun-93 29750 58,384.00 5740 5 2.70%
Jun-94 33930 60,979.30 5780 5.5 3.30%
Jun-95 39240 64,244.10 5713 5.5 8.90%
Jun-96 41930 68,020.60 5755 6.65 6.70%Jun-97 46640 71,868.40 5952 8 4%
Jun-98 51890 75,573.20 5983 8 8.70%
Jun-99 59240 193430 6016 7.75 7.10%
Jun-00 70200 204930 6056 7 2.80%
Jun-01 81610 215,735 6156 7.03 1.94%
Jun-02 92020 225,261 6278 6.74 2.79%
Jun-03 106570 237,101 6159 6.29 4.38%
Jun-04 121230 251,968 6236 5.65 5.83%
Jun-05 142580 266,974 6318 5.62 6.48%Jun-06 168990 284,673 6425 6.68 7.16%
Jun-07 165119 302,971 6596 6.85 7.20%
Jun-08 196640 321,726 6747 6.95 9.94%
Jun-09 225934 340,197 6936 7.01 6.66%
Jun-10 278250 360,047 7246 6.01 7.31%
In the above table aggregate data and especially rural data are mentioned regarding deposit,
GDP, Bank Branches, interest rate and inflation. By analyzing these parameters we can easily
get scenario about overall situation of economy and more specifically the contribution of the
rural area in those economic parameters. In the aggregate data chart we include information
of this parameter of overall economy that is both rural and urban transaction. On the other
hand in rural chart we consider only rural area information.
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
14/22
14
3.3 Rural Banking Performance
Year Deposit (Rural) Bank Branches
(Rural)
Interest Rate Inflation Rate
(Rural)
Jun-90 4738.24 3621 6.5 7.00%Jun-91 5373.7 3669 6.25 4.30%
Jun-92 5712.55 3710 6.75 2.90%
Jun-93 6485.5 3616 5 3.20%
Jun-94 7498.53 3626 5.5 8.45%
Jun-95 8632.8 3609 5.5 6.65%
Jun-96 9518.11 3602 6.65 4.00%
Jun-97 10587.28 3610 8 4.47%
Jun-98 11882.81 3622 8 5.99%
Jun-99 13210.52 3620 7.75 3.95%
Jun-00 14180.4 3623 7 3.08%
Jun-01 16003.72 3594 7.03 7.16%Jun-02 17290.56 3665 6.74 2.56%
Jun-03 17189.74 3596 6.29 4.74%
Jun-04 18911.88 3641 5.65 5.77%
Jun-05 20346.17 3688 5.62 6.62%
Jun-06 22999.54 3751 6.68 7.36%
Jun-07 21845.24 3851 6.85 7.28%
Jun-08 26015.47 3939 6.95 9.99%
Jun-09 34409.75 4049 7.01 6.83%
Jun-10 42377.48 4230 6.01 7.16%
In aggregate data chart we experienced 22780 core tk deposit and 51,888.20 core tk GDP in
June1990 in which rural area contribute 4738.24 core tk deposits which is about 21% of total
deposit. In that time interest was 6.5% and inflation rate was 8% and number of bank branch
was 5539. It indicates that in June 1990 rural area contribution was about 21% of total
deposit with 6.5% interest rate and 8% inflation rate.
On the other hand if we consider June 2010 we experienced aggregate deposit 278250 core tk
and GDP 51,888.20 core tk where rural area contribution was 4738.24 core tk with 7246 bank
branches, interest rate and inflation rate.
3.4 Deposits Mobilized by Bank Branches
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
15/22
15
Deposits are largely mobilized by the ncbs because of their wide network and their
predominance in the total banking sector. Total deposit mobilized by 5539 bank branches of
all sorts of banks in 1990 was 22780 core taka and the amount increased in to 278250 core
taka in 2010 by 7246 bank branches countrywide. The average deposit mobilization in this
period was 96464.9 core.
Deposit mobilized by 1918 urban bank branches in 1990 was 18132.88 core taka which rose
to 234036.08 core taka in 2010 by 3016 bank branches in urban area. The average deposit
mobilized in this period was 80353.10 core taka. The rural deposit in 1990 was only 4738.24
core taka and it increased to 42377.48 core taka in 2010. The average deposit was 15962.38
core taka.
3.5 umber of Bank Branches
The availability of banking services in a country can be measured by the total number of bank
branches. The growth of deposits will be larger if there are more bank branches in the
country. Conveniently located bank branches can reduce transaction costs significantly and
thereby increases the net return earned on deposits.
The scheduled commercial banks were required to open two rural branches for every urban
branch. As a result expansion of bank branches in the rural areas was much faster than the
overall expansion in bank branches. The number of bank branches in the rural areas increased
from 694 (or 46% of total bank branches) at the end of June, 1974 to 2457 (or 64%) at the
end of June, 1980 and further to 3626 at the end of December, 1999. In 2008 approximately
0
100000
200000
300000
Deposit Mobilization
Deposit Deposit (Urban) Deposit (Rural)
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
16/22
16
58% of total bank branches were located in rural areas and most of them were branches of
state-owned commercial banks and specialized banks
3.6 Bank Branches and the Expansion of Rural Finance
Number of bank branches is a very important variable for deposit mobilization. The number
of bank branches in Bangladesh has been increasing indicating the economic opportunity and
development. The total number of bank branches of all sorts was 5539 in 1990 and it
increased into 7246 in 2010. The average growth of last 21 years was 1.36%.
The number or urban and rural bank branches also increased. Most of the rural bank branches
were set by nationalized commercial banks and specialized banks. Private commercial banks
have few rural branches and foreign commercial banks have no rural bank branches. The
amount of urban bank branches in 1990 was 1918 and in 2010 it rose to 3016. The growth
rate was almost 2.32%. On the other hand the number of rural bank branches in total in 1990
was 3621 and it increased to 4230 in 2010. The growth rate was almost .79%.
0
1000
2000
3000
4000
5000
6000
7000
8000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
AxisTitle Bank Branches
Bank Branches (Urban)
Bank Branches (Rural)
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
17/22
17
4.1 GDP, Deposit Mobilization and Economic growth:
Gross Domestic Production (GDP) is used here as a proxy of peoples income as income data
is not available. GDP of Bangladesh has increased constantly for last couple of years. The
graph given below admits this. In 1990 the GDP was 51888.2 core taka and the amount is
360047 core taka for the year 2010. The average GDP for this period was 179314.9 core taka.
The growth rate of GDP & deposit is an important factor. The growth rate that is given below
is shown from 1990 to 2010. In 1991 the growth rate of deposit was 8.21% and the rate is
23.16% for the year 2010. The average growth rate of deposit for this period was 13.46%. In
1991 the growth rate of GDP was 3.34% and the rate is 5.83% for the year 2010. The
average growth rate of GDP for this period was 5.42% .
-
50,000.0
100,000.0
150,000.0
200,000.0
250,000.0
300,000.0
350,000.0
400,000.0
GDP
GDP
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
18/22
18
4.2 Sector-wise contribution to GDP growth:
The Agriculture; value added (% of GDP) in Bangladesh was last reported at 18.43 in 2011, according
to a World Bank report published in 2012. Agriculture corresponds to ISIC divisions 1-5 and includes
forestry, hunting, and fishing, as well as cultivation of crops and livestock production. Value added is
the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is
calculated without making deductions for depreciation of fabricated assets or depletion and
degradation of natural resources. The origin of value added is determined by the International
Standard Industrial Classification (ISIC), revision 3. Note: For VAB countries, gross value added at
factor cost is used as the denominator.
Bangladesh is considered as a developing economy which has recorded GDP growth above 5% during
the last few years. Microcredit has been a major driver of economic development in Bangladesh and
although three fifths of Bangladeshis are employed in the agriculture sector, three quarters of exports
revenues come from garment industry. The biggest obstacles to sustainable development in
Bangladesh are overpopulation, poor infrastructure, corruption, political instability and a slow
implementation of economic reforms.
-5.00%
0.00%
5.00%
10.00%15.00%
20.00%
25.00%
Growth rate of GDP & Deposit
Deposit growth rate GDP Growth rate
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
19/22
19
Figure: Contribution of Agriculture on GDP over time
The Industry; value added (% of GDP) in Bangladesh was last reported at 28.55 in 2011,
according to a World Bank report published in 2012. Industry corresponds to ISIC divisions
10-45 and includes manufacturing (ISIC divisions 15-37). It comprises value added in
mining, manufacturing (also reported as a separate subgroup), construction, electricity, water,
and gas. Value added is the net output of a sector after adding up all outputs and subtracting
intermediate inputs. It is calculated without making deductions for depreciation of fabricated
assets or depletion and degradation of natural resources.
The origin of value added is determined by the International Standard Industrial
Classification (ISIC), revision 3. Note: For VAB countries, gross value added at factor cost is
used as the denominator. Bangladesh is considered as a developing economy which has
recorded GDP growth above 5% during the last few years. Microcredit has been a major
driver of economic development in Bangladesh and although three fifths of Bangladeshis are
employed in the agriculture sector, three quarters of exports revenues come from garment
industry. The biggest obstacles to sustainable development in Bangladesh are overpopulation,
poor infrastructure, corruption, political instability and a slow implementation of economic
reforms.
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
20/22
20
Figure: Contribution of Industry on GDP over time
Agricultural loan is basically provided to the rural economy. On the other hand industrial
loan is basically provided to the commercial area.
The actual disbursement of industrial loan was 3057 core in 2001 and it was 25870 core in
2010. The average disbursement during this period was 11393.4 core. The recovery of
agricultural loan was 2795 core in 2001 and it was 18980 core in 2010. The average recovery
during this period was 8805.3 core. The percentage of agricultural loan collection during this
period was 77.28%.
0
5000
10000
1500020000
25000
30000
2001200220032004200520062007200820092010
Amountcore
intk. Actual disbursement of
agriculturalloan
Recovery of agricultural loan
Actual disbursement of
industrialloan
Recovery of industrial loan
-
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
21/22
21
Access to finance refers to the possibility that individuals or enterprises can access financial
services, including credit,deposit, payment,insurance, and other risk management services.
There are many sources of finance like informal credit market, formal market, banks etc.
In this study, we have focused on both the financial markets and microfinance sector in
contributing to the alleviation of poverty from Bangladesh. Along with the financial markets,
microfinance institutions are playing back to back role in providing credit. Poor people who
do not have access to the financial markets, approach to these microfinance institutions to get
credit. These people constitute the SME sector of Bangladesh. The SME share in
manufacturing value added to GDP varies at 28% 30%. The services sector is primarily
composed of SMEs, which is responsible for the bulk of employment growth. SME
contribution to national exports is significant through different industries such as ready-made
garments, jute, and leather.
The commercial banks of Bangladesh are playing very important role in providing finance to
the Small and Medium Enterprises. According to SME Foundation, about 20 commercial
banks are providing easy and wide access to finance for SMEs. These banks include BRAC
Bank, Trust Bank, Dhaka Bank, Prime Bank etc.
Finally we can say that financial market approach is not alone strong enough to handle the
credit disbursement program. This sector needs the support of micro finance sector to
contribute to economic growth and poverty alleviation.
http://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Credit_%28finance%29http://en.wikipedia.org/wiki/Deposit_accounthttp://en.wikipedia.org/wiki/Paymenthttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Paymenthttp://en.wikipedia.org/wiki/Deposit_accounthttp://en.wikipedia.org/wiki/Credit_%28finance%29http://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Financial_services -
7/31/2019 Role of Capital Market Versus Role of Microfinance in Bangladesh
22/22
22
www.wikipedia.comwww.smef.org.bdwww.academia.edu.documents International Journal of Business And Management: Performance
evaluation of SMEs in Bangladesh
Microcredit Regulatory Authority BangladeshAsian Development Bank
http://www.wikipedia.com/http://www.wikipedia.com/http://www.smef.org.bd/http://www.smef.org.bd/http://www.academia.edu.documents/http://www.academia.edu.documents/http://www.academia.edu.documents/http://www.smef.org.bd/http://www.wikipedia.com/