state of microfinance in bangladesh

7/29/2019 State of Microfinance in Bangladesh

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State of Microfinance in Bangladesh

Evolve over time (History, Development, and Growth) of Micro Finance:

The growth in the poors access to credit took place in several distinct phases over the last

three decades. The origins of the current microcredit model can be traced back to actionresearch in the late 1970s, carried out by academics as well as practioners in organizationsthat were created to deal with the relief and rehabilitation needs of post-independenceBangladesh. The 1980s witnessed a growing number of non-governmental organizations(NGOs) which experimented with different modalities of delivering credit to the poor. Thevarious models converged in the beginning of the 1990s toward a fairly uniform Grameen-model of delivering microcredit. It sparked a sharp growth of access to microcredit duringthis decade. In recent years, the standard Grameen-model has undergone more refinements inorder to cater to different niche markets as well as to different life-cycle circumstances.

The 1970s:

Experimentation in providing credit to households considered unbankable by the formal financial system originated a few years after Bangladeshs war for independence in 1971. Theindependence movement gave rise to a new generation of young activists who were keen oncontributing to the reconstruction of this war-ravaged country. The new government and amyriad of aid agencies that arrived on the scene were unable to cope with the scale ofdestitution, and non-governmental organizations emerged to meet the challenges. The earlyyears of the NGO movement in Bangladesh focused on relief and rehabilitation with anemphasis on community development. However, by the mid-1970s, two of the NGOs thatwould subsequently expand in scale, BRAC and Proshika, found that elite capture was aserious impediment to their development objectives. As a result, a separate focus on the poor

through a target-group approach was introduced. Moreover, an ideological debate withinboth these organizations began to brew, between those who favored economic tools (credit,savings, etc.) to support poverty reduction and those who believed that social mobilizationagainst existing injustices would suffice and financial services were unnecessary.

Around the same time, a team of researchers at Chittagong University, led by ProfessorYunus, began an action-research program that provided loans to poor households in a fewVillages. Borrowers were mobilized in peer groups composed of four to five individuals who were jointly responsible for each others repayment. Several of these small peermonitoring groups would be organized together into a larger unit which would meet weeklywith the primary purpose of repaying loan installments. The process of trial and error initiallycombined males and females in the same credit group, but then changed to separate gendergroups. It also included occupational groups, but this was dropped in favor of village -

based groups. The demand for loans grew rapidly and Professor Yunus enlisted the support ofthe Bangladesh Bank and other commercial banks to provide the Grameen Projectas it wasthen calledwith resources. The success of this experiment paved the way for theestablishment of the Grameen Bank under a special ordinance in 1983.

The 1980s:

In the early 1980s, several NGOs experimented with different ways of delivering credit.

One important mode tested was the efficacy of providing loans for group projects comparedto offering loans to individuals with peer monitoring. The broad lesson was that the latter was


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more effective because of its incentives, and it lacked the free -rider problems seen inlending to a group. Hence, by the late 1980s, the predominant model became providingindividual loans to a target group of poor households, with peer monitoring and strong MFIstaff follow-up.

The Association for Social Advancement (ASA) is a classic example of this shift. Its initialemphasis was on forming peoples organizations, mobilized for social action against oppression. It changed to target groups and then to provision of financial services in the late1980s. Now ASA is the fourth largest MFI in Bangladesh in number of clients, and its uniquelow-cost credit delivery mechanism is being replicated in several other countries. ASA keeps

paperwork requirements to a minimum, has decentralized most decision making to the field,and overall has a very lean operation.

The 1980s and early 1990s were also important to the development of management capacitywithin several of the large MFIs, which allowed them to expand their microcredit programs.What is particularly interesting is that the development of the know-how and confidence to

implement large programs arose, in some cases, from the experience of scaling up programsnot related to microcredit. For instance, in the case of BRAC, its first major experience with anationwide program came when it implemented an oral rehydration program to combatdiarrheal disease. Thirteen million women were trained to use a simple but effectiverehydration solution, and BRAC staff were paid based on how many of their trainees usedand retained this knowledge.

Early to Mid-1990s:

The early 1990s was the period of rapid expansion of the Grameen-style microcreditapproach. The growth was fueled largely by franchising, whereby new branches replicated

the procedures and norms that prevailed in existing branches. It was clearly aided by the highpopulation density and relative ethnic, social, and cultural homogeneity in Bangladesh. Anotable shift occurred during this expansion phase to placing a greater emphasis on individual

borrower accountability for loan repayment and less reliance on peer monitoring. Stafffollow- up of loans became more rigorous and professional with the use of computerizedmanagement information systems. Donor funds helped in varying degreesto expand therevolving loan funds for MFIs, particularly during expansion phases of the variousinstitutions. Moreover, PKSF emerged during this period as a wholesale financing institution.Following this expansion, a geographical mapping of microfinance suggests that all districtsin Bangladesh now have microcredit services, although there are many smaller pockets withlittle or no coverage (e.g., Chittagong Hill Tracts). A closer look shows that there is

somewhat greater coverage of poor households in the central and western districts. Thesoutheast and pockets of the northeast still have room for expansion of coverage.

Mid-1990s Onward:

Feedback from the field, academic research, and international experience contributed to anincreasing emphasis on providing diversified financial services for different groups ofhouseholds from the mid-1990s onwards. The benefits of a narrow focus on microcreditduring the expansion phase was that it kept costs low, operations transparent, andmanagement oversight relatively straightforward. However, it became clear that the standardGrameen model of providing microcredit with fixed repayment schedules, and standard floors

and ceilings on loans sizes, was not sufficient to meet the needs of the extreme poor or thevulnerable non-poor.


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Moreover, existing microcredit borrowers also required complementary financial andnonfinancial services. The standard practice for MFIs until the late 1990s was to collectcompulsory weekly savings from their clients, holding the money as a de facto lump sumpension, which was returned when a client left the organization. Access to these deposits

was otherwise limited, which curtailed a potentially important source for smoothingconsumption.

Recognizing these limitations, an increasing number of MFIs in Bangladesh have offeredsavings accounts that clients can withdraw from more freely, in addition to the fixed depositscheme. Moreover, many MFIs have life insurance products, whereby outstandingmicrocredit debts are written off and other benefits are paid following the death of a

borrower. Noncredit services can also take the form of input supply, skills training, andmarketing support for micro-entrepreneurs.7 A complementary package to microcredit canalso take the form of providing education for the children of borrowers. Grameen Bank, forinstance, has a scholarship program for secondary education for girls, and a student loan

program for tertiary education. Similarly many MFIs have community health programs, legalliteracy training, and information on how to access local resources.

MFIs began to experiment with new niche markets as the traditional microcredit businessbecame standardized (and horizontal expansion slowed) and required less attention. Forinstance, several NGOs began providing larger loans to graduate microcredit borrowers,and in some cases to households which were not part of the microcredit system but whichwanted a micro-enterprise loan. These loans typically range from 20000 taka (around US$320) to 200,000 taka (US $3,200). Innovative solutions are also emerging to address the

problem of access for the small enterprise sector. For instance, BRAC has established aseparate financial institution, BRAC Bank, which focuses on lending to the smaller end ofthe small enterprise sector, with loans averaging 400,000 taka.

Moreover, evaluation studies pointed out those extremely poor households were struggling tobenefit from the standard microcredit model, even if they joined the programs. There were anumber of factors that kept the extreme poor from borrowing or from benefiting from loans ifthey obtained them. Minimum loan floors for a first loan sometimes exceeded what clients

perceived they needed. Fixed weekly loan repayments could be difficult to commit to in lightof seasonal income. Other members of peer-monitored groups sometimes might not wish toguarantee loans for extremely poor households. Residing in remote or depressed areas canalso complicate access. Programs have been developed to make these constraints more

manageable. ASAs Flexible Loan Program introduced more flexible repayment schedules.Mimimum loan floors for first loans were lowered so that amounts as small as 500 taka (US$9) could be borrowed. Grameens program offers zero interest loans to beggars. TheResource Integration Centers program specializes in offering loans specifically to the elderly

poor, an unnerved vulnerable group. Various programs also combine food aid withmicrocredit and training, like BRACs IGVGD program.

Product diversification of MFI in Bangladesh:

Market, Products and Prices

The microfinance industry in Bangladesh consists of NGOs, cooperatives, public sectorprograms and the Grameen Bank. The country is now teeming with more than 1000


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microfinance NGOs. Each and every NGO has taken up microfinance as a core activity. TheNGO led market consists of segmented markets and is seemingly characterized withmonopolistic competition with a few large actors having preponderance. In essence, these arecaptive markets as the buyers of services remain in the domain of a particular NGO and findit difficult to exercise their free choices due to methodological reasons. Many people

maintain that there is a need to review whether microfinance programs should be separatedfrom other development programs and conducted independently. Again, if we critically lookat the supply side, we see that the donors' grant money is on the wane. Banks are moving atsnail's pace though a little bit faster than in the past. PKSF being a major funding agencydoes not also find it easy sailing with the small NGO-MFIs. In fact, the savers deposit is

playing a considerable role in augmenting the volume of credit. It is proven that the poorpeople are willing to save more and are indeed saving in a number of ways. But what hasbeen lacking as of now, is the opportunity to allow the micro clients to save in a way that willhelp them to meet their current needs and at the same time to save for tomorrow. Savings isgrowing over time and clearly there is a huge savings potential. But the clients need qualitysaving services and dependable organizations to save with. On the other hand, demand for

money to provide as credit is also increasing. Against this backdrop, many NGO-MFIshaving been mature, will eventually feel the need to enter the formal financial system to fundtheir growth and provide diversified financial services as demanded by their target markets.The NGOs are now in a state of uncertainty in the absence of a regulation and fear to take anynew risk of providing the needed services. A microfinance friendly regulation is, therefore,required to facilitate these services.

Available statistical data up to December 2012 posit that, currently all microfinance programscover 100% poor households, representing about 13 million in the country. The NGOs havesaved Tk. 6,922 million and have loans outstanding of Tk 18,692 million. The BangladeshRural Development Board (BRDB) and the Ministry of Youth sponsored programs haveoutstanding loans of Tk 2,337 million. The Grameen Bank clients have accumulated savingsof Tk 9,676 million and have outstanding loans of Tk 13,724 million. While the aggregate

picture shows that microsavings constitutes 3% of the total sectoral savings and microcreditcontributes to 6% of total sectoral advances made in the financial sector. It is gathered thathuge overlapping is occurring, particularly among the big microfinance NGOs as well as theGrameen Bank. Overlapping is said to occur, when an NGO client receives loan from morethan one source. No one really knows its extent. There are a number of factors why it occurs.Inadequacy of loans is learnt to be a significant factor that compels a client to go beyond the

periphery of an institution for hunting larger loans. Who is to blame? Have we ever seriouslythought over this issue? In fact, none should be blamed. One of the reasons may mean that

the financial needs of the clients and the capacity of the creditors is a mismatch and is,therefore, resulting in a gap. Overlapping, therefore, may have inflated the outreach figure sohigh. In reality, the coverage of poor households will be much less.

Albeit, there are no remarkable promotional measures for boosting microfinance, efforts areseen ever stronger than in the past in mobilizing local resources by bringing in varioussavings and credit products. The savings products of NGOs now include daily savings,mandatory savings, voluntary savings, forced savings, contractual savings, and time deposits.The NGOs are also trying to become more responsive to the demand for credit facilities. Overtime, the credit products have been diversified. Today there exists more than 15 credit

products including daily credit, leasing loans, housing loans etc. Normally, the loan ranges

from Tk 1000 -15,000 for one year. The average loan size is Tk 3500 ($70). Organizationsproviding loans above Tk 3000 is very few. Only a handful of organizations can adequately


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support the real needs of their clients. The clients opine that the money that is given as creditfalls far short of the actual need. This means that the market can absorb more. Microfinanceis supposed to play an upbeat role by undertaking various income generating activities. Fieldexperience, however, suggests that 30-40% of loans given for income generating activitiesare not used for actual purposes rather these were used for consumption needs. It transpires

that microfinance tends to play the role of traditional financial service instead of being aneffective tool of poverty alleviation. This may be substantiated by the findings of a recentstudy (a sample of 1798 households) that 1% of the population can lift itself from povertyeach year through microfinance programs. Insurance product is also available in the marketthat appears in various names and has different mode of applications. Technicalities indesigning the product are not taken into account. Mere rule of thumb is being used in

premium setting. It covers mostly the risk factor due to death of a client. In some cases,livestock is insured and claims are partly met for the death of animals. According to a sampleof 524 NGOs surveyed shows that 15% NGOs have some kind of insurance practices.

Again, the NGO-MFIs practically do not determine product costing judiciously be it savings,

credit or insurance. They just set the prices on the basis of on-going prices and practiceswithout looking at its cost of operations, cost of fund and other germane factors. Statisticaldata shows that about 52% NGOs provide interest on savings @ 6-7%, which is a little lessthan the commercial banks do. There are, however, a few who provide more. There are alsosome, who promise to provide interest on normal savings, if the clients do not withdrawmoney before a specified period of time. But if they do, they are denied any interest. Theloans carry interest @ 11-15% in flat method. About 81% NGOs apply this method. Someexperts uphold the view that loans to the informal sector require interest rates at least 7-10%higher than the standard commercial rates, as they think the cost of operations to be higherdue to inherent nature of microfinance program.

Clients of many NGO-MFIs are heard to grumble that they seize poor people's savings in thename of insurance, risk fund, levy, group fund etc, which are scarcely refunded. According tothe clients, this practice is not wholesome as it goes contrary to their interest. As a matter offact, there seems to have a strong necessity for reversing the practice and making it customer-oriented to cater to their needs. A general feeling, among many, is also that these tiny clients'innocence and indigence should not be taken as advantage in raising fund. This circumstancesuggests that customer service indeed should be the motto of all NGO-MFIs and thereforeunderscores the necessity to maintain the probity of this service in the industry. Given the

present circumstances, what is imperative is that the market has to be expanded in terms ofbusiness volume by bringing a larger number of people within its fold through competitive

services. Mere increase in the number of NGO-MFIs will only bring about throat-cutcompetition among them, which will plausibly lead to sharing of the limited market. Thismay not be, however, a desirable situation. As microfinance industry in the country isgrowing and evolving, new issues are constantly coming to the fore. The role of marketing inmicrofinance institutions is one such vital issue that had been ignored hitherto. While thefocus of so many institutions has always been to give loans and get them back, very littlecircumspect effort has been put into this subject.


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Regional distribution of MFI in Bangladesh:

In view of the foregoing, strategic emphasis should be given on commercialization by the

NGO-MFIs. In fact, the article attempts to focus on the issues of microfinance NGOs. The

term "commercialization" in the microfinance industry of Bangladesh is relatively a nascent

idea and has understandably wide ramifications. This concept is also gradually gaining

ground in some other developing countries of the world. Chiefly, it tends to treat the poor as

clients rather than as beneficiaries. It conceives the microfinance market not as segmented

markets but as the integral of part of the country's total monetary system. It takes into view of

healthy competition through product differentiation that encompasses the practice of

marketing by launching new products. On the other hand, grant money that has zero cost, isnot perceived favorably by many small potential organizations in the country as it distorts

market competition. Anyway, microfinance is considered as a business and there is every

justification to look at it from commercial angle. Notably, forty percent of a large sample of

533 NGO-MFIs surveyed recently shows that they have received grants from various donors

for operating microfinance programs. Of the aforesaid figure, about thirty five percent has

also received concessionary loans. There may be a commonality, however, between the

grants and soft loans recipients. This advantage of grants and soft loans received by a

segment of organizations may put the majority NGOs in a precarious position in pricing their

loans. As a result, maximum number of NGOs will enjoy a very thin spread, if the grants and

soft loan culture continues. Under the circumstances, the donors should ponder to review

their policy of providing grants. The donors may rather come up with alternative ways of

financing. This will consequently invigorate commercialization and help expand the

microfinance market. This commercial approach also argues for the delivery of services at a

scale and cost commensurate with the needs and ability of the market for which it is intended.

People are indeed willing to pay full cost for a service they value. This is the universal text of

value in market-based economy.

state of microfinance in bangladesh

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