The Microfinance Sector in Bangladesh - UZH ? Â· 3.3.1 BRAC Bank ... (Bangladesh Microfinance ... the Grameen Bank remains the only bank with a poverty alleviation bank license (Microfinance

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<ul><li><p> CMF Thesis Series no. 6 (2010) </p><p>Date May 2010 </p><p>Center for Microfinance Thesis Series </p><p>The microfinance sector in Bangladesh: Innovation or Stagnation. </p><p>BA Thesis in Banking and Finance </p><p>David Pine </p><p>Advisor: Annette Krauss </p><p> Full Paper version </p></li><li><p>I </p><p>Bangladesh has been known as the birthplace of microfinance, and competition has markedly </p><p>increased during the last decade. However, the microfinance industry is only just now </p><p>beginning to put mechanisms in place that will advance commercialization and innovation. </p><p>As the MFI-sector's apex wholesaler played an important role with regard to the rapid growth </p><p>of the sector during the 1990s, it will now be necessary to reduce these cheap, subsidized </p><p>funds. </p><p>The "Microcredit Regulatory Act", enacted in 2006, could help prepare large and middle-</p><p>sized MFIs to transform into formal financial institutions and to integrate into the formal </p><p>financial sector, but at present, it is still nascent and the newly established Microcredit </p><p>Regulatory Authority will need to build its own capacity before the law can be extended. In </p><p>addition, the MRA must further the interests of both large and small microfinance institutions </p><p>- which were virtually unregulated during the last three decades - in order to gain their </p><p>universal acceptance. </p><p>The microfinance sector in Bangladesh: Innovation or Stagnation. </p><p>BA Thesis in Banking and Finance </p><p>David Pine </p><p>Advisor: Dr. Annette Krauss </p><p>Professor: Professor Dr. Thorsten Hens / Urs Birchler </p><p>Full Text Version </p><p>Center for Microfinance Thesis Series no. 6 (2010) </p><p>Zurich: University of Zurich, Swiss Banking Institute / Center for Microfinance </p><p>Plattenstrasse 14, 8032 Zurich, Switzerland</p></li><li><p>II </p><p>Table of Contents </p><p>List of Figures ................................................................................................................................................ IV </p><p>List of Tables ................................................................................................................................................... V </p><p>List of Acronyms ............................................................................................................................................ VI </p><p>1. Introduction ............................................................................................................................................. 1 </p><p>2. Introduction to the Microfinance Industry of Bangladesh ...................................................................... 3 </p><p>2.1 Country Indicators ............................................................................................................................. 3 </p><p>2.2 The Microfinance Sector in Bangladesh ............................................................................................ 3 </p><p>3. Suppliers and Microfinance Products ..................................................................................................... 8 </p><p>3.1 Grameen Bank ................................................................................................................................. 10 </p><p>3.2 ASA ................................................................................................................................................. 13 </p><p>3.3 BRAC .............................................................................................................................................. 14 </p><p>3.3.1 BRAC Bank ............................................................................................................................ 16 </p><p>3.4 Proshika ........................................................................................................................................... 17 </p><p>3.5 SafeSave .......................................................................................................................................... 17 </p><p>3.6 Government Agencies and the BRDB ............................................................................................. 19 </p><p>4. Funding of Microfinance ...................................................................................................................... 20 </p><p>4.1 Resource mobilization of MFIs ....................................................................................................... 20 </p><p>4.1.1 Donor funding ........................................................................................................................ 20 </p><p>4.1.2 Deposits and interest income .................................................................................................. 23 </p><p>4.1.3 Retained earnings ................................................................................................................... 23 </p><p>4.1.4 PKSF wholesale funds ............................................................................................................ 23 </p><p>4.1.5 Bank loans .............................................................................................................................. 27 </p><p>5. Regulation and Supervision .................................................................................................................. 30 </p><p>5.1 The Microcredit Regulatory Authority ............................................................................................ 33 </p><p>5.2 The MRA Act 2006 ......................................................................................................................... 33 </p><p>5.2.1 Evaluation of the MRA Act .................................................................................................... 34 </p><p>6. Competitive environment within the Microfinance Industry ................................................................ 39 </p><p>6.1 Market Share and Overlapping ........................................................................................................ 39 </p><p>6.2 Microfinance Credit Bureaus ........................................................................................................... 43 </p><p>6.3 Competition and microfinance interest rates ................................................................................... 43 </p><p>6.3.1 Interest rates in Bangladesh .................................................................................................... 45 </p><p>6.3.2 Interest Rates and Competition ............................................................................................... 48 </p><p>7. Conclusion ............................................................................................................................................ 50 </p></li><li><p>III </p><p>Reference List ............................................................................................................................................... 54 </p><p>Articles ...................................................................................................................................................... 54 </p><p>Websites .................................................................................................................................................... 59 </p><p>Interview Partners ......................................................................................................................................... 63 </p><p>Appendix I: Product List of Grameen Bank .................................................................................................. 65 </p><p>Appendix II: Product List of ASA ................................................................................................................ 67 </p><p>Appendix III: Product List of BRAC Bank ................................................................................................... 72 </p><p>Appendix IV: Product List of Proshika ......................................................................................................... 79 </p><p>Appendix V: Product List of SafeSave ......................................................................................................... 81 </p></li><li><p>IV </p><p>List of Figures </p><p>Figure 1: Funding, Regulation &amp; Supervision and Competition in the Context of Innovation..1 </p><p>Figure 2: Expansion of MFIs in the 1990s....5 </p><p>Figure 3: Deposit Amount ASA, 2003-200831 </p><p>Figure 4: Deposit Amount BRAC, 2003-2008.32 </p><p>Figure 5: Deposit Amount Grameen Bank, 2005-200832 </p><p>Figure 6: Emergence of NGO-MFIs in Pathrail Union1979-2007...40 </p><p>Figure 7: Upazilawise distribution of MFIs 2005.47 </p><p>Figure 8: Percentage of poor households covered by MFI programs, 2005.47 </p></li><li><p>V </p><p>List of Tables </p><p>Table 1: Sources of fund for loan portfolio of MFIs.........20 </p><p>Table 2: Rating Criteria for PKSF POs.25 </p><p>Table 3: Excess liquidity with banks at June, 2005..28 </p><p>Table 4: Involvement of commercial banks in wholesaling (in million US$) .29 </p><p>Table 5: Regulation in Bangladesh...38 </p><p>Table 6: Distribution of Interest Rate on Loan under Flat Method, Dec. 2007....46 </p><p>Table 7: Comparison of Interest Rates: Flat v APR (Loan size Taka 1,000).46 </p></li><li><p>VI </p><p>List of Acronyms </p><p>ASA Association for Social Advancement </p><p>BIDS Bangladesh Institute for Development Studies </p><p>BRAC Bangladesh Rural Action Committee </p><p>BRDB Bangladesh Rural Development Board </p><p>CDF Credit and Development Forum </p><p>CGAP Consultative Group to assist the Poor </p><p>CIB Credit Information Bureau </p><p>G8 Group of Eight </p><p>GNI Gross National Income </p><p>GOB Government of Bangladesh </p><p>IGA Income Generating Activities </p><p>MFI Microfinance Institution </p><p>MIX Microfinance Information eXchange </p><p>MRA Microcredit Regulatory Authority </p><p>NGO Non-Government-Organization </p><p>NGOAB NGO Affairs Bureau </p><p>PKSF Palli Karma Sahayak Foundation </p><p>PO Partner Organization </p><p>RLF Revolving Loan Fund </p><p>SME Small Medium Enterprise </p><p>USAID United States Agency for International Development </p></li><li><p>1 </p><p>1. Introduction </p><p>This paper assesses the state of the microfinance sector of Bangladesh. The question this </p><p>paper deals with is if the microfinance industry of Bangladesh is innovative, or if there are </p><p>obstacles in the way that inhibit the development of innovative products. </p><p>In order to approach this complex issue, this paper examines the basic prerequisites for </p><p>innovative product development in the microfinance industry of Bangladesh. Therefore it </p><p>focuses on the state of the three cornerstones of innovation, i.e. funding of microfinance, </p><p>regulation &amp; supervision and competition and their implications on innovative microfinance </p><p>product development. </p><p>From the literature the following context can be derived: </p><p>Commercialization of microfinance includes the application of market-based principles to </p><p>microfinance (Rahman / Charitonenko, 2002). It is widely believed that only through </p><p>achievements in sustainability are MFIs able to reach great levels of outreach and </p><p>accommodate demand through innovative product development. Financial sustainability </p><p>implies turning away from donor grants and making use of commercial funding sources, such </p><p>as retained earnings, equity investments, bank loans or clients deposits. Without proper </p><p>regulation, MFIs are not allowed to collect deposits from the general public, and banks will </p><p>only lend to financial institutions which are subject to financial monitoring and reporting </p><p>using standardized accounting (Conroy / McGuire, 2000). As the market matures and is more </p><p>and more saturated, competition among MFIs intensifies, resulting again in the development </p><p>of innovative microfinance products (Mahmoud, C. et al, 2009). </p><p>Fig. 1: Funding, Regulation &amp; Supervision and Competition in the Context of Innovation </p><p>Source: Author </p></li><li><p>2 </p><p>The first section provides a brief overview of the microfinance sector of Bangladesh. Second, </p><p>it introduces the main microfinance players in the industry and their microfinance products. </p><p>Third, it deals with funding issues of microfinance and looks at the funding sources for MFIs </p><p>in Bangladesh. Fourth, it looks into the regulatory environment of microfinance. Fifth, it </p><p>analyzes the competitive environment in the microfinance sector and the sixth section </p><p>concludes. </p></li><li><p>3 </p><p>2. Introduction to the Microfinance Industry of Bangladesh </p><p>2.1 Country Indicators </p><p>Bangladesh, with a total population of almost 160 million, is one of the worlds most densely </p><p>populated countries. In 2006, nearly half of the population was living under the national </p><p>poverty line, i.e. earning less than $1 per day. The GNI per capita (Atlas method, US$) for </p><p>2008 was at $520, compared with $986 for South Asia (Bangladesh at a glance, 2009). The </p><p>literacy rate for Bangladeshi adults was 47%, compared with 58% for South Asia, and life </p><p>expectancy at birth was 64 years in 2007. The countrys poverty has various dimensions </p><p>which are apparent in terms of inequality in income distribution, dramatic increases in the cost </p><p>of living, malnutrition by the vast majority of the population and unemployment and internal </p><p>migration. The United Nations Human Development Programme (UNDP) ranked Bangladesh </p><p>139th</p><p> out of 177 countries in 2005 measured by the Programmes Human Development Index </p><p>(Bangladesh Microfinance Country Profile, 2006). </p><p>2.2 The Microfinance Sector in Bangladesh </p><p>The Author divides the development of the microfinance sector in Bangladesh into four </p><p>phases since the mid-70s on the basis of Zaman (2004): </p><p>1) Action research phase in the 1970s </p><p>2) Microcredit development phase in the 1980s </p><p>3) Expansion phase in the 1990s </p><p>4) Increased competition and formalization from 2000 onwards. </p><p>Action research phase in the 1970s </p><p>Right after Bangladeshs independence war in 1971 the country was in a condition of </p><p>devastation. Since the new government was unable to cope with the scale of destitution, a </p><p>number of NGOs emerged to confront the challenges (Zaman, 2004). The independence </p><p>movement led to a new generation of young activists who were devoted to the reconstruction </p><p>of war-ravaged Bangladesh. Hence, the early years of NGO activities focused on relief and </p></li><li><p>4 </p><p>rehabilitation, with an emphasis on community development (Microfinance industry report: </p><p>Bangladesh, 2009). Besides that, the main emphasis was on health, literacy, agricultural </p><p>development programs and food relief programs. The focus was not yet particularly on </p><p>microcredit. The mid 1970s though can be seen as the hour of birth of microcredit in </p><p>Bangladesh, when a team of researchers at Chittagong University, led by Prof Yunus, began </p><p>an action-research program, known as the Jobra experiment, which provided loans to poor </p><p>households in a few villages (Zaman, 2004). The team used a solidarity group-based delivery </p><p>system using peer pressure and group guarantee to ensure timely repayment. After some trial </p><p>and error the Grameen Project proved highly successful and its success eventually paved the </p><p>way for the establishment of the Grameen bank under a special ordinance in 1983. To this day </p><p>the Grameen Bank remains the only bank with a poverty alleviation bank license </p><p>(Microfinance industry report: Bangladesh, 2009). This full-fledged banking license allows </p><p>Grameen to collect deposits not only from its members but also from the ge...</p></li></ul>

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