The overview of Financial System and Microfinance in Bangladesh

Download The overview of Financial System and Microfinance in Bangladesh

Post on 04-Jan-2017

213 views

Category:

Documents

1 download

TRANSCRIPT

  • RegulationandSupervisionofMFIsinBangladesh1

    By

    Dr.Md.KabirAhmedBangladeshBank

    ThePaperPresentedintheSAARCFINANCESeminaron

    "RegulationandSupervisionofMicrofinanceInstitutions(MFIs)inSAARCRegion

    OrganizedbyNepalRastraBank

    Kathmandu,2022March,2013

    1OpinionsexpressedinthepaperareofauthorsownanddonotnecessarilyreflectneitherthepoliciesandstandsofBangladeshBanknorMicrofinanceRegulatoryAuthorityoranyotheragency inBangladesh. Iamgrateful toDr.Md.Aktaruzzaman,EconomicAdvisor,BangladeshBankforhisvaluablesuggestionsandcommentsintheearlierversionofthepaper.

  • 1

    1.0IntroductionPovertyandemploymentcreationare theoverarchinggoalsofall theSAARCnations.Sharingour

    knowledgeandexperienceinthisendeavourcangraduallybuildaSouthAsianCommonKnowledge

    Pool thatmayguide the futureof this region fromapoverty zone toaprosperityone.However,

    characteristicsofBangladesharethatitisoneofthemostpopulouscountrieshavingpopulationof

    152.5millionswithin a small territoryof 147600 square kilometres. Life expectancyofpeople at

    birthis69yearsand71percentofthemliveinruralareas.Despitebeingoneofthemostpopulous

    and ruralbased economywith frequent natural attacks, the country has achieved commendable

    success inthe last4decadesbyreducingpovertyfrom59percent in1984to31.5percent in2010

    (BBS,2011).ThecountrymaintainedsixpercentrealGDPgrowthforthe lastdecade.Povertyalso

    declinedmore than2percentagepointsince2005.Given thispaceofdevelopmentand following

    thesimplealgebra,thestoryaheadforBangladeshisthatitcanbeapovertyfreecountryby2030.It

    maysurprisemanyofusthatwithmoderatelevelGDPgrowthand65percentlandlesspopulation,

    how the country achieved this covetous success while the development partners were always

    assumingitasahugechallengeforaresourcepoorcountry.

    Fortunately,while policymakers in Bangladesh delinked financial network of rural economy by

    reducing lossmaking rural bank branches as per recommendations of Financial Sector Reform

    Program in 1990, the countrywitnessed a demand driven propoor growthmodel that evolved

    withintheruralsectorthroughmassiveexpansionofNGOMFIs followingthesuccessofGrameen

    Banksmicrocreditactivities. Aftera longexperimentwith continuous success,our learning from

    themisthatwhiletheirsocialmissionenablesthemtoaddresspoverty,alargenumberofgrowth

    promoting high yielding small projects financed by them significantly contribute to employment

    creationandsustainablemoderatelevelGDPgrowthamidaperiodofglobalfinancialandeconomic

    crises. Allure by their contribution for a social cause, establishment of a separate body for the

    regulationandsupervisionof the industry iswelldebatedamong thepolicymakers,academicians

    and practitioners since late 1990s. However, considering several factors such as enormous

    involvementofMFIs in savingsmobilization, furthering their activities in socialbusiness,building

    confidence among the financiers for their continuous support; Government in Bangladesh has

    establishedaseparateregulatoryandsupervisorybodyi.e.MicrocreditRegulatoryAuthority(MRA)

    in 2006. The Authority also promulgated some prudential rules in 2010 for development of the

    industryona sustainablebasisbybringingmore transparency, reducingdistortionand creatinga

    level playing field for all the market players. Nevertheless, there are still some problems and

    challengesfacedbytheindustryaswellasthisnewbornAuthorityinimplementingregulationsand

  • 2

    supervisionsofNGOMFIsalongwithotherprovidersofmicrofinanceservices.Thispaperhasbriefly

    discussed these issueswhileproposingsomemeasures tobe takentoaddress them.Thepaper is

    organizedasfollows.Thenextsectiondescribesdevelopmentofmicrofinanceindustryemphasizing

    onthereasonsthathelpedtogrowNGOMFIs inruraleconomyofBangladesh.Section3narrates

    themeasures that are initiated to improve the legal and regulatory architecture of the industry

    includingtheimpactofnewMicrocreditRegulationAct2006.Section4highlightsontheregulatory

    and supervisory problems and challenges faced by both the microfinance markets and the

    regulatoryauthorities. Insection5,somepossiblemeasuresareproposedtoaddresstheongoing

    challengesfacedbyallthemarketparticipantsincludingtheregulators.Section6concludes.

    2.0MicrofinancedevelopmentinBangladesh

    StageI(19711982):Traditionalinstitutions

    After independence in 1971, state owned rural banks and cooperative societies were primarily

    engaged in rural financing activities wheremicrocredit was embedded in their services. At the

    beginning,asapartofpreindependencepoliticalcommitment foreconomicemancipationof the

    ruralpoor,thegovernmentinBangladeshwantedtoincreasebankingfacilitiestotheruralareasof

    thecountry(BB,1974).However,itwasdifficulttomaterializethisobjective,astherewasonlyone

    governmentownedagriculturalbank,whichhadalimitednumberofbranches(only75branchesin

    1972) in the entire country. The other governmentowned six commercial banks namely Sonali,

    Janata,Agrani,Rupali,PubaliandUttararemainedabsenttill1977inagriculturalfinancinginrural

    economy,althoughtheyhadlimitedexposureinnonagriculturalcreditactivities.Themaintargetof

    thesecommercialbankswasdepositcollectionforsubsequent investment inurbanareas.In1974,

    theeconomicadversitymainlydue todevastating floodprompted thegovernmentsattention to

    revive agroeconomy. Another important factor that drew policy makers attention is that as

    agriculture contributed considerably todomesticoutput throughout the1970s, thegovernments

    desiretoincreasenationaloutputalsoentailedemphasizeonthissector.Forexample,inthefiscal

    year1977agriculturealoneaccountedfor54percentofaggregateGDP(BB,1978).Consideringall

    thesefactors,thegovernmentinitiatedaSpecializedAgriculturalCreditProgram(SACP)inFebruary

    1977. Themain purpose of this programwas to enhance the flow of institutional credit to the

    agriculturesector.Anotherpurposewas to reach institutionalcredit facilities to themarginaland

    small farmers.Both theCentralBank and the government administered this credit program and

    implemented it throughstateownedcommercialbanks,aswellasagriculturalbanks.Sincestate

    ownedbankswerenotinvolvedinagriculturallendinguntil1977,andtheonlyagriculturalbankhad

  • verylimitedbranches,thisnewinitiativesrequiredallofthemtoexpandbankbranchesinunbanked

    areas of the local economy. Consequently, the rural financial infrastructure increased rapidly in

    1977, although the growth of bank branch continued at a very slow pace until late 1980s and

    remainedstagnantsincethebeginningof1990s.

    Chart1:Numberofnewruralbankbranches

    0

    100

    200

    300

    400

    500

    600

    700

    800

    900

    1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

    No. o

    f new

    rural

    bank

    bran

    ches

    Source:Annualreports(variousissues),BangladeshBank

    Apart from rural banks, two types of cooperatives such as traditional and nontraditionalwere

    engaged inmicrocredit activities. The traditional cooperatives,which continued since theBritish

    Raj,weremostly nonagriculture in character. Theywere organized and supervised by an apex

    institution,namelyBangladesh SamabayaBank (BSB).The traditional cooperatives are supervised

    and partly financed by Bangladesh Samabaya (Cooperative) Bank. The policy of these traditional

    cooperativeswastoestablishonecentralcooperativebankineachsubdivision(presentdistrict)as

    secondarylevelandMultipurposeCooperativeSocietiesineachunionasprimarylevel.Thepurpose

    oftheprimarysocietieswastoprovidecredittomembersengagedinactivitiessuchasagriculture,

    afforestation,fishingandcottageindustries.

    The nontraditional cooperatives were established based on the Comilla Model, which was

    developedand triedonanexperimentalbasis in the1960s.Twomajorcomponentsof themodel

    weretheestablishmentof (i)primarycooperativesatthevillage level,generallyknownasKrishak

    Samabaya Samity (KSS),whichwas organized by three categories of people: landless labourers,

    marginalandwealthyfarmersand(ii)allKSSswithinasubdistrictwerefederatedintoTCCA2/UCCA.

    Themajor responsibility of TCCA/UCCAwas to provide input support, training, credit and other

    services to theKSS. After its initialsuccessduring thepreliberationperiod,asapartofpoverty

    orientedruraldevelopmentstrategythegovernmentwantedtoimplementtheideathroughoutthe

    3

    2 TCCA/UCCA refers to Thana or Upazila Central Cooperative Associations. Thana is an administrative unit which was converted into upazila in 1983.

  • 4

    ruraleconomyaiming todevelopanequitablesocietyby includingallcategoriesofhouseholds in

    rural development activities. Adoption of high yielding varieties, i.e., seedfertilizerirrigation

    technologywasassumedtobeequallybeneficialtosmallholdersaswellaslargefarmers.Thetwo

    tiercooperativesystemwasconsideredasoneoftheeasiestwaysofdiffusingmoderninputs,credit

    and knowledge to the small farmers without bringing any fundamental change to the private

    ownershipofland.

    In parallel with government efforts, a number of nongovernmental organizations (NGOs) were

    working in the 1970s for rural development and poverty alleviation.However, creditwas only a

    small part of their overall programme. Theymainly perceived poverty as a consequence of the

    poors systematic disorganised relationship with the economic, social and political system.

    Awareness creation and group solidarity had been considered as a longterm solution to escape

    poverty.

    StageII(19821989):Birthofmodernmicrofinanceinstitutions

    During the1980s, rural financialmarket (RFM) inBangladeshexperienced three typesofnotable

    changes. These are (i) change in legal status and reorientation of organizational objective, (ii)

    entranceofnewtypeofbankand(iii)changeinbankownershipstructure.Thefirstchangeoccurred

    by transforming the IRDP into the BRDB (Bangladesh Rural Development Board) in 1982. The

    backgroundofthistransformationisthatalthoughtheprogrammesofIRDPwasrapidlyexpandingin

    most of the subdistricts, their role as a reliable vehicle for rural poverty alleviation through

    equitableparticipationindevelopmentwerequestionedduetothegreaterinfluencebythewealthy

    farmersatKSSlevel(Ali,1990).Asaresponsetothesecriticisms,aneffortwasmadetoreformthis

    programme.IRDPwasreconstitutedin1982asaparastatalbodyandrenamedasBRDB,3mandating

    itsroleforincomeandemploymentgenerationfortheruralpoor.

    WhilethefocusofIRDP/BRDBandBKBwasagriculture,duringthesametimealargesectionofthe

    ruralpopulation inBangladeshsuchasday labourers,traders, fishermenandwomenearnedtheir

    livelihoodfromnonagriculturesector.Theywerevirtuallylandlessandstruggledtomeettheirbasic

    humanneeds.As landwas theprimarycollateral ingettingaccess tocredit from localbanks, this

    sectionofthepopulationwasoutsideofformalbankingfacilitiesforaconsiderableperiodandwas

    trappedintoaviciouscycleofpoverty.Inordertoservethissectionofsociety,amaterialisticschool

    3 UndertheBangladeshRuralDevelopmentBoardOrdinance,1982.

  • 5

    ofthoughtemergedin1983throughtheestablishmentoftheGrameenBank4arguingthatthepoor

    needmaterialisticassistancetoimprovetheireconomicsituation.ThenewnessofGrameenBankis

    that the bank is legally mandated to provide credit facilities and other services to landless

    households in rural areas. Another change occurred when the government, as a generalmove

    towards private sector participation in economic activities, privatised two state owned banks,

    namelyPubaliandUttara, in1985.Thisdecision leftruralbranchesoftheotherfourgovernment

    ownedcommercialbanksand lonegovernmentownedagriculturalbankasdirectvehiclesforrural

    developmentthroughcredit intervention. In1986,the loneagriculturalbank,BKB,was legallysplit

    intoBKBandRAKUB(RajshahiKrishiUnnayanBank)5.The latterstartedworking inMarch1987by

    takingoverthebranchesandofficesalongwithassetsandliabilitiesofBangladeshKrishiBankwithin

    theRajshahidivision6.Thenewbanksobjective remains the samewithanexceptionof regional

    focus.Theperiodof1980salsoexperiencedthebirthofanumberofprivatebanks,knownasfirst

    generationprivatebanks.However,exceptIslamiBank,noneofthemopenedanybranchinarural

    area.Thelatterbankfirstestablishedtheprivatesectorruralbranchin1988.Theabovediscussion

    suggeststhatexceptestablishmentofGrameenBank,therewasnomajorchange inorganizational

    makeupof the rural financialmarket in the 1980s.As argued earlier, although theNGOs in the

    1980swereinclosecontactwiththepoor,theymostlyfollowedtheconscientizationapproachasa

    longtermsolutiontopoverty.However,successofGrameenBankinfluenceddevelopmentthought

    ofNGOsandanumberofbegantoreplicateGrameenBankModelonanexperimentalbasis.

    StageIII(19901996):GrowthphaseofMFIs

    Marketbasedpolicyreformandclosureofruralbankbranchnetwork

    In 1990, the Central Bank undertook a financial sector reform program under the guidance of

    development partners. This reform program deviated from the social objectives of rural bank

    branchesandemphasizedtheircommercialviability.Theysuggestedforclosureandmergersofloss

    makingbranches.Thisdecisioninfluencedstateownedbanksbranchexpansion,causedmergerand

    closuresofsomeof the lossmakingbankbranchesandsloweddown theexpansionof ruralbank

    branches inruraleconomythroughoutthe1990s.Branchexpansion inthe latterpartofthe1990s

    wasalmoststagnant.RatherruralbranchesoftheNCBs(seeChart2)marginallydeclinedduringthe

    periodof1991to2004.

    4 It was established under a special ordinance , namely Grameen Bank Ordinance 1983. 5 Presidents Ordinance No. 58, 1986 6 During that period, Bangladesh had four divisions. Other divisions were Dhaka, Chittagong and Khulna.

  • Chart2:Totalnumberofruralbankbranchesbytypesofbanks

    195020002050210021502200225023002350240024502500

    1983198419851986198719881989199019911992199319941995199619971998199920002001200220032004

    No.

    of r

    ural

    ban

    k br

    anch

    es

    0

    200

    400

    600

    800

    1000

    1200

    1400

    NCBs (left scale) Specialised banks (right scale)

    Source:BangladeshBank(2008)

    Inthesamefigure,wecanobserveamildgrowthofthenumberofagriculturalbankbranchessince

    2002while a declining trend in bank branches forNCBs can be found during the corresponding

    period.ThesetrendsemergedasagriculturalbankstookoversomeoftheruralbranchesofNCBs.

    Asmentionedearlier,prioritysectorlendingpolicywascompromisedunderfinancialsectorreform

    program forenablingacompetitive financialmarketenvironment throughanumberofmeasures

    including liberalizationof interestpolicy. As a response, rural creditdeposit ratio aswell asper

    capita ruralcreditbegan to shrinkhampering thedevelopmentactivitiesof ruraleconomywhere

    mostofthepoorliveandearntheirlivelihood(seeChart3and4).

    Chart3:Ruralcreditdepositratio

    0

    20

    40

    60

    80

    100

    120

    140

    160

    180

    Apr

    .-Jun

    .'77

    Jul-S

    ept.'

    78

    Oct

    .-Dec

    .'79

    Jan.

    -Mar

    .'81

    Apr

    .-Jun

    .'82

    Jul-S

    ept.'

    83

    Oct

    .-Dec

    .'84

    Jan.

    -Mar

    .86

    Apr

    .-Jun

    .'87

    Oct

    .-Dec

    .'88

    Apr

    .-Jun

    .'91

    Oct

    .-Dec

    .'92

    Jan.

    -Mar

    .'94

    Apr

    .-Jun

    .'95

    Jul-S

    ept.'

    96

    Oct

    .-Dec

    .'97

    Jan.

    -Mar

    .'99

    Apr

    .-Jun

    .'00

    Jul-S

    ept.'

    01

    Oct

    -Dec

    '02

    Jan.

    -Mar

    .'04

    Apr

    .-Jun

    .'05

    Jul-S

    ept.'

    06

    Rur

    al c

    redi

    t-de

    posi

    t rat

    io

    Source:BangladeshBank(2008)

    6

  • Chart4:Percapitaruraldepositandcredit

    0

    500

    1000

    1500

    2000

    2500

    1980 1990 2000 2005

    Ban

    glad

    esh

    Taka

    Per capita rural deposit Per capita rural credit

    Source:BangladeshBank(2008)

    Whenmarketbased neoclassical ideawas atwork for rural banks, this period coincidedwith a

    major shift in theparadigmofdevelopment thinking.Newparadigm consideredmicrocredit as a

    developmenttoolandrapidlyexpandedmicrocreditactivitiesintheruraleconomythroughmassive

    expansionofNGOMFIs.Khandker (1998)thereforearguesthat failureofruralbankstoreachthe

    intended lowincome households has led to the evolution of alternative credit programmes and

    institutions inBangladesh.Onthecontrary,otherauthors(Carpenter,1997;ConroyandMcGuire,

    2000) argue that lack of formal regulation and supervisory oversight resulted in rapid growth of

    sophisticatedandinnovativeMFIsinBangladesh.

    AlthoughMFIsprovideasmallamountofcreditperborrower,theseinstitutionsprovidesuchfacility

    exclusivelytothepoor,particularlylandlesshouseholds.Thisisanuprightmirrorofcreditpolicyof

    the rural formalbanking system.Theireligibilitycriteriaofficiallyexclude thenonpoor.Thisclear

    demarcation of lending policy increases credit flow to lowincome households of rural economy.

    Considering the growthofnew institutions and the sizeof their aggregate capital and asset, this

    paradigmofchangecanbearguedasastructuralchangeintheruralfinancialmarketofBangladesh.

    Chart5:GrowthofMicrofinanceInstitutions

    Cum

    ulat

    ive

    num

    ber

    Note:ThisFigurecapturesonlythoseMFIs,whichrespondedtoCDFqueryduringtheirbiannualsurveysSource:Ahmed(2005)

    7

  • StageIV(1997present):MaturedstageofMFIs

    During the matured stage, the NGOMFIs have experienced robust growth providing both

    geographical and demographic access tomicrocredit throughout the rural economy. They have

    appearedwithawiderangeofinnovativefinancialservicesincludingdiversificationoftheirproducts

    and servicesand sourcesof fund. Withinavery short spanof time, theyhaveoccupied the lion

    shareof rural financialmarketandareassumed tohave significant contribution to theequitable

    growthpathofthecountry.Recentstatusofmicrofinanceindustryanditscontributiontopropoor

    developmentarediscussedbelowinbrevity.

    OutreachofMicrofinanceServices

    MicrofinanceindustryinBangladeshhasreachedasizeablepositionasitprovidedfinancialservices

    to34.36millionclients in2011coveringalmost72percentofpoorpopulationwhile28millionof

    them are active borrowers. In the same calendar year, the industry supplied Taka 454 billion

    microcreditwithsavingsservicesofTaka140billion.The industrymaintainedrobustnesseven ina

    regulatory regime asmost of the outreach indicators such as loan outstanding per client, loan

    outstandingperborrower, loanoutstandingperbranch, savingsper client, savingsperborrower,

    andsavingsperbranchshoweddoubledigitgrowth in2011.However,some indicatorssuchasno.

    ofbranches,no.ofmembers/clientsandclientsperbranchexperiencedsomewhatslothmainlydue

    toclosureNGOMFIswhofailedtomeetnewmicrocreditregulatoryrequirements.

    Table1:OutreachofMicrofinanceParticulars 2010 2011 GrowthNo. of Branches 19134 18281 -4.46No. of Borrowers (Million) 27.83 28.00 0.61No. of Members/Clients (Million) 36.18 34.36 -5.03Loan disbursement (Billion Taka ) 383.60 454.49 18.48Loan Outstanding (Billion Taka) 246.27 289.49 17.55Member/Clients' savings (Billion Taka) 117.74 140.00 18.91No. of people below the poverty line (Million, estimated) 47.15 48.04 1.89Clients per branch 1890.87 1879.55 -0.60Borrowers per branch 1454.48 1531.64 5.31Loan outstanding per branch (Tk. Million) 12.87 15.84 23.03Savings per branch (Tk. Million) 6.15 7.66 24.45Loan outstanding per Member/Client (Tk.) 6806.80 8425.20 23.78Loan outstanding per borrower (Tk.) 8849.08 10338.93 16.84Savings per client (Tk.) 3254.28 4074.51 25.20Savings per borrower (Tk.) 4230.69 5000.00 18.18Savings-Loan ratio 47.81 48.36 1.15Microcredit coverage (% of poor population) 76.73 71.52 -6.79

    Source:CDFandINM(2010&2011)

    8

  • ProductsandservicesofMFIs

    MFIs in Bangladesh provide awider spectrum of financial services,which are created through a

    demand driven innovative process inmeeting the poors complex livelihood and heterogeneous

    needs.Theindustryprovidesdifferenttypesofsavingsproductssothatthepoorcansaveevenfora

    daywithverylittleamount.Althoughsomeoftheproductsappeartobesimilartothoseofformal

    bankingsector,theirinherentcharacteristicssuchastermsandconditions,collateralrequirements,

    size of instalment and period of repayment are in line with the economic life of the poor.

    Furthermore, livingandworking inthemarginaleconomyoftenexposethepoortodifferenttypes

    of householdspecific and environmental risks such as loss of earnings due to sickness, urgent

    medicalexpense,theft, insecureconditionofemployment,naturalhazards,andharvest failure. In

    dealing with those emergencies, MFIs provide different types of insurance services. Since

    September, 2011 they have initiatedmobile financial services as agents/partners of local banks.

    These mobile financial services include disbursement of inward foreign remittances; person to

    business payments such as utility bill payments and merchant payments; business to person

    payments suchas salarydisbursement,dividendand refundwarrantpayments,vendorpayments

    etc.; government to person payments such as elderly allowances, freedomfighter allowances,

    subsidies etc.; person to government payments such as tax, levy payments; person to person

    payments (one registered mobile account to another registered mobile account) while other

    paymentsincludemicrofinance,overdrawnfacility, insurancepremium,DPSetc.ByFebruary2013,

    14MFIshavebeengivenpermissionbyMRAtostartmobilefinancialservicesunderBankledAgent

    Modelwhere they have to sign anMOUwith commercial banks for subsequent approval from

    CentralBank. Ina furthermove,BB isgoing toexpandmobile financial servicesbyallowing loan

    disbursementandrepaymentactivitiesunderagent/partnershipagreement.

    Table2:ProductsandServicesofMFIs

    Savings Credit Insurance Others1. Regular/Compulsory savings 1. Term loan 1. Health 1. Inward foreign remittance2. Voluntary savings 2. Entrepreneurs Loan 2. Life 2. Moblie financial services3. Flexible 3. Housing Loan 3. Credit4. Daily 4. Health & sanitation 4. Property 5. Time deposit/DPS 5. Seasonal 5. Crop6. Fixed deposit 6. Education 6. Others7 Risk fund 7. Disaster

    8. Special9. Consumption

    FundcompositionofMFIs

    The NGO-MFIs maintained progressive upward trend in maintaining capital fund from various

    sources since their inception (see Chart 6). However, the dynamics of funding sources changed over

    9

  • time as they have moved from outward looking donor dependent to inward looking self-reliant

    sources. For instance, contribution of foreign sources in revolving fund (RLF) of MFIs in 1996 was

    47.90 percent, which declined to 3.82 percent by June 2011. From 2000 onward, they appear to be

    inward looking as domestic sources of financing dominated their capital portfolio. By June 2011, they

    collected 60 percent of their capital fund from clients savings, cumulative surplus and own fund

    indicating their anchor on self-reliant model. Other major sources of their capital fund are loan from

    PKSF and banks.

    Chart 6: Capital Fund of NGO-MFIs

    0

    20

    40

    60

    80

    100

    120

    140

    160

    180

    200

    2008 2009 2010 2011

    In b

    illio

    n Ta

    ka

    Source:MRA(2011)

    Chart 7: Major Components of Capital Fund

    0

    5

    10

    15

    20

    25

    30

    35

    40

    2005 Jun-08 Jun-09 Jun-10 Jun-11

    Perc

    ent Clients' savings

    Cumulative Surplus

    Loan from PKSF

    Loan from banks

    Source:MRA(2011)

    FinancialdeepeningofMicrocreditServices

    A vast theoretical and empirical literature (see Levine, 1997 for details) provides evidence that

    financialdeepeningandeconomicdevelopmentarestronglycorrelated.Economicdevelopmentof

    microfinanceservicesthereforecanbewellunderstoodbytheircontributioninfinancialdeepening,

    whichreferstoavailabilityof liquidfundforfinancingeconomicactivities.Availablestatisticsshow

    thatmicrocreditplays adominant role ineconomicdevelopment, as they constitute almost1.68

    timesofruralbankcreditbytheendof2011.Abettermeasureoffinancialdeepeningistoconsider 10

  • financial development in relation to its output. Considering concentration ofmicrocredit in rural

    economicactivities,developmentofmicrocredit inrelationtoagriculturalGDP iscomparedand is

    found thatmicrocreditagriculturalGDP ratio is gainingmomentum reaching from 25 percent in

    2007to31percentin2011.

    Table3:FinancialDeepeningofMicrocredit

    Year Microcredit (MC)

    Rural Bank credit

    Domestic credit

    Agri. GDP

    MC as % of rural bank

    credit

    MC as % of domestic credit

    MC as % of agri. GDP

    2007 234.97 134.25 1817.48 939.34 175.02 12.93 25.012008 282.97 155.67 2180.84 1052.04 181.78 12.98 26.92009 381.05 184.42 2586.76 1156.27 206.62 14.73 32.952010 383.60 232.07 3299.04 1334.55 165.29 11.62 28.742011 454.49 271.07 3905.43 1477.27 167.67 11.63 30.77

    (2007:N=535; 2008:N=612; 2009:N=744; 2010: N=772; 2011: N=694); Note: N refers to no. of NGO-MFIs

    Fig. in billion Taka

    Source:CDF&INM(2009,2010and2011)

    Allocationofmicrocreditbyeconomicactivities

    From supply-side, microcredit in Bangladesh is mainly used to finance non-farm activities (see Table

    4). However, there exists strong demand of microcredit for agricultural activities, as food security is a

    major concern for the poor. Due to the landless character of the poor, only a small part of them is

    engaged in agriculture sector as sharecroppers/tenant farmers. A survey conducted by BIDS

    (Bangladesh Institute of Development Studies) shows that roughly, 18 percent of credit disbursed by

    MFIs are employed in agriculture and agriculture related activities (see Table 4). However, some

    recent steps initiated by Central Bank such as introduction of refinancing scheme of Taka 5 billion7

    for sharecroppers and disbursement of agricultural credit by banks8 through bank-MFI linkage may

    enable the MFIs to play a bigger role in agricultural financing.

    Table4:Allocationofmicrocreditbyeconomicactivities

    N o . P u r p o se o f m ic r o c r e d it ta k e n b y p o o r h o u se h o ld sP e r c e n t o f to ta l

    lo a n1 A g ric u ltu re 1 5 .2 02 C a ttle a n d p o u ltry re a r in g 2 0 .8 73 F ish in g 2 .2 04 N u rse y 0 .1 95 T u b e w e ll in s ta llm e n t 0 .2 96 Irr ig a tio n 0 .1 97 B u s in e ss o f ra w m a te r ia ls 0 .8 08 H o u se re p a ir in g a n d b u ild in g 4 .2 99 R ic k sh a w /v a n 3 .2 3

    1 0 S tre e t v e n d o r 1 .4 01 1 P ro c e ss in g a c tiv itie s 2 .0 31 2 L a n d le a s in g 2 .0 31 3 M a rr ia g e 0 .1 71 4 F o o d a n d o th e r c o n su m e r g o o d s 0 .0 81 5 P e tty tra d e 3 6 .6 91 6 S m a ll a n d m e d iu m b u s in e ss 5 .4 91 7 O th e rs 4 .8 5- T o ta l 1 0 0 .0 0

    Source:Zohir(2001)

    7 Central Bank and BRAC, one of the largest NGO-MFI has signed an MOU in this respect. Under this scheme, BRAC will get credit at 5 percent for subsequent disbursement to sharecroppers.

    11

    8 All scheduled banks are required to disburse at least 2 percent of loan outstanding balance as 31 March of the preceding fiscal year in agriculture sector either through their own branches or through Bank-MFI linkage.

  • 12

    3.0Measuresforimprovinglegalandregulatoryarchitecture3.1PhaseI(19711989):ConventionalLaws&GrameenBankOrdinance1983Asarguedearlier,sinceindependencein1971to1989,governmentownedagriculturalbanks,state

    owned commercial banks, Grameen Bank and two cooperatives were engaged in microcredit

    activities.StateownedcommercialbanksandagriculturalbanksweremainlyregulatedbyBanking

    CompaniesOrdinance1962,directivesissuedbyCentralBankandanyinstructionfromgovernment.

    Thetwoapexcooperatives,IRDPandBSBLwereprimarilygovernedbyBengalCooperativeSocieties

    Act,1940andTheCooperativeSocietiesOrdinance,1984.However,as theywereprovidedwith

    cheapcredit facilities fromCentralBank for theirsubsequent lending to farmersand landlessday

    labourers in the rural sectorof theeconomy,CentralBanks rural creditpolicy instructionswere

    equally applicable to them as like as other rural banks. During this period, Central Bank in

    consultation with government used to determine agriculture related interest rate policy, credit

    policy, refinance policy, loan classification and provisioning policy, loan rescheduling policy for

    flood/cycloneaffectedfarmersanddifferentiatedcreditpolicyforsharecroppers,marginalfarmers

    and smallholders. Central Bank also used to fix regional as well as annual agricultural credit

    disbursementtargets,whichwereequallyapplicableforboththestateownedbanksaswellasfor

    thetwoapexcooperativesocieties.Asmentionedearlier,GrameenBankwasthe firstmicrocredit

    institute,whichwasmandatedbylawtoprovidecreditfacilitiesandotherservicestolandlesspoor

    in the rural areas. Its activities are regulated by Grameen Bank Ordinance, 1983. GB remained

    beyond the surveillanceofCentralBankuntil1997 asperClause4(3)of the saidOrdinance that

    restrictedapplicationofthethenbanking law,BankingCompaniesOrdinance,1962.However,the

    GBcameunderCentralBanksupervisionwhengovernmentappliedsection44ofBankCompanyAct,

    1991foraspecialinvestigationinlate1990s.

    Table5:PhaseI(19711989):ConventionalLaws&GrameenBankOrdinance1983

    INSTITUTIONS CONVENTIONALLAWSCooperatives(IRDP&BSBL) (i)BengalCooperativeSocietiesAct1940

    (ii)TheCooperativeSocietiesOrdinance1984

    Stateownedcommercialbanksandagriculturalbanks(BKB&RAKUB)

    (i)BankingCompaniesOrdinance1962(ii)Directives/instructionsfromGovernment(iii)Circulars/instructions/guidanceissuedbyCentralBank

    GrameenBank GrameenBankOrdinance1983NGOs (i)SocietiesRegistrationAct,1860associeties

    (ii)TrustAct,1882asTrust(iii)CompaniesAct1913(iv)CharitableandReligiousTrustAct(1920)(v)TheVoluntarySocialWelfareAgencies(Registrationand

    Control)Ordinance1961(vi)ForeignDonations(VoluntaryActivities)Regulation

    Ordinance1978

  • 13

    Asarguedearlier,afterindependencein1971,manynongovernmentalorganizations(NGOs)came

    intoexistencesuchasBrac,ProshikaandRDRS(theRangpurandDinajpurRehabilitationServices)to

    servetheruralpoorwithconscientizationapproach.Inthisapproach,longtermsolutionstopoverty

    isaddressedbyassistingthepoortochallengetheeconomic,socialandpoliticalrelationshipswhich

    impoverishthem.Throughoutthe1970s,NGOsworkedasasocialintermediationbyprovidingnon

    financialservicessuchashealth,education,waterandsanitation,trainingandskilldevelopmentand

    awarenessbuilding(Zohir,2004).SomeNGOsarguethatonlyconciousnessisnotenoughtoaddress

    theconditionsofthepoor,rathermaterialisticassistance isneededtoescape frompoverty.After

    initialsuccessofGrameenBank,materialisticbelieversbegan toexperimentwithmicrocreditasa

    smallpartoftheiroverallprogramme.SincetheNGOsusedtheirownfund,didnot involvepublic

    depositand theircreditprogrammewasnot sizeableamount, financial regulators suchasCentral

    Bank remained silent to supervise theseactivities,althoughoverallactivitiesof theseNGOswere

    guidedbyrespectivelawsunderwhichtheyhadbeenregistered.

    3.2PhaseII(19902005):ConventionallawsalongwithnonprudentialguidelinesbyPKSF

    NGOs initialexperimentwithmicrocredit in the late1980sgot immediatepositive response from

    the demand side and pushed away their sceptical view ofmicrocredit product as a strategy for

    development intervention. The balance of development thinking rapidly swung to materialistic

    school of thought by urging higher need for credit. The birth of Palli KarmaSayayak Foundation

    (PKSF),awholesalefundingagencyformicrocreditorganizations,coincidedwiththegrowingneed

    for fund. Access to seed fund from PKSF formicrocredit operations changed the landscape of

    microcreditactivitiesbyfacilitatingrapidgrowthoftheindustry.

    As a funding agency, the Foundation sets some criteria and conditions in getting access to its

    financial resources. These standards and conditions can be argued as introduction of quasi

    regulations formicrocreditactivities inBangladesh.The fundedorganization requiresmeeting the

    following criteria. The microcredit organization needs to have a legal basis for conducting its

    businessmandating it tooperatecreditprogramandborrowmoney from thegovernment, semi

    government, private and any other organizations for selfemployment and income generating

    activitiesofthelandlessandassetlesshouseholds.Thesponsoroftheorganizationshouldbesocially

    reputablewithhonest intentiontoservethepoorpeoplewhiletheorganizationrequireshavinga

    definitestructurewitha full timeChiefExecutivealongwithadequatenumberofstaffs toensure

    properimplementationofmicrocreditprogramme.Theorganizationisneededtomaintainasound

    accounting system including an information system on the details ofmicrocredit operation. The

  • 14

    Organization should have at least 400 members who are landless, assetless, likeminded and

    organized ingroupsandhavesixmonthspracticeofregularsavingsdeposit.Thegroupsshouldbe

    organizedwithinthe10kmradiusoftheprojectoffice.TheorganizationneedstohaveTaka0.20

    millionoutstanding loanatfield leveland isrequiredtomaintainaminimum loanrecoveryrateof

    98percentonacontinuousbasis.Furthermore,PKSFdevelopedanumberofothernonprudential

    guidelinesforthefundedorganizations,whicharealsoknownaspartnerorganizations(POs).These

    guidelines are as follows: (i)Guideline forAccounting; (ii) Policy for LoanClassification andDebt

    Management Reserve; (iii)Guidelines forDesigning Internal Control System for POs or PKSF; (iv)

    GuidelinesforManagementofSavings;(v)GuidelinesforManagementofServiceChargeEarnings;

    (vi)Guidelines forAvoidingOverlapping (vii)Management InformationSystem; (viii)Guidelines for

    Performance Standards and Categorization of POs; (ix) Financial RatioAnalysis; (x) Policy for the

    UtilizationofDisasterManagementFund;(xi)BusinessplanforPOs;(xii)GuidelinesforManagement

    AuditofPOs;(xiii)GuidelinesforInternalAuditofPOs;(xiv)AuditTORforExternalAuditorofPKSF

    forAuditingPKSF;(xv)AuditTORforExternalAuditorofPKSFforAuditingPOs;(xvi)AuditTORfor

    AuditorsappointedbyPOs;and(xvii)PolicyforLoansforInstitutionalDevelopment.

    Duringthesecondphase,somelawssuchastheCooperativeSocietiesOrdinance1984,Companies

    Act1913andBankingCompaniesOrdinance1962wereupdatedtotheCooperativeSocietiesAct2001,

    CompanyAct1994andBankCompanyAct1991withoutrequiringaseparatelawforsupervisingmicrocredit

    activities.ThedistantregulatoryframeworkthathadlighttouchonmicrocreditactivitiesisshowninTable6.

    Table6:RegulationsandsupervisionsofmicrocreditduringPhaseII

    INSTITUTIONS CONVENTIONALLAWSCooperatives (i)TheCooperativeSocietiesAct2001

    Stateownedcommercialbanks,agriculturalbanks(BKB&RAKUB)andBASICBankLtd

    (i)BankCompanyAct1991(ii)Directives/instructionsfromGovernment(iii)Circulars/instructions/guidanceissuedbyCentralBank

    GrameenBank GrameenBankOrdinance1983PrivateCommercialBanks (i)BankCompanyAct1991

    (ii)Circulars/instructions/guidanceissuedbyCentralBank

    NGOMFIs (i)TheSocietiesRegistrationAct,1860associeties(ii)TheTrustAct,1882asTrust(iii)CompanyAct1994(iv)CharitableandReligiousTrustAct(1920)(v)TheVoluntarySocialWelfareAgencies

    (RegistrationandControl)Ordinance1961(vi)ForeignDonations(VoluntaryActivities)Regulation

    Ordinance1978(vii)TheCooperativeSocietiesAct2001(viii)Nonprudentialguidelinesformicrocreditoperation

    developedbyPKSF

  • 15

    Sharpdecliningofforeignfundinthemid1990sputtheNGOMFIsatriskandpushthemsearchfor

    furthersourcesofdomesticfund.Althoughcollectingsavingsfromtheirclientswasassumedtobe

    themosteffectiveandeasiestwayofraisingcapitalfund,theysufferedfromthedilemmathatthe

    poorhastoo littletosave.Asnotforsure,they, inadditiontocompulsorysavings,whicharetied

    against credit, began to experiment with different kinds of financial products, which include

    voluntarysavingsofflexibleamount,differentkindsoftermdepositslikeDPS,pensionschemeetc.

    SatisfactoryresponsefromsupplysidegavetheNGOssomesortofreliefwhileonthesamescene,

    the financial regulators such as theministry of finance and theCentral Bank began to feel their

    responsibilitytosafeguardtheclientsdeposits.Ontheotherhand,regulatorydialoguesfearedthe

    NGOMFIs that any kind of regulation might substantially limit their autonomy and innovative

    activitiesbycontrollingtheirbusinessfunctions(ConroyandMcGuire,2000).

    Asafurthermoveforfinancialresources,theNGOssoughtforothersourcesofinstitutionalfunding,

    particularly from the formal banking sector, international investors, interMFI borrowings and

    securitization (Rashidet al.,2010).However, their lackof ability toprovide tangible security and

    absenceofalegalplatformtosuperviseandprotectthemoneyoffinancierputthemsomesortof

    uncomfortablesituationtodrawenoughconfidence ingettingaccesstorequired fund.Duringthe

    sametime,severalstudies(PittandKhandker,1998)providedempiricalevidenceinsupportofthe

    NGOMFIspositiveroleinpovertyreductionwhichrequiredfurtherdevelopmentofMFIsandtheir

    financingactivities.Frombothdemandsideandsupplysideperspective,regulationandsupervision

    ofMFIswereseenasanimportantnecessityfortheoverallwellbeingofallthestakeholders.Inthis

    context,theBangladeshBank,thecentralbankcommissionedastudyinDecember1997toexamine

    "theRegulatoryAspectsofMicrofinanceInstitutions(MFIs)andLinking itwiththeFormalFinancial

    Sector"(seeRashidetal.,2010and;Haque2006fordetails).Thestudywascompletedin1998and

    thetwoimportantfindingsandrecommendationswereasfollows;

    Theregulationavailableintheformofstatutoryrequirementundertheexistingbanking

    andfinanciallawswillnotcatertothespecialneedsofthissector,

    LegalrecognitionofMFIsthroughenactmentoflawisrequiredtoaccessformalsources

    offunds,sothattheycanoperateunderanagreed"Codeofnorms/Conducts"underthe

    formofspeciallicensingarrangements.

    Subsequently inthe lightoftheaboverecommendations,BangladeshBankandotherstakeholders

    alsoraisedtheissueofregulationforthissectortothegovernment.Underthesecircumstances,the

    government formed a Committee of sevenmemberswith the chairmanship of the Governor of

    BangladeshBankinOctober1999inorderto(i)recommendaneffectivecreditandsavingspolicyfor

  • 16

    this sector, (ii) ensure transparency and accountability into their activities and (iii)make some

    recommendations regarding a regulatory framework and to propose a body to regulate and

    supervisetheseinstitutions.

    This Committee prepared its report after discussing the issuewith policymakers, stakeholders,

    academiciansandothercivilsocietymembersatnational leveland finallysubmittedthereportto

    the government in March 2000. The major recommendations of the committee consist of

    suggestionsforformulatingthefollowingpoliciesandactions:

    PolicyregardingestablishmentoflinkagebetweenNGOsandformalfinancialsector

    tosolveNGOs'fundingproblem,

    Policyforloanclassification,provisioning,interestrate,reserverequirementagainst

    savings/deposit,andinvestmentofsavings/deposits,

    Legalbasistorecoverdefaultloan,

    Properdefinitionofmemberandnonmember,

    Policyforuniformaccountingstandard,internalandexternalaudit,

    FixuptheupperlimitofadministrativeexpensesofNGOs,

    Formulationofaprudentialguidelineforthemicrofinancesector,

    FormulationofperformancestandardtomonitorandratingNGOMFIs,

    Policytoremoveoverlappingproblem,

    CreationofaseparateregulatorybodyorasubsidiaryorganizationofBangladesh

    BanktoregulateNGOMicrofinanceInstitutions(NGOMFIs).

    OnthebasisoftheaboverecommendationsaUnitnamely"MicrofinanceResearchandReference

    Unit (MRRU)"was established in Bangladesh Bank under the supervision of a National Steering

    Committee formed in June 2000 to formulate policy guidelines to ensure transparency and

    accountabilityof this sector.TheGovernorof theBangladeshBankheaded thisCommitteealong

    with 10 other members selected from both government and private sectors. The Committee

    completedfollowingmajortasksby2005:

    DecidedthatNGOMFIsshouldnotbepermittedtoacceptdepositsfromthenonmember/

    generalpublicandcirculatedthisinformationamongthestakeholders.

    Preparedasetofguidelinessuchasaccountingmanual,reportingformat,guidelines

    forAuditors,etc.andhadtakenstepstoimplementthose.

    Communicatedwithnear about1000NGOMFIsworking indifferentareasof the country

    under various legal systems tomake them aware about governments intention to bring

    themunderasinglelegalumbrella.

  • Collectedinformationfromthemabouttheiroperationsandtrainedthemmostlyonhowto

    preparefinancialstatements,importanceofreporting,etc.

    Preparedadraft structureof a legal framework after consulting the issuewith the sector

    representatives.Thedraftlawsuggestedforanindependentregulatoryauthoritythatwould

    beresponsibleforprovidinglicensetotheMFIsandmonitoringtheiractivities.

    3.3PhaseIII(2006present):Conventionallawsalongwith(i)MRAAct,2006(ii)MRARules,2010and(iii)MRADirectives/Guidelines

    Recommendations of National Steering Committee in 2005 culminated a separate Microcredit

    Regulatory Act 2006, which enabled to establish a regulatory authority, namely Microcredit

    Regulatory Authority (MRA). This authority is the formal regulatory and supervisory body of

    microfinanceinstitutionsinBangladesh.

    In the new phase of regulation and supervision,microfinance activities in Bangladesh are now

    governedbyfourregulatoryauthorities,whichare:(i)MinistryofFinance(ii)BangladeshBank(iii)

    MinistryofLocalGovernment,RuralDevelopmentandCooperativesand(iv)MicrocreditRegulatory

    Authority.On behalf of the government, theMinistry of Finance coordinates the activities of all

    other regulatory authorities. The overall legal structure of rural financial market system in

    BangladeshisshowninChart8.

    Chart8:RuralFinancialMarketofBangladesh

    Source:Author

    17

  • 18

    However,aftertheenactmentofthenewMicrocreditRegulatoryAct2006,MRAhasemergedasthe

    mainregulator inregulatingandsupervisingmicrofinance industry inBangladesh.AsonDecember

    2011,NGOMFIsthatareundertheregulationofMRAconstitute84percentofmicrocreditbranches

    and 72 percent of active members/clients of the industry while Grameen Bank constitutes 14

    percentofmicrocreditbranchesand24percentofactivemembers/clients.Restofthissectionhas

    thereforeconcentratedondifferentprovisionsof thenewmicrocreditActalongwithMicrocredit

    Regulatory Authority Rules 2010 followed by the experience of the new regulation. All

    directives/instructionsissuedbythenewAuthorityhavebeenattachedintheAppendix.

    3.3.1ImportantProvisionsofMicrocreditRegulatoryAct2006

    The Act facilitated establishment of a new regulatory authority, namelyMicrocredit Regulatory

    Authority,whichisentrustedwiththefollowingmajorresponsibilities:

    licensing,

    supervision,

    policyformulation,

    andauditingtheaccountsofmicrocreditorganizationsattherequestoffinancingagency.

    Byvirtueofposition,GovernorofCentralBank,i.e.,BangladeshBankistheChairmanoftheBoardof

    DirectorsoftheAuthority.However,themajorprovisionsoftheActforthemicrocreditinstitutions

    areasfollows:

    Licensing

    MicrocreditoperationisrestrictedwithoutobtaininglicensefromtheAuthority

    Asaprimary condition forobtaining license,microcreditorganization requires registration

    underoneofthefollowinglaws:

    (a)TheSocietiesRegistrationAct,1860

    (b)TheTrustAct,1882

    (c)TheVoluntarySocialWelfareAgencies(RegistrationandControl)Ordinance,1961

    (d)SamabayaSamityAin(cooperativesocietiesact)2001

    (e)CompanyAin(companyact)1994.

    Furthermore,amicrocreditorganizationneedstofulfilotherrequirementsasprescribedby

    theAuthority.Atpresent,suchrequirementsareasfollows:

    (i)Itneedstohaveeitherminimum1000borrowers

    or,(ii)loanoutstandingbalanceof58,000USdollar.

    AnycertificateortheownershipachievedunderMRAshallnotbetransferable,completelyto

    partiallyandanysuchtransfershallbeconsideredasvoid.

  • 19

    Thelicensedorganizationwillhavetopayannualfeesasfollows:

    SL.No. No.ofBorrowers LicenseFee(Taka) AnnualFee(Taka)

    1.

    Morethan10Lakh 5lakh 25Thousand

    2. Morethan1Lakhandup

    to10Lakh

    2Lakh 15Thousand

    3. Morethan25Thousand

    andupto1Lakh

    25Thousand 10Thousand

    4. Upto25Thousand 10Thousand 5Thousand

    TheauthorityandresponsibilityofeachlicensedmicrocreditinstitutiondefinedbythisActare:

    toprovideloansupportstopoorpeopletomakethemcomfortableandselfreliant;

    to provide advice and support to the poor people for carrying out different economic

    activities;

    acceptdepositfrommembersofthemicrocreditinstitution;

    openaccountforofferingmicrocredit

    receiveloanorgrantfrombanksoranyothersourcesfordevelopingfunds;

    investthesurplusfund,ifany,insectorsapprovedbytheAuthority;

    receiveservicechargeforthecreditservicesintheratetobedeterminedbytheAuthority

    offer different types of insurance services and other social developmentoriented loan

    facilitiesfortheloanrecipientsandmembersoftheirfamilies.

    withouttheapprovaloftheAuthority,microcreditinstitutionisprohibitedtoundertakeany

    programorenterintoanytransactioncontrarytotheprovisionorobjectivesofthisAct.

    ReservedFundandSurplusIncome:

    Everymicro credit institution requiresdevelopingaReservedFundusing10percentof its

    incomesurplusandneedstobemaintainedinabankaccountofaspecifiedscheduledbank.

    After depositing 10 percent of the surplus income to the Reserve Fund account, the

    remainingamountmaybeutilized formicrocreditactivitiesandotherprogramsrelatingto

    alleviationofclientspoverty.

    Investigationincasesofsuspiciousactivities

    If it appears before theAuthority or it has reasons to believe that any person is running

    microcredit program defying any provision of this Act, the Authority or any official

    authorizedbytheAuthority

  • 20

    (a) Can order him/her (suspected offender) to furnish any information, document,

    paper,accountsandrecordsunderhiscontrolwithinthetimeframespecifiedforsuch

    purpose;and

    (b)Can carryout searchesand seize relevantdocuments, files,books,accountsand

    recordsenteringintoanypremisefromwheresuchactivitiesarebeingrun.

    Authority for framing rules formicro credit institutions:TheActhasempoweredMRA to frame

    rulesparticularlyonfollowingmatters:

    ReserveFundofmicrocreditinstitutionandconditionforitsoperation;

    Necessaryconditionsforrunningmicrocreditprogrambythemicrocreditinstitution;

    Conditionforinvestmentinsmalltradingwithsmallcapitalandcottageindustry;

    Conditionsforspendingpartoftheincomeofthemicrocreditinstitutiontoachievethegoals

    andobjectivesofthemicrocreditinstitution;

    Carryingoutactivitiesintheareaasspecifiedinthecertificate;

    Internalauditingandaccountingpolicyandstandards;

    Preservationoffiles,documentsandrecords;

    Descriptions,reportsandreturnstobesubmitted;

    Limitofmicrocreditprogram;

    Procedurestobefollowedforcarryingoutprogramsinanefficientandtransparentmanner;

    Controllingheadsofexpenditures;

    Rightsandresponsibilitiesofmembersofmicrocreditinstitutions;

    Collectionandpreservationofdeposits;

    Utilizationofprofitearned;

    Qualification/criterion,appointmentandsalariesallowancesofchiefexecutiveofficersof

    microcreditinstitutions;

    Provisionagainstloansanctionedandwritingoffloans;and

    Inspection,investigationandauditingofmicrocreditorganization.

    3.3.2MicrocreditRegulatoryAuthorityRules,2010

    Inaccordancewiththepowerdelegatedundertheclause51(1)andmattersrelatingtoclause51(2)

    ofMRAAct,2006,theAuthorityhaspromulgatedsomeRulesinthefollowingmatters.

    License issuing procedure, conditions for license issue,matters relating to its suspension,

    withdrawalandcancellation.

  • 21

    Formation and functions of General Body of microcredit organization, formation and

    functionsofCouncilofDirectors,appointmentofChiefExecutiveOfficerandrestrictionsfor

    holdingthepostofChairmanandCEOofmicrocreditorganizationsimultaneously

    Assetmanagementandmaintenanceofaccounts

    Rightsanddutiesoftheclients

    SourcesofFund, restrictionsonusesofFund,developmentofReserveFundandusageof

    SurplusIncome

    Inspection,investigationandauditoftheactivitiesofMicrocreditOrganization

    Heads of Income and Expenditure, General Rules in preparation of Financial Statements,

    internalandexternalauditofaccounts

    Disbursementandrealizationofmicrocreditloans

    Servicechargesonloans

    Collection,returnandwithdrawalofdepositandfixationofinterestrateondeposit

    UsageofdepositFundsandmaintenanceofliquidity

    Inspection,investigationandauditoftheactivitiesofmicrocreditorganization

    Classificationofloansandprovisioning

    RulesforUseofDepositFundsandMaintenanceofLiquidity

    Every Microcredit Organization must maintain 15 percent liquid fund of its entire

    compulsory,voluntaryandtermdepositinthesavingsaccountofascheduledbank.

    Liquidity fund may be maintained in the form of minimum 5 percent in cash and the

    remainingportionasfixeddeposit.

    Microcreditorganizationsarerestrictedtotakeanyloansagainstthesaidfixeddeposit.

    Furthermore,theyarenotallowedtousethedepositfundforpurchaseofanymoveableor

    immovableassetortomeetanyexpenses.

    RulesforClassificationofLoansandProvisioning

    The Microcredit Organization is required to classify loans as Regular, Watchful, Sub

    standard,DoubtfulandBadLoanonanannualbasis.

    (ii)Afterclassifyingloansasmentionedinsubclause(i),theMicrocreditOrganizationneeds

  • 22

    tomaintainprovisionatthefollowingrates:

    LoanClassification No.ofDaysOutstanding RateofProvisionagainst

    PrincipalamountRegular Loanswithnooverdueinstalments 1%

    Watchful Loandefaultbetween1and30days 5%

    Substandard Loandefaultbetween31and180days 25%

    Doubtful Loandefaultbetween181and365days 75%

    BadLoan Loandefaultabove365days 100%

    TheMicrocreditOrganizationsarerequiredtoclassifyloansandmaintainbaddebtprovision

    onthebasisofloansoutstandingasonJune30andDecember31everyyear.

    RulesforInspection,InvestigationandAuditoftheActivitiesofMicrocreditOrganization

    The Authority may inspect any Microcredit Organization at any time and audit and

    investigateitsrecordsandinformation

    IfspecificcomplaintsarereceivedagainstanyMicrocreditOrganization,theAuthoritymay,

    after inspectionof thesaidorganization,undertakeor instructadditional investigationand

    specialauditprogramsdependinguponthegravityofsuchcomplaint.

    RulesforCorporateGovernanceofMFIs

    Each microcredit organization requires having a General Body as well as a Council of

    Directors.

    ThesizeofGeneralBodyis1531memberswhowillbenominatedamongtheentrepreneurs

    oftheconcernedorganization.

    TheGeneralBody isthehighest levelpolicymakingauthorityas itwillfinalizeandapprove

    theorganizationspolicies,budgetandauditedaccounts.

    TheCouncilofDirectorswillbe510memberselected from themembersof theGeneral

    BodywhereaChairmanwillbeelectedfromthemembersoftheCouncilofDirectors.

    TheCouncilofDirectorsisresponsibleforformulatingpoliciesandpreparingbudgetforthe

    operationofmicrocreditactivities.

    Women empowerment is embedded in the governance structure by compelling both the

    GeneralBodyandtheCouncilofDirectorstohaveatleasttwofemalemembers.

    RulesforSourcesofFund

    Minimumcapitalrequirementoraspecifiedcapitaladequacyratioforamicrocreditinstituteisnot

    clearly stated neither in the Act nor in the rules, although the sources of fund formicrocredit

    organizationarementionedasfollows:

  • 23

    GrantsreceivedfromthemembersoftheGeneralBodyunderawelldefinedcontract;

    Approved national or international grant having clear documentary proof and the

    organizationwillingtoacceptsuchgrantmustberegisteredwiththeBureauofNGOAffairs;

    DepositsreceivedfromtheClients;

    Loansobtainedunderofficialcontractsfromlegallyrecognizedlocalfinancialinstitutionsand

    organizations;

    Loans from foreign sources subject topermissionobtained from the relevant government

    agencies;

    Funds received through securitization from recognized financial institutions subject to

    permissionfromtheAuthority;

    FundsreceivedthecapitalmarketsubjecttopermissionfromtheAuthority;

    LoansobtainedfromapersonotherthantheClientunderawelldefinedcontract.

    However,the loansmustnotcarryan interestratehigherthanthe interestratepayableto

    ClientsandDepositorsontheircompulsorydeposits.

    Thepersonfromwhom loan isobtainedmustnotbeparent,child,spouseorsiblingofany

    employeeoftheMicrocreditOrganization.

    ConditionsforDeposit

    Themicrocreditorganizationmayreceivecompulsorydeposit,voluntarydepositandtermdeposit.

    However,thetotaldepositbalanceofanymicrocreditorganizationwillnotexceed80percentofthe

    principalloanoutstandingatanygivetime.Otherconditionsareasfollows.

    Conditions forCompulsoryDeposit: Itneeds tobe collected at auniform rate subject to

    unanimousagreementbytheclientsofthesamity(association).

    Conditions for Voluntary Deposit: The microcredit organization may collect voluntary

    depositsubjecttothefollowingtermsandconditions:

    The organization must have a minimum of 5 years of experience in conducting

    microcreditoperation

    Itshouldruntheoperationprofitablyforthelast3years

    Accumulated loan recovery ratemustbeat least95percentandcurrent loan recovery

    ratemustbeatleast90percentduringthepast5years

    Itmustmaintain15percentliquidityfundwhereminimum5percentwillbeincash

    Thetotalvoluntarydepositwillnotbemorethan25percentofthetotalcapital.

  • 24

    Conditions forTermDeposit:Themicrocreditorganizationmay collect termdeposit from

    theclientssubjecttothefollowingtermsandconditions:

    The organization must have a minimum of 10 years of experience in conducting

    microcreditoperation

    Itshouldhavedocumentaryevidenceof running theoperationprofitably for the last5

    years

    Collectionofloansduringthepast10yearsmustbeatleast95percentforaccumulated

    loansand90percentforcurrentloans

    Itmustmaintain15percentliquidityfundwhereminimum5percentwillbeincash

    Thetotaltermdepositwillnotbemorethan25percentofthetotalcapital.

    OtherImportantRules

    The microcredit organization may offer loans to the members of the Samity, either

    individuallyorcollectivelyasagroup

    Thesizeofmicroenterprise loanswillnotbegreaterthanhalfthesizeofthetotal loan

    portfolioatanygiventime

    Loans extended to the members may be realized in weekly, fortnightly or monthly

    instalments

    Discriminatory servicechargescannotbeapplied todifferentclientsof themicrocredit

    organizationbelongingtothesametypeandobtainingloansforsimilarpurposes.

    The fundsofmicrocreditorganizationwillnotbeusable foranypurposeother than its

    operational activities specified under the rules and regulations and specified heads of

    expenditure

    Themicrocreditorganizationwillnotfundlongtermassetswithshorttermliabilities

    Atleast70percentoftheclientsmustbeborrowers

    Themicrocreditorganizationwillpublishtheproceduresof itsfinancialmanagementof

    BadDebtReserves,loanclassification,loanwriteoffetc.inaccordancewiththeRules

    In caseof closureof themicrocreditorganization, thedepositorswillhave thehighest

    priorityinthesettlementofclaims.

    RulesforServiceChargeonLoans

    ServicechargeneedstobesetonthebasisofdirectivesissuedbyAuthority

    Asperdirectiveno.5of2010,maximumchargeableamountfromtheclientagainstloan

    processingisTaka15

    Minimumgraceperiodbetweenthedateofloandisbursementandtherepaymentofthe

    firstinstalmentis15days

  • 25

    Theminimumnumberofinstalmentsforanaverageloanwouldbe50

    Atthetimeofdisbursementoftheloannoupfrontdeductionscanbemadefromthe

    loanamountagainstcompulsorysavings,insuranceorunderanyothername.

    Aminimuminterestof6.00percentperannumneedstobepaidontheweeklyamount

    collectedformandatorysavings

    InterestshouldbecalculatedonaDecliningBalanceMethod

    Initiallythemaximuminterestratetobechargedfromtheclientshasbeensetat27

    percentperannum.However,MFIsneedtobegraduallybringingtheratedownwith

    operationalefficiency.

    MRAwillcategorizetheMFIs

    RulesfordeterminationofInterestRateonDeposit

    TheMicrocreditOrganizationwillsettheinterestrateondepositbytheClientsconsistent

    withthemaximumannualServiceChargeapplicabletomicrocreditloans.

    EveryMicrocreditOrganizationmustdeclaretheapplicablerateofinterestondepositsin

    advanceandmustnotpayinterestatalesserrateunderanycircumstances.

    Monthlyinterestwillbecalculatedonaveragebalancedeterminedonthebasisofbalances

    ofthedepositatthebeginningandendofeverymonth.

    RulesforDepositorsSafetyFund(DSF)

    In2013,themicrocreditregulatorhasfinalizedaruletitledDepositorsSafetyFund(DSF)Ruleunder

    section19ofMRAAct2006tosetupandmanageafund,whichwillprotectandsecurethedeposits

    mobilised byMFIs from its clients including the poormember.Main features of this rule are as

    follows.

    AfundworthTaka300millionwillberaisedwithinthenext6years

    Shareofgovernment in the fundwillbeTaka50millionwhile the restwillbecollectedas

    premiumpaidbythelincensedMFIs

    RiskbasedpremiumpolicywillbeadoptedbyclassifyingtheMFIsinto4riskcategoriessuch

    asA,B,CandDwhileAcategorybelongstothe leastriskyorganization followedbyother

    categories. Premium against deposit amountwill be charged at 0.06%, 0.10%, 0.20% and

    0.30%respectively.

    Trusteesofatrusteeboardwilloperatethisfund.

    Underthefund,adepositorislikelytogetuptoTk3,500incoverage,ifanMFIgoesoutof

    business.Theamountofcoveragewillprovidesecurity to80percentofdepositors in the

    microfinancesector

  • 26

    3.3.3ExperienceofMRAAct2006

    InstitutionalGrowtheffect

    ThenewMicroCreditRegulationAct2006,undersection15,prohibitsmicrocreditorganizationsto

    runanymicrocreditprogramwithout thecertificateof theAuthority.Thecriteria,amongothers,

    attached to the licensing requirement is that amicro credit organization needs to have either

    minimum 1000 borrowers or outstanding loan balance of US dollar 58,000. Since obtaining

    certificaterequiresmeetingsomeconditionsandcriteria,itcanbereasonablypresumethattheAct

    may injecta temporary shock togrowthof themicrofinance institutions,although the industry is

    expected to be more stable. However, counter factual or benchmark scenario is essential to

    understand the impact of regulation. We argue that if this newAct had not been enacted, the

    industrywouldhave followed itsnatural trend.As theActhasbeen introduced in2006,wehave

    takenmean growth rateof industry variablesof thepreceding two years as counter factual and

    argue thatwithout thenewAct, the variableswouldhave followed thebenchmark levelgrowth.

    FromtheTable7,wecanseethatmeangrowthrateofNGOMFIsbeforetheActwas34.96percent

    whilethenumberofNGOMFIsshrunk inthesubsequenttwoyearsshowinganegativegrowthof

    morethan30percent.Theseresultsseemtoberathermoreconservativeconsideringthelicensing

    figuresofMRA.AfterestablishmentoftheAuthority in2006, itreceived4241applicationsseeking

    licensing permission formicrocredit operation.However, byAugust 2012, theAuthority declined

    3380 applications, i.e., 80 percent of total applications as they failed to meet regulatory

    requirementswhilelicensehasbeenissuedagainst651NGOMFIsandrestofthe5percentarekept

    under potential category.However, industry seems to have absorbed this shock showing a high

    positivetrendsinceFiscalYear2009.Similarly,outreach indicatorssuchasno.ofbranches,no.of

    clients, no. of borrowers, outstanding amount of credit and savings all have positive trend. In

    particular,growthoftwofinancialdeepeningvariablessuchascreditandsavingswerealmostclosed

    topreActperiodinFY2011showingpossibilityofanoutperformtrendintheyearstocome.

  • Table7:GrowthEffectofMRAAct2006

    GrowthaftertheMRAAct2006Particulars Meangrowth

    beforetheAct 200607 200708 200809 200910 201011

    No.ofNGOMFIs 34.96 33.70 31.06 43.00 23.15 11.63

    No.MFIbranches 41.92 5.72 31.55 11.77 2.38 4.72

    No.ofemployees 87.35 36.66 5.21 8.37 2.26 2.04

    No.ofClients 26.16 9.00 12.58 5.97 1.73 3.16

    No.ofborrowers 24.19 0.99 4.59 6.18 1.69 7.50

    Outstandingcredit(Tk.bil.) 31.64 14.19 56.84 6.27 1.32 19.85

    Savings(Tk.bil.) 26.53 0.45 70.71 6.79 1.48 23.25

    MarketConcentrationeffect

    Theoryarguesthatregulatoryinterventionisgenerallyassociatedwithmoreconcentratedindustry

    thantheinterventionfreeeraallowingmoremarketpowerinthehandsoffewerfirms.Takingthe

    advantageofmarketpower,dominant firms in the industrymay chargehigher rates indifferent

    forms for financialproducts.Asaconsequence, theoverallwelfareoutcomesof themicrofinance

    industrymaynotbebeneficialtothemasspoor.Thisunderstandingguidesustoexaminethetrend

    ofoutcome variables since theenactmentofMRAAct, 2006by applying standard concentration

    indicesC4andC8whilecorrespondingfiguresof2005areusedasbenchmarkforcomparison.Using

    C4Index we find that concentration ratios of industry outcome variables such as no. of MFI

    branches, no. of employees, no. of clients, no. of borrowers, amount of savings and amount of

    outstandingloanhavedeclinedcomparedtobenchmarkyear.Forinstance,C4Indexfornumberof

    branchesin2005was62.12,whichreducesto37.78in2011indicatingthatMFIsotherthanthebig

    fouraretakingmoreshareofthemarketbyexpandingtheirbranches.Thistrendalso impliesthat

    the new regulation provides more encouragement to nonbig firms as they responded more

    positivelycomparedtotheirrivalfirms.Otheroutcomevariablesalsofollowthesimilarpattern.

    Table8:C4ConcentrationIndex2005 2006 2007 2008 2009 2010 2011

    C4-Index C4-Index C4-Index C4-Index C4-Index C4-Index C4-IndexNo. branches 54.80 49.51 60.34 48.46 40.46 40.10 37.78No. of employees 55.90 42.30 63.43 64.81 54.17 49.57 46.53No. of clients 75.77 65.32 69.01 71.43 62.70 59.30 56.30No. of borrowers 74.82 65.50 69.55 76.78 63.90 59.97 55.26Amount of savings 69.24 59.88 63.26 68.90 53.95 61.93 57.59Amount of outstanding loan 73.58 66.83 71.12 57.64 53.29 61.44 58.22

    Particulars

    27

  • ThenwetakeC8Indextounderstandthemarketconcentrationoutcomes.Wefindthatcompared

    topreregulatoryera,alltheconcentrationratiosgraduallydeclinedindicatingthatrivalfirmsofbig

    NGOs are fighting for market share. Presumably, regulation may create a competitive market

    environmentbyfacilitatingalevelplayingfieldfortheNGOMFIsinBangladesh.

    Table9:C8ConcentrationIndex

    2005 2006 2007 2008 2009 2010 2011C8-Index C8-Index C8-Index C8-Index C8-Index C8-Index C8-Index

    No. branches 61.66 55.59 66.91 54.06 45.62 45.61 43.41No. of employees 64.99 46.94 69.46 72.08 61.12 56.65 54.16No. of members 80.98 70.08 74.70 75.99 67.65 64.87 62.08No. of borrowers 80.40 70.27 75.40 81.56 69.35 66.27 61.36Amount of savings 77.79 67.29 71.78 73.55 59.07 68.13 64.68Amount of outstanding loan 80.15 72.63 77.01 61.83 58.49 68.26 65.91

    Particulars

    Performanceeffect

    We have measured performance of NGOMFIs by considering outreach indicators while the

    corresponding figuresof2005 remainas referenceperiod forpreActera.We find thatoutreach

    indicatorssuchasloanoutstandingperbranch,savingsperbranch,loanoutstandingperclient,loan

    outstandingperborrower,savingsperclient,andsavingsperborrowersignificantlyincreasedduring

    thepostActera.Forinstance,savingsperborrowerincreasedto104percentin2011fromthebase

    period2005.However,asmarketexperiencedsignificantgrowthinno.ofnewbranchesduringpost

    regulatoryera,clientsperbranchandborrowersperbranchhaveshownsometemporarymoribund

    trends.Limitationofthesefiguresisthattheydonotreflectthecompletepictureoftheindustryas

    theyarebasedonthoseNGOMFIs,whichreportedtoMRAonly.Ontheotherhand,afteradjusting

    mean savings and safety net of Taka 3500 per depositor against mean loan outstanding per

    borrower,22percentof loanperborrower remainsunsecured.Basel IIcapitalnorms forbanking

    sectorinBangladesh,i.e.,minimumcapitalforabankis10percentormoreofriskweightedasset.

    ConsideringMFIsasahigherriskcategoryandminimumcapitalrequirementof15percentofrisk

    weightedasset,anNGOMFIminimumcapitalshouldbeminimum3.3percentofitsloan

    outstandingbalance.

    28

  • Table10:Performancemeasuredbyoutreachindicators

    Particulars 2005 2006 2007 2008 2009 2010 2011Clients per branch 2434 1883 1817 1555 1475 1465 1444Borrowers per branch 1808 1413 1484 1180 1121 1113 1143Loan outstanding per branch (Tk. Million) 7.25 6.19 7.49 8.93 8.49 8.41 9.62Savings per branch (Tk. Million) 2.72 2.27 3.29 3.14 3.00 2.98 3.50Loan outstanding per client (Tk.) 2979 3285 4123 5743 5760 5737 6664Loan outstanding per borrower (Tk.) 4010 4377 5048 7571 7577 7549 8416Savings per client (Tk.) 1116 1207 1813 2021 2037 2032 2427Savings per borrower (Tk.) 1503 1609 2220 2664 2679 2674 3066Savings-Loan ratio 37.47 36.75 43.97 35.18 35.36 35.42 36.42Savings adjusted unsecured loan per borrower (Tk.) 2507 2768 2829 4907 4898 4876 5351Insurance covered per borrower (Tk.) 3500 3500 3500 3500 3500 3500 3500Percent of uninsured loan per borrower - - - 18.58 18.45 18.22 21.99

    Source:MRA(2007,2008,2009,2010,2011)

    4.0ProblemsandchallengesinregulationandsupervisionofMicrocreditinBangladesh

    RegulationandsupervisionarenewtotheAuthorityandtheNGOMFIsaswell.Becauseofthis,both

    partiesfacesomeproblemsandchallenges inthenewregulatoryenvironment,althoughnatureof

    problemsandchallengesaredifferentfromeachother.Furthermore,othersuppliersofmicrocredit

    also face some problems. Apparently,majority of the stakeholders appear to face the following

    regulatoryandsupervisorychallenges:

    Absenceofseparatemicrocreditpolicyguidelinesforscheduledbanks

    Asmentionedearlier, inBangladesh,microfinanceservicesareprovidedbyawiderangeofactors.

    Mainstakeholdersofthesector isscheduledbanksandNGOMFIs.However,there isnoseparate

    regulatoryguidelineformicrocreditasagriculturalandmicrocreditactivitiesofbanksarecurrently

    guidedby the sameprudentialnorms (seeAppendix fordetails).Asarguedearlier,microcredit is

    mainlyprovidedtolandlesshouseholdsfornonfarmactivitieswhileagriculturalcreditmayincludea

    wide variety of households ranging from rich farmers to smallholders to sharecroppers.

    Furthermore, size ofmicrocredit, its duration, collateral requirements, terms and conditions of

    repayment often substantially differ with traditional agricultural credit. Considerable difference

    between these two types of credit entails separate policy guidelines for scheduled banks in

    Bangladesh.

    29

  • 30

    Capacitybuildup

    Skilled human resource of theMFIs is one of the critical factors for effective implementation of

    microcreditregulationinBangladesh,asthenewregulationrequiresclearunderstandingofmodern

    accountingconcepts,maintenanceofdifferenttypesofaccountsand ledgers includingpreparation

    ofannualbudget,incomestatementandbalancesheet.Whilesomeofthemaretechnicalinnature,

    otherssuchasdirectivesissuedbytheAuthorityandotheragenciesrequireclearunderstandingof

    theinstructions.Asanewformalindustryhavingpeoplefrommultipledisciplines,humanresources

    need tobe trained inorder todevelop their skills in linewith thenew regulatory requirements.

    Fortunately, anew institutenamely InstituteofMicrofinance (Inm)hasbeenestablished in2006

    mandating ittomeetresearchandtrainingneedsoftheMFIs inBangladesh.Asapartofcapacity

    buildup; Inm isorganizing regular trainingprograms for the trainersofMFIsandengage themas

    resourcepersonswhileconductingtrainingforMFIsattheirheadquarterandregionaloffices.Asa

    primarysteps, Inmhas initiatedthefollowingstructuredtrainingprogramsforcapacitybuildingof

    themicrofinanceinstitutions.

    MicrofinanceOperationsandManagement

    BookKeepingandAccountingManagementforMFIs

    FinancialManagementforMFIs

    MonitoringandEvaluationofMicrofinanceProgrammeforMFIs

    ImprovingParticipatoryManagerialSkillsandManagementStyle

    EntrepreneurshipDevelopmentandBusinessPlanning

    RiskManagementforMFIs

    LegalRegulatorySystemandGovernance

    ProductDevelopmentandBusinessPlanningforMFIs

    Considering the number of MFIs and their employees, capacity development seems to be

    considerable challenging as itmay take anumberof years.Costof trainingprogramwill alsobe

    additionalburdenfortheindustry,particularlyforthefinanciallyweakNGOMFIs.

    Overlappingandoverindebtedness

    One of the main purposes of microcredit regulation and supervision is to ensure safety and

    soundness of financial system by checking financial system risk. However, over indebtedness

    through multiple borrowings may cause high default risk for the system. This is because; one

    borrowermay take credit frommultiple sources and bypass regulation by hiding his/her credit

    information.Borrowers levelover indebtednessmayultimately lead todefaultculture,whichcan

    beathreatforthesustainabilityofmicrocreditinstitutionsaswellasforthemicrofinancesystemas

  • 31

    awhole.For instance, inanumberofstudiesconductedbyPKSF, itappearsthatasegmentofthe

    poorborrowsfrommorethanonemicrocreditorganizationwithbad intention.Theyborrowfrom

    onemicrocredit organization to repay credit instalment of another one without engaging it in

    income generating activities. Thismalpracticemay lead to over indebtedness and credit default

    culture.Sincemicrocreditorganizationsdonotsharetheirclients informationwitheachother,a

    defaultborrowerhasa scope to take credit fromanothermicrocreditorganizationbyhiding this

    information. Establishment of a Credit Information Bureau for Microfinance Institutions may

    substantially address this issue. However, MRA has already initiated some dialogues with the

    stakeholders of the industry to establish a Central Microfinance Database, which will store

    informationonindividualsborrowings,businessesandpayinghabitswhilemicrofinanceinstitutions

    willhaveonlineaccesstothesystem.

    Lackofadequatestaffforsupervision

    Themost carefully conceived regulationswillbeuselessorworse if they cannotbeenforcedby

    effectivesupervision (ChristenandRosenberg,2000).Asa regulatoryauthority,MRAhasadopted

    thefollowingsupervisoryapproaches:

    Onsitesupervision

    Offsitesupervision

    SpecialInspectionbasedonCustomerComplaints

    Indoingso,theAuthorityisfacingfinancialandhumanresourceconstraint.Thisisbecausebranches

    of MFIs are widely scattered across the country and strategically located in the periphery of

    mainstreameconomy.However,considering thesizeanddistanceofMFIbranches from theMRA

    officeatDhaka,itcanbereasonablyassumethatasizeablenumberofMFIexaminersareessential

    foronsightsupervision.ChristenandRosenberg(2000)alsoarguethatgiventhegenerallysmaller

    assetbaseofMFIs,theirmuchnumberofaccounts,highdegreeofdecentralisationandthemore

    labourintensive nature of inspecting their portfolio, supervision of MFIs is likely to be more

    expensive.Ontheotherhand,financialresourcesforconductingonsiteinspectiononawiderscale

    byMRAseemstobesomewhatweakasitsfundingislimitedbygrantsfromgovernment,although

    other sources include certificate fees, annual fees paid by themicro credit organization, grants

    receivedfromanyforeigngovernment,agencyorinternationalorganizations.Giventhemarketsize

    andlocationsofthemicrocreditinstitutions,itcanbeassumedthatonsightinspectionmayheavily

    draw fiscal attention. However, introduction of eregulation and esupervision on a larger scale

    accompaniedbymobilemonitoringatborrowerslevelmaysubstantiallyreducethecostburdenfor

    bothMRAandthelicensedNGOMFIs.

  • 32

    InadequateresponseofbankstofinanceNGOMFIs

    In2005,theNGOMFIscollected16.89percentoftheircapitalfundfromcommercialbanks,which

    declinedto12.84percentbyJune2011(seeChart7fordetails),althoughitwasanticipatedbefore

    theregulationthatthenewlawmayenhancebankledborrowedfundforthelicensedMFIs.

    5.0TheWayForward

    Developmentofaliquiditymarket

    SomeMFIssuchasGrameenBankhasvoluminoussurplusfundandhasbecomeoneofthemajor

    sourcesof institutionalborrowingsforthecommercialbanks inBangladesh.Sincemainpurposeof

    theseMFIsistoprovidecreditfacilitiesforthepoorratherthaninvestingincommercialbanks,they

    cansupplytheirsurplusfundtootherMFIsthroughamarketmechanism.Inparticular,DhakaInter

    MFI BorrowingMarket (DIMBOM) can be developed under the initiative ofMRA. An electronic

    boardmanagedbyMRAwillworkasamarketmakerwhereMFIswilldeclaretheirbidaskpricesat

    thebeginningof eachworkingday. Fundmanagerof eachMFIwill have access to thisplatform

    maintainingsomeprotocolsdesignedbytheAuthority.Aftertheendofeachworkingday,MRAwill

    calculate theweightedaverageborrowing rate,whichcanbecalledasDIMBOR (Dhaka InterMFI

    BorrowingRate)andwillworkasabenchmarkforthenextworkingday.

    FinancialLiteracy

    Oneofthemainpurposesofmicrofinanceregulation istominimizetheriskoffinancialsystemby

    directing and guiding the behaviour of microfinance institutions. However, risk of over

    indebtedness,misuseoffund,misunderstandingoffinancialproductsandfearofcosteffectivenew

    technologyuseatborrower levelmayfutilethesafetyandsoundnessofmicrofinance institutions,

    whichmayinturntransmitintothefinancialsystem.Understandingthebenefitsandriskassociated

    with innovative financial products, development of numerical skills, financial management of

    microenterprise,rightsandresponsibilitiesofaborrowerhasnotonlybeneficialeffectsonthepoor

    butalso financial systemasawhole.However,very soon,CentralBankofBangladesh isgoing to

    initiate a financial literacy program using radio, television and internet aiming to reduce this

    knowledge gap. Thisprogrammaybe generic innaturewhile such literacyprogramneeds tobe

    customisedformicrofinanceusers,astheireconomicactivitiesareconsiderablydifferentfromusual

    ones.

    LinkageBankingForDepositIntermediation

    As argued earlier,MFIs in Bangladesh are legally prohibited to accept deposits from the public

    excepttheGrameenBank.Ontheotherhand,ruralspecializedbankssubstantiallyrelyonCentral

  • Banks cheap credit for their rural financingactivities. In this situation,awinwin strategy canbe

    adopted by gradually allowingMFIs tomobilise public deposit on the behalf of rural banks. The

    benefit for theMFIs is that theywill earn commission against their deposit services to the rural

    banks.On theotherhand, interactionbetween commercialbanks andMFIswillhelp todevelop

    mutualunderstanding andbuildingof institutional relationship. Thesedeposits canbe relend to

    ruraleconomy through theMFIs. In thisway,ruraldepositsmayrecycleasmicrocredit fromrural

    commercialbankstotheruralpoorthroughtheMFIs.Thecentralbankcanalsogiveclearguidelines

    or advice to the rural formal financial intermediaries to employ a certain percentage of rural

    deposits inmicrocredit. This policy can address funding problem ofMFIs and can be a potential

    source of earnings for them. On the other hand, default rate in rural banks can be reduced

    substantially.Beforelargescaleimplementationoftheidea,thiscanbetriedonexperimentalbasis

    inalimitedgeographicalspace.

    Chart9:LinkingruralbankswithMFIsthroughinstitutionalarrangement

    Credit

    Credit

    reimbursement Credit Credit

    publicdepositSavings savings

    Credit

    33

    Rural Bank Branch

    Branch Office of MFI 1

    SHGs

    SHGs

    SHGs

    Centre1

    Different sectors of the economy

    twowayflowsofpublicdepositsandwithdrawals

    Theabovemodelhas implicationforformalmoneymarketaswell.This isbecause, inBangladesh,

    themajorbanksparticularlySonali,Agrani,Janata,Rupali,Uttara,Pubali,BangladeshKrishiBankand

    RajshahiKrishiUnnayanBankhavewidernetworkintheruralsectoraswellasintheformalsector.

    WhentheywillcollectdepositthroughthebranchofficeofMFIs,onepartofdepositswillgotothe

    MFIsas credit.The restof thedeposits caneasily flow to the formalmoneymarket through the

    interbranchlinkageofindividualbanks.Thiswaythemoneycanagainflowinthedifferentbusiness

  • sectorsoftheeconomy.Eventhismoneycanplayanimportantroleintheinterbankmoneymarket

    asshowninthefollowingdiagram:

    FormalSector

    34

    Regional office Local Office Rural branch of a scheduled bank

    MFIs

    Inter-bank money market

    Credit Guarantee scheme

    InthequestionofreachingouttherestofthepoorandsustainabilityoftheMFIs,strengtheningthe

    BankMFI lending channels seems tobehighlywarranted inBangladesh.Although recently some

    effortssuchasregionalmeetingsbetweenbanksandMFIsandGovernorscallforMFIsfundfrom

    banks under Corporate Social Responsibility aremade, a CreditGuarantee Scheme under either

    CentralBankorPKSFmaybeinitiatedtoexpeditethisdevelopment.

    Mobilemonitoring

    As a part of costeffective supervision, online supervision supported by client level mobile

    monitoringmaybeintroduced.

    6.0Conclusion

    Theoreticalargumentsandempiricalresearchsuggestthataccesstofinanceforthepoorandsupply

    offundintheeconomicsectorswherethepoorliveandearntheirlivelihoodarethetwonecessary

    conditions for sustainedpoverty reduction. InBangladesh,majorityof thepoor live in ruralareas

    where theMFIsaremainly locatedand their financingactivities reachedalmostclose to twiceof

    ruralbankcredit.Therefore,mainspiritofregulationandsupervisionofMFIs inBangladesh isnot

    onlytoprovidesafetyofthepoordepositorsmoney,butalsotofinancially includetherestofthe

    poortoignitetheirlatententrepreneurialingenuitybycreatingaselfsustainableindustry.However,

    considering regulatory burden for both the industry and the Authority, soft touch supervisory

    approach can be adopted by bringing the head office ofMFIs and their selected high default

    branches under onsite supervision. Apart from eregulatory system, ebased costless offsite

    supervisionsystemaccompaniedbymobilemonitoringcanbeinitiated.Asbanksarenotadequately

    respondingtothecallofMFIs,aCreditGuaranteeSchemeundereitherPKSForCentralBankmaybe

    initiated.ItishighlylikelythatsuchaschemewillfacilitatebankcreditforMFIswhileitwillprevent

    any spill over effects from the latter sector to the earlier one. Furthermore, twoway linkage

  • 35

    betweenbanksandMFIscanbestartedonalimitedscalesothatMFIscangetaccesstofundona

    sustainablebasis.InordertoaddressshorttermoroverthenightliquidityproblemofMFIs,Dhaka

    InterMFIBorrowingMarket (DIMBOM)canbedeveloped. Inaddition,establishmentofaCentral

    Microfinance Database, initiation of customized financial literacy campaign and strengthening

    institutional capacity ofMFIsmay provide sound footing for regulation and supervision of the

    industry.

  • 36

    References

    Ahmed,S.(2004),MicrocreditinBangladesh:AchievementandChallenges,presentedatan

    InternationalConferenceonMicroFinanceinPakistan:InnovatingandMainstreaming,pp.114.

    http://www.microfinancegateway.org/gm/document

    .9.24645/22944_Microcredit_in_Banglades.pdf

    Ali,AMMS.(1990),AgriculturalCreditinBangladesh,CentreforDevelopmentResearch,

    Bangladesh,Dhaka,pp.xii+1104.

    BB(1974),AnnualReport197374,BangladeshBank,HeadOfficeDhaka,Bangladesh,pp.1125.

    BB(1978),AnnualReport,197778,BangladeshBank,HeadOfficeDhaka,Bangladesh,pp.1165.

    BB(2008),StatisticsDepartment,BangladeshBank,HeadOfficeDhaka,Bangladesh.

    BBS (2011), Report of the Household Income and Expenditure Survey 2010, Bangladesh Bureau of

    Statistics, Ministry of Planning, Government of the Peoples Republic of Bangladesh, Dhaka,

    Bangladesh.

    Carpenter,J.(1997),Bangladesh.InRegulationandSupervisionofMicrofinanceInstitutions:Case

    Studies,ed.CraigChurchill,OccasionalPaperNo.2.

    ChristenR.P.and&Rosenberg,R.(2000),TheRushtoRegulate:LegalFrameworksforMicrofinance.

    USA,CGAP.OccasionalPaper:No.4,availablehttp://www.cgap.org

    Conroy, J. and McGuire, P. (2000), The Role of Central Banks in Microfinance in Asia and the Pacific,

    Vol. 1, Overview, Asian Development Bank, Manila.

    http://www.adb.org/Documents/Books/Central_Banks_Microfinance/Overview/default.asp, 09/15/2009

    CreditandDevelopmentForum(CDF)andInstituteofMicrofinance(InM)(2009),Bangladesh

    MicrofinanceStatistics2009,Agargaon,Dhaka

    CreditandDevelopmentForum(CDF)andInstituteofMicrofinance(InM)(2010),Bangladesh

    MicrofinanceStatistics2010,Agargaon,Dhaka

    CreditandDevelopmentForum(CDF)andInstituteofMicrofinance(InM)(2011),Bangladesh

    MicrofinanceStatistics2011,Agargaon,Dhaka

    Haque,K.M.(2006),MicrofinanceinBangladesh:MajorAchievementsandNewChallenges.In

    PapersandProceedingsoftheSAARCFINANCEGovernorsSymposiumonMicrocredit,PP.1105.

    Khandker,S.R.(1998)MicroFinanceandPoverty:EvidenceUsingPanelDatafromBangladesh,

    WorldBankPolicyResearchWorkingPaperNo.2945,pp.131

    http://www.microfinancegateway.org/gm/document-.9.24645/22944_Microcredit_in_Banglades.pdfhttp://www.microfinancegateway.org/gm/document-.9.24645/22944_Microcredit_in_Banglades.pdfhttp://www.cgap.org/

  • 37

    MicroCreditRegulatoryAct(MRA)2006,ActNo.32of2006,BangladeshJatiyaSangsad,Dhaka.MRA(2007),NGOMFIsinBangladesh:AStatisticalPublication,Vol.IV,Dhaka.MRA(2008),NGOMFIsinBangladesh:AStatisticalPublication,Vol.V,Dhaka,PP.1237.MRA(2009),NGOMFIsinBangladesh:AStatisticalPublication,Vol.VI,Dhaka,PP.1246.MRA(2010),NGOMFIsinBangladesh:AStatisticalPublication,Vol.VI,Dhaka,PP.1469

    MRA(2011),NGOMFIsinBangladesh:AStatisticalPublication,Vol.111,Dhaka,pp.1209.

    MRA(2011a),MicrocreditRegulatoryAuthorityRules2010,MicrocreditRegulatoryAuthority,

    Bangladesh.

    Pitt,MarkM., and Khandker, S. R. (998), The Impact of GroupBased Credit Programs on Poor

    Households inBangladesh:Does theGenderofParticipantsMatter? JournalofPoliticalEconomy,

    Vol.106,pp.95896.

    Levine,R.(1997),FinancialDevelopmentandEconomicGrowth:ViewsandAgenda,Journalof

    EconomicPerspective,Vol.XXXV,pp.688726.

    Rashid,L,Haque,K.M.,Jamsheduzzaman,Roy,R.K.(2010),MicrofinanceRegulationsinBangladesh:

    DevelopmentandExperiences

    Zohir,S.(2004).NGOSectorinBangladesh:AnOverview,EconomicandPoliticalWeekly,Vol.39,No.

    36,pp.41094113.

    Zohir,S.(2001),BIDSstudyonPKSFMES:AnOverview;APaperpresentedinaWorkshop

    onMicrofinance,heldinBIDS,June27,Dhaka,Bangladesh.

  • 38

    Appendix

    A.AllCirculars/CircularLettersissuedbyMicrocreditRegulatoryAuthority

    MRACircularNo.01/2009:Temporarysuspensionofrecoveryofagriculturalandmicrocreditinthe

    UnionsseverelyaffectedbycycloneAila.

    MRACircularNo.2/2009:Temporary suspensionof recoveryofagriculturalandmicrocredit from

    theadverselyaffectedfamiliesintheUnionswhichwereseverelyaffectedbycycloneAila.

    MRACircularNo.3/2010:Meetingminimumcriteriawithinthetimelimitforobtaininglicense.

    MRACircularNo.4/2010:DisplayingoflicensedcopyincludinglicensenumberissuedbyMRA.

    MRACircularLetterNo.05/2010:Guidelineson InterestRate/ServiceChargeofMicrocreditand

    otherrelevantissues.

    MRACircularNo.6/2010:Actionstobetakenbymicrocreditinstitutionsforwomenempowerment.

    MRA Circular Letter No. 07/2011: Guidelines for fixation of weekly instalment for general

    microcredit.

    MRACircularLetterNo.08/2011:Refixationofgraceperiodandno.ofinstalmentsforrepaymentof

    microcredit.

    MRA Letter No. 09/2011: Instructions that need to be followed byMicrocredit Institutions as a

    complianceofMoneyLaunderingPreventionAct,2009.

    MRACircularLetterNo.12/2012:Appointmentofexternalauditorsformicrocreditinstitutions.

    MRACircularLetterNo.13/2012:Carryingoutofanyprogramotherthanmicrocredit.

    MRACircularLetterNo.14/2012:LoanClassificationandmaintenanceofloanlossprovision

    MRACircularLetterNo.15/2012:DirectivestofollowMoneyLaunderingPreventionAct,2009.

    B.BangladeshBanksCircularonLoanClassificationandProvisioningPolicy forAgriculturalandMicrocredit(BRPDCircularNo.14/2012)

    Classificationstatusforagriculturalcreditandmicrocreditinbankingsector

    OverduePeriod RateofProvisionagainstbaseforprovision

    Unclassified 5%

    Substandard 12months 5%

    Doubtful 36months 5%

    BadLoan 60months 100%

Recommended

View more >