Microfinance has evolved as a potent driver of financial inclusion in Bangladesh with much positive impact on poverty alleviation and other social development indicators. The microfinance industry in Bangladesh started its operations in late 1970s with the objectives of delivering micro financial services among the poor people for poverty alleviation. The industry has evolved from its initial focus on credit, disbursing standardized loan products and collecting obligatory savings to the development of diversified loan, flexible savings and other micro financial products. This sector has now attained maturity and entered into dynamic phase in terms of financial inclusion, positive impacts and sustainability.
In the microfinance sector, total loan outstanding (As on June-2014) is around TK 62,000 crore and savings worth around TK 20,000. This sector accounts for around 4.26 percent of GDP in 2013. The existing theoretical literature attributes the high success of micro finance programs in Bangladesh to peer group micro lending, high density of population, macroeconomic stability and liberal socio-political environment etc. There are four main types of institutions involved in microfinance activities in Bangladesh: (a) Grameen Bank; (b) NGO-MFIs that have received licenses from Microcredit Regularly Authority (MRA); (c) Commercial and specialized banks; (d) Government sponsored microfinance programs (e.g. through Bangladesh Rural Development Board-BRDB, Cooperative Societies and programs under different ministries of the Government). However, Grameen Bank and 10 large Microcredit Institutions (MFIs) represent near 95% market share of microfinance industry.
Salient Features of Micro Finance Program in Bangladesh
Microfinance is a broader concept than microcredit. The former includes microcredit, micro savings, micro insurance, pension and other financial products provided mainly by NGOs/MFIs among the low-income poor people. However, microcredit is the main product offered in Bangladesh. Credit services of this sector can be categorized into six broad groups: i) general microcredit for small-scale self-employment based activities, ii) microenterprise loans, iii) loans for ultra poor, iv) agricultural loans, v) seasonal loans, and vi) loans for disaster management. Loan amounts up to BDT 40,000 are generally considered as microcredit; loans above this amount are considered as microenterprise loans.
In delivery of financial services among the poor, MFIs in Bangladesh address the problems of targeting, screening, monitoring and enforcement innovatively. The problem of screening i.e. distinguishing the good (creditworthy) from the bad (not creditworthy) borrowers is resolved by MFIs through formation of groups. Since all borrowers of a group are jointly liable for each other’s loan and they know each other in almost all respects, a bad borrower has a little chance to enter into a group. The problem of monitoring is also resolved through joint liability of all members of a group as well as close supervision of MFI’s staff. Borrowers under joint liability lose right to future credit in case of a default member implying that group members monitor each other and compel debt repayments by threatening to impose social sanctions upon peers who default strategically. Though the poor have no useful physical collateral, peer pressure works as social collateral that make group members to repay loans regularly. Now MFIs conducts individual based model viz-a-viz group based model in delivery credit.
Microcredit is used mainly in off-farm income generating activities. Small business accounts for the highest share (43.02%) followed by livestock (18.11%), agriculture (12.23%), fisheries (4.91%), food processing (3.78%) and cottage industries (3.03%).
The geographical concentration of NGO-MFIs in Bangladesh is high in economically advanced region compared to that of the backward region. In June 2013, Dhaka district has shown the highest concentration as usual where more than 160 licensed NGO-MFIs have been operating while Gazipur has the second highest concentration. The lowest concentrations are observed in the four districts i.e. Chagrachari, Bandarban, Rangamati Shariatpur where less than 10 NGO-MFIs licensed from MRA have been operating.
According to the size of institutions in terms of the number of borrowers served, MFIs are grouped into four major types: very large, large, medium and small. Two of the very large MFIs, viz. BRAC & ASA and other large 4 MFIS ( TMSS, BURO, JCF and SSS) have nearly 64 % coverage of clients and control over 67 % of financial portfolios.
Although the fund composition of NGO-MFIs is shifting, total fund has increased over time. Previously donor driven NGOs are now increasingly trying to become more dependent on local fund with the decline of foreign fund, which stood only at 2.9 percent in June 2014. Savings from the clients (31.15 percent) and surplus income from microcredit operations (22.89 percent) appeared as two major sources of fund in 2014. Funds from Palli Karma Shahayak Foundation (PKSF) accounts for 21.08 percent, Government owned Wholesale Fund and the commercial banks together accounts for 24.11 percent.
Both loan outstanding per borrower and savings per member are increasing gradually in the sector. The loan outstanding per borrower has increased over the years and average growth rate of loan outstanding per borrower is around 84 percent (from Tk. 5377 in 2008 to Tk.9893 in 2014). Savings per member has also been increasing over the years. In 2008 savings per member was Tk. 1,207 and in 2014, it stands at Tk. 2,097, which is 73.7 percent higher.
Most of the NGO-MFIs' capital adequacy ratios are generally high as their repayment rate is very high, but for few of them the ratios are very low which could be a cause of concern for the sustainability of these NGOs.
Top ten MFIs have higher portfolio yield, interest rate spread, return on assets, operational self-sufficiency and financial self-sufficiency, which indicates that these top NGO-MFIs have better financial performance. The average portfolio yield of 582 NGOs ( 2008 to 2014) is 22.71 percent whereas average portfolio yield of top ten NGOs is 42.02 percent which is higher as they are bigger MFIs.
A total of 59 (11.8 percent) NGO-MFIs have negative net surplus (MRA, 2013). There are different reasons for the negative surplus, the major causes of losing are: (i) High staff salary (ii) Low repayment rate (iii) Low service charge realization (iv) High loan loss provision (LLP) (v) High depreciation charge and (vi) Poor fund management.
Microcredit Regulatory Authority (MRA) is the watchdog of microfinance industry in Bangladesh established by the Government of the Peoples' Republic of Bangladesh under the "Microcredit Regulatory Authority Act -2006" to promote and foster sustainable development of microfinance sector through creating an enabling environment for NGO-MFIs in Bangladesh. As the statutory body, MRA monitors and supervises microfinance operations of NGO-MFIs. License from the Authority is mandatory to carry out microfinance operations in Bangladesh. The number of NGO-MFIs licensed from MRA stood at 746 at the end of 2014.
Achievements of the Sector
There is a close nexus between finance and growth as many seminal imperial works reveal. Providing easy access to financial services among poor by MFIs and other institutions brings myriads benefit in Bangladesh, the birthplace of modern microfinance of the world. The positive impact of micro finance on the lives of the poor people are furnished below.
Potent Driver of Financial Inclusion for the Poor :
In Bangladesh, MFIs are the most powerful diver of financial inclusion that leads to greater asset accumulation by the poor, their ability to smooth consumption and cope with external shocks. The Bangladesh Household Income and Expenditure Survey, 2013 reveals that MFIs including Grameen Bank are the dominant sources of loans for the poor (79.38%). Now about 30 million poor, more than half of the poor are in the financial folds of MFIs. No other institution either public or private has been as successful as MFIs to reach the poor with finance that help them promote income, employment and alleviate poverty.
The amount of microfinance disbursed by MFIs is increasing fast with high recovery rate (more than 95%) in Bangladesh. Not only that the amount of annual microcredit (around BDT 270 billion) disbursed by NGO-MFIs has already outpaced the amount of annual agricultural credit (BDT 160 billion) by state owned and private banks. Obviously, micro credit has evolved the most powerful tool of financial inclusion in rural areas where more than 70% people live. Obviously, MFIs have emerged as the most strong part of rural finance creating momentum toward broadening and deepening of rural financial markets.
Micro credit for Poverty Alleviation via Promotion of Self-Employment:
MFIs have proved that micro borrowers are creditworthy who pay regularly with recovery rate more than 95 percent. In a fact, the key success of microfinance lies in addressing lack of finance faced by the poor in generation of self-employment for poverty alleviation. Microfinance provides small funds for income generating activities and thus it creates self-employment, promotes income and helps the poor to get rid out of the poverty trap. Microfinance also makes consumption smooth for the poor and helps them cope with the vulnerability stemming either from temporary lack of work or natural disasters. Microfinance programs have been able to generate self-employment for near 30 million poor households in different economic activities, off-farm activities in particular. Some studies show that the generation of self-employment is the main mechanism through which microfinance has been effective in accelerating growth of income/expenditure and alleviating poverty which is reflected in the higher labour force participation ratio among participants in microfinance programs as compared to non-participants.
A recent paper by S. R. Osmani (2013) upholds the role of microcredit in poverty dynamics in the rural areas of Bangladesh. The paper was based on the findings from the first phase survey of long-term panel surveys covering 6500 rural households in 63 districts, and it examined the factors, including the role of microfinance, that have a causal influence on poverty dynamics. The study used the dynamic adaptation of the entitlement approach for determination of contribution of micro credit. A conservative estimate was about 5 per cent – in the sense that if microcredit had not existed rural poverty would have been almost 5 per cent higher than what it was in 2010. The contribution to the reduction of extreme poverty was found to be considerably higher – about 9 per cent. Though poverty remained stubborn in Bangladesh for nearly two decades since Independence 1971, it began to decline appreciably since 1990, S. R Osmani (2013), rightly recognized the key players involved in poverty reduction in Bangladesh e.g. sustainable annual growth of GDP, strong inflows of external remittances and massive expansion of microfinance.
Promotion of Savings and Investment:
MFIs have been able to defy the perception that the poor do not save. MFIs in Bangladesh initially mobilized compulsory savings but now these institutions collect different types of savings viz-a-viz obligatory savings. The outstanding of savings of MFIs stood at about BDT 20,000 crore in June, 2014. MFIs influence the rural informal credit market through its impact on poor household’s savings and investment. MFIs help reduce the dependency of poor on the informal money market directly through the provision of microfinance and also indirectly through the scope for increased savings by poor households. Loans from MFIs supplement their own investment and bridge the consumption need in slack season. In addition to cash savings, poor household’s savings take
various forms of direct investment. The value of such investment may be substantial and it may even be higher than cash savings. MFIs are expected to contribute to accumulation of both working and fixed capital of the poor. S. R. Osmani (2013) also upholds the positive contribution of microcredit in asset accumulation by the poor. Access to microcredit was found to enhance the probability of moving up the asset ladder and to reduce the probability of falling. While this is true for both poor and non-poor households, the effect is much stronger for the poor. Most of the poor borrowers started their journey in life with fewer assets compared to poor non-borrowers. But over time they have been able to accumulate assets at a faster pace in comparison with poor non-borrowers, thereby narrowing the original gap in endowments, and access to microcredit is found to have made a positive contribution in this regard. Furthermore, faster pace of asset accumulation has not remained confined only to those borrowers who have utilized the loan productively; it has also extended to those who have used the loans mainly for consumption purposes. For the latter group, access to microcredit has helped by reducing the need for asset depletion at times of crises. It is clearly noticed that microcredit’s contribution to asset accumulation has translated itself into contribution to poverty reduction.
Empowerment of women:
In Bangladesh, recipients of microfinance are above 90% women who have been able to raise their empowerment through involvement in income generating activities. Empowerment of women includes both material and non-material benefits achieved through participation in micro credit programs. Material benefits means increase in income, nutrition, food security, health care facilities etc. Non- material benefits includes increase in power of decision-making, self-sense of honor, respect and recognition from family members and others of the society and higher mobility. Though Goetz and Gupta (1996) reveal 10 minimal impact of microfinance on empowerment of woman, many studies like Rahman (1986), Ray (1987), Zohir (1990), Rahman (1996), Mustafa et al (1996); Schular and Hashemi (1995), Hashemi, Schular and Riley (2008, 2012), Zaman (2010), Mahmud S (2000, 2004, 2011) show positive correlation between participation in microfinance and empowerment of woman.
Impacts on Human Capital Formation.
Besides micro credit programs, some MFIs conduct non-formal education, health and other social programs ( like BRAC, TMSS ) which contribute to increase in school enrollment and education of children of poor households. Most MFIs require that the members learn to sign their names. Thus MFIs have been effective in generating relevant skills and social awareness which leads to human capital formation badly needed for socio economic upliftment of the poor. (Rahman 2011; Hossain, 2010, Khandker 2010, BIDS 2012).
Employment of Large Numbers of Graduates:
MFIs do not only create self-employment for millions of the poor, these institutes also generate jobs for more than 0.19 million young gradates. The continued tired less service rendered by thousands of committed and devoted graduates across the whole of Bangladesh has contributed a lot to make the microfinance industry a success one in Bangladesh and the most viable model for financial inclusion of the poor of the globe. Based on information provided for the fiscal year 2010 by 482 NGO-MFIs, microfinance sector has created direct job opportunities for over 110,000 people; 82 percent of them are male and 18 percent are female (MRA, 2010).
Export of Bangladeshi Model of MFI:
The success of grouped based microcredit lending model among the poor in Bangladesh initiated by Nobel Peace Winner Prof. Mohammad Yunus has not confined only in the territory of Bangladesh; its wave has also reached in other developing as well as developed countries of the world creating hope of relief from poverty and social exclusion among millions of the poor. Such success has generated markets in abroad for Bangladeshi largeMFIs (e.g. BRAC, ASA) to sell their service in building MFIs.
Key Policy Options and Conclusions
To enhance the outreach in remote area and provide fast services to existing customers, MFIs need cost effective channel. In this case, mobile financial services are the best options. MFIs may establish partnerships with mobile phone operators and banks to reach the unbanked low income people. Presently some MFIsare providing only foreign remittances; other mobile financial services such as deposits, person to person’s payments may be launched.
MFIs need more funds to serve graduated clients and unbanked poor people. Enhanced supply of funds for graduated clients can be made possible by (a) raising voluntary and involuntary savings of NGOs/MFIs; (b) attracting more funds from commercial banks (c) increasing size of wholesale funds (PKSF);(d) introducing loan guarantee services (e) raising fund from capital markets (f) securitization of income receivables of MFIs. Soft funds for hard core poor may be increased through greater involvement of large MFIs and donor agencies. The present allocations for different ministries/departments of the Government in serving hard core poor must be enhanced. The fund for CSR allocated by private companies must be increased to meet various needs of hard core poor .
(3) Strengthening Supervisory Framework:
The overall strength and capacity of MRA needs to be enhanced significantly in terms of manpower, resource base, geographical outreach and rule making authority in order to make it capable of meeting all of its operational targets. Supervisory works must be streamlined towards ensuring good governance of MFIs, which is vital for financial and operational sustainability. Days are gone for soft loans funds; good governance is a must for commercial funds which needs for maintained continued growth.
To make MFIs more transparent, accountable and people oriented new measures may be taken to include representative from micro borrowers and nonpolitical highly honoured professionals having good grounding on microfinance and its mission.
(5) Diversification of Products:
MFIs must diversify financial products and innovate suitable products for extending horizontal and vertical outreach of microfinance with a view to addressing the financial needs of the poor. Such diversification will ensure viability of MFIs as well as its programs designed for poverty alleviation. All groups of the poor are likely to need financial services relating to savings, credit and insurance.
A crucial factor to attain sustainability is the application of rational interest rate. Some one argue that MFIs set high interest rate in the name of poverty alleviation and the poor people would not be able to break the vicious circle of poverty if interest rate is not lowered. This is not justified. MFIs in Bangladesh charge between 11-13 percent flat interests which is much lower than that of money lender (more than 100%) and BRI (27%) - a successful commercial MFI in Indonesia. The interest rate of MFIs is high as compared to that of commercial bank since transactions costs are higher in dealing small loans and taking financial intermediary directly to the Poor’s doorstep. Surplus generated from this operation is revealed back through the revolving fund in order to be able to serve more clients and enhance loan size. MFIs should charge such interest rate to cover operational cost with a view to achieving sustainability and attracting huge commercial funds into microfinance industry.
(7) Programs for Hard core poor:
They need supports beyond subsidized funds which includes food relief, training and health facilities. Already Grameen Bank and large MFIs have taken special programs to address the problems of hardcore poor. But well coordinated area based sufficient programs are required. Each large MFI can be given the lead role in particular economically backward area avoiding overlapping. Government support must also be continued for hardcore poor through enhanced investment in physical and social infrastructures under different Government ministries/departments, and social safety nets.
There must have a national data base covering major data of all institutions providing microfinance. This needs concerted efforts to be taken by MRA, PKSF and large MFIs. This database will ensure accountability and transparency in micro finance operations and remove the overlapping problems. MRA may do comprehensive multidimensional credit rating of all licensed NGO-MFIs and make them public regularly.
(9) Strengthening Research and Training Capability:
MFIs are facing many emerging issues that need to be addressed for smooth development of the microfinance industry. To meet the present and future challenges, it is imperative to strengthen research and training capability of MRA.
It is an established issue and fact that Microcredit opens up an opportunity for the poor and their inescapable poverty, particularly the women who have long been considered as vulnerable, oppressed and non-bankable. The innovative idea of Microcredit has proved the fact that the poor are bank-worthy and their long oppressed destiny can be changed through Microcredit. It is a common observation that the Microcredit recipients have become self-reliant and their economic solvency and family income is raised through proper utilization of loans. The Microcredit recipients, especially women, have been able to raise their social and family status through decision–making power in the family level. The idea of group work as strategy of Microcredit operation has further reinforced cohesiveness among the group members. Beyond their weekly meetings regarding repayment of the installments, group members come forward in case of any difficulty and jeopardy to help each other. The group, which has been facilitated by the NGOs, has become a crucial platform beyond meeting immediate needs related to financial borrowing. In times of crisis, group members provides substantial support for each other and as a result conflicts and quarrels among the Microcredit borrowers are less existent and they hardly face problem in paying their installments.
Apart from its immediate economic contribution, Microcredit has challenged the long practiced patriarchal value system in the society by providing women an opportunity to become self-reliant through small enterprises. The revenues that have been generated from investing Microcredit are used for better housing, sanitation and children’s education. Thus women have appeared as a real change-maker at the family and community level. It has been proved that Microcredit acts as a safeguard against gender-based discrimination and domestic violence at the family level. The byproduct of Microcredit program as its generates income and creates job opportunity for millions of young people at the village level have further established the fact that juvenile delinquency, drug addiction and many more social offences can be reduced through Microcredit.
Thus it can be concluded that the idea of Microcredit, if implemented and monitored properly, may change the many social parasitic conditions, including but not limited to poverty, unemployment, gender based discrimination, family violence and conflict. The root of many social conflicts and violence faced by the Third World Countries is poverty, which can be genuinely alleviated by providing them an opportunity to fight against their odds, which Microcredit offers. Individuals must not be blamed as passive subjects or victims of poverty, but should be considered as an active agent of social change, if appropriate opportunity, avenue and advantage are provided with. It is no longer just an idealistic envision or dream to have a fair, just and peaceful world, Microcredit, if applied and used properly, can be instrumental in achieving peace, prosperity and overall well-being of the humanity.
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