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Saturday, February 21, 2009

Microfinance in Bangladesh: Challenges and prospects

The Daily Star ,nov 15 2006

Bangladesh micro-finance sector is regarded as the largest and most efficient in the world. We still lead the global microfinance industry both in terms of its sheer size and productivity. Several efficiency indicators are quite in favor of Bangladeshi Microfinance Institutions (MFIs). From being development partner-supported entities, increasingly the Bangladeshi MFIs are moving towards self-sufficiency through commercialization of financing sources and improving internal control mechanism. Having said that, in terms of accessing the commercial market, we are still way behind our comparables in other part of the world. It is learnt that in 2005 median MFIs sourced more than half of its financing from commercial funds, while Bangladeshi MFIs reached only one-third of the global average. The primary sources of financing for local MFIs are member's deposit and Palli-Karma Sahayak Foundation(PKSF) financing. MFIs in Bangladesh cannot offer regular deposit/savings services, hence, they have to depend primarily on forced savings which are collected as a condition for membership or for access to loan. The donor-backed PKSF financing is attractive for smaller MFIs with limited requirements and because they are yet to be able to establish their credibility for commercial borrowings. However, few analysts argue whether any kind of development support is a barrier for microfinance sector to integrate into the mainstream financial sector since MFIs are more like "working banks".

The reporting standards attract attention. Except for the larger few, most MFIs in Bangladesh do not follow international standard reporting. Calculation of delinquent loans by few MFIs remains obscure. MIS system is of utmost importance, since the granular level of operation and numbers/types of products/accounts must be accurately reconciled and reported in international standards to standardize the local MFIs with the rest of the world. Since Bangladesh is yet to have a national common identification system for its populace, possible misrepresentation in borrowers information remains a problem.

The Microfinance Information Exchange (MIX) survey (2005) reveals that eight leading Bangladeshi MFIs show the industry's strength in huge client coverage. Keeping aside big names such as Grameen Bank, BRAC and ASA, leading local MFIs serve over three times more clients as compared to the Indian MFIs. Market leaders such as Grameen Bank and ASA each added 1.3 million new borrowers in 2005. The growth rate was in line with other Asian markets, adding about 40% in new borrowers. The trends in Asia and Bangladesh are strong as compared to global growth.

As for financing sources locally, in 2005 only 20% of the loan portfolio of MFIs were funded through commercial sources; encouragingly it is 45% higher than that of 2004 numbers. BRAC has completed the World's first AAA-rated Micro-Credit Receivables Securitization; the transaction has attracted coverage from all leading international press and established a model to be replicated around the world. In the immediate past, MFIs raised financing through syndicated finance from the local market at commercial rates and terms. Talking about cost of operation, the median cost per borrower in 2005 was US$9 leading to record efficiency level for Bangladeshi MFIs, and strong productivity further leverages these low costs. And, the two Bangladeshi MFIs in the global top 10 most efficient institutions spent just over USD5 per borrower. Interestingly, the group-lending model has achieved employee productivity level 75% higher than global norms, and 50% higher than Asian norms with each employee serving over 200 borrowers in Bangladesh.

Combining the above factors, in 2005 leading local MFIs posted median return on assets of 2.6% and on equity of 10.6% after adjustments for any subsidy and provisioning. Reasons for the impressive returns being lower composition of commercial borrowing, and the group-lending model that reduces cost per borrower as compared to MFIs globally. However, as MFIs reach out for wider coverage and require more fund for their operations, they will be forced to source financing from commercial markets and the level of return will eventually come down to the level of several other countries where MFIs are more commercial market driven.

In Bangladesh, the total number of borrowers is roughly 18 million, with Grameen Bank leading the way with 6 million, and BRAC and ASA each having 5 million borrowers. The average size of the loan stands at BDT8,000, making the Bangladesh micro-finance segment a vibrant US$2.1 billion industry. The weekly village meetings and massive establishments to monitor borrowers who do not have any identification number or track record or any credible address is an enormous task. In the absence of any database, such as Credit Information Bureau (CIB) for the commercial banking sector, MFIs are to maintain their own database of micro-borrowers and the customer credit as well as social history responsibly they not only maintain credit information but also social information due to their development angle of operation. As compared to commercial banks, the operational and monitoring cost of MFIs, operating in areas where commercial banks will never provide coverage, is far greater. Despite these hard facts, the rates charged by MFIs are lower than the interest rates charged from unsecured credit cardholders by commercial banks despite their clients being "well-to-do" high-income consumer group. The myth about higher interest rate will also replenish overtime as competition increases and dependency on development-fund reduces this is inevitable.

Most convincingly, the repayment rates are above 90% for most MFIs, and for larger MFIs with proper MIS system the recovery rates are even higher. The strong process that MFIs follow in terms of Credit & collections policies, Credit underwriting process & collections process, Backend systems, Branch operations, HR systems and policies, Audit & controls, and MIS reporting are commendable and contribute significantly to the recovery of loans. If we draw comparison with banks, credit rating of few MFIs are likely to be as good as banks'. The median capital/asset ratio is over 20%, which is higher than Asian peer group figure but close to the world median. As compared to commercial banks, this is a high standard required to provide adequate capital coverage to the micro-loans extended to so-called "high risk" segment in conventional sense.

Now that Bangladesh has a Microfinance Regulatory Act 2006, we would expect uniform reporting requirements and performance assessment procedure, proper policy guidelines that would help micro-credit flourish, a central database of micro-borrowers, and active support for MFIs to become more vibrant for the greater interest of social and economic development.

Through Professor Yunus, Bangladesh has achieved its highest recognition for its pioneering role and contribution to the global micro-finance industry. Our confidence level has increased, however we have an urge to take the MFI industry to its next trajectory through comparing the local norms against international benchmarks. This is high time to increase our standards of reporting as well as processing, ensuring far wider coverage with timely recoveries, and looking into the possibility of integrating micro-finance into the mainstream financial system, and again leave footprints for others to follow



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