Bangladesh: Micro-Credit in Bangladesh Beyond Yunus
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Dhaka, Bangladesh, January, 24 2012 - The Bangladesh micro-finance sector is regarded as the largest and most efficient in the world. However, the micro-finance industry is now at a crossroads, and to take it to the next trajectory we have to increase our standards of reporting as well as processing, to ensure wider coverage with timely recovery, integrate micro-finance into the mainstream financial system and, in the process, set global standards for others to follow.
With the acts of Yunus bashing subsiding, maybe temporarily, the Bangladesh micro- credit sector seems to have taken a back seat. At least there are less of talks and less of discussion these days about micro-credit in Bangladesh. Though we didn't want this to happen, we seem to be less concerned about the future of micro-credit in Bangladesh. With the professor finding a new niche in `social business', the sector appears to be directionless too.
However, this is not what we deserve. The Bangladesh micro-finance sector is regarded as the largest and most efficient in the world. According to the Microfinance Information Exchange (MIX) analysis report on Asia, Bangladesh caters close to 24 million borrowers compared to 16 million in India and 58 million in the whole of Asia.
Bangladesh also boasts of a Gross Loan Portfolio of $2.5 billion compared to $4.7 billion for South Asia. The cost per borrower in Bangladesh is also much lower than in other Asian countries. With a population of 160 million and more than 31 per cent of them living below the poverty line, there is still large opportunity space for growth of micro credit in Bangladesh.
Microfinance Institutions (MFIs) in the country have advanced from being development partner-supported entities towards self-sufficient institutions supported by commercial financing. The majority of the loan portfolio of the MFIs is increasingly targeted towards agriculture. The present government is also very pro-poor and the central bank has directed all banks to provide credit directly to agri-business or through MFI-linkage at competitive rates. The directive was followed by a few large syndications in the market for the MFIs, for which we could be again proud of.
However, the primary sources of financing for smaller MFIs still remain to be members' deposits and Palli-Karma Sahayak Foundation (PKSF) funds. MFIs in Bangladesh cannot offer regular deposit/ savings service. Hence, they have to rely primarily on forced savings of their membership. Some analysts argue whether donor support acts as a barrier to the microfinance sector for its integration into the mainstream financial sector.
A survey titled "Microfinance Banana Skins" done in late 2009 identified the risks to the business in the light of the recent economic crisis. The survey was followed by a roundtable in Bangladesh, which concluded that the risks for Bangladesh MFIs are still comparatively lower than in India, Pakistan and some other developing countries. The three major risks identified were rising credit risks resulting from competition and lack of management information or data, eroding image, and absence of succession plan in the respective micro-finance institutions.
Credit disbursements of MFIs used to be considered risk-free because of the high recovery rate compared to banks. But the loan recovery rate has been declining worldwide in the backdrop of the global financial crisis. It has to be taken into consideration that the crisis is likely to increase credit risk due to economic slowdown.
Many microfinance clients live close to the edge and are perilously exposed to worsening economic conditions.
The economic crisis hit microfinance at a time when credit quality had already been deteriorating for reasons linked to the intensely competitive nature of the industry and a more calculating attitude to debt among borrowers. The concern is that the crisis will cause these unwelcome trends to accelerate.
Competition has led to an erosion of lending standards as lenders fight for market share and borrowers accept easy credit. This is evident from the shift from group lending to riskier individual lending. There is no clear data source to identify what the actual level of multiple borrowing for the industry or the Portfolio At Risk (Par).
Except for the larger few, most MFIs do not follow international reporting standards. Calculation of delinquent loans by few MFIs remains obscure. Monitoring borrowers who do not have any identification number or track record is a mammoth task. The MFIs are currently trying to integrate the information contained in the national ID cards but system support is quite inadequate.
In the absence of any official database, MFIs have to maintain their own records of micro-borrowers and also social information due to their development orientation. Therefore, there exists a crying need for a strong and effective databank of micro-borrowers.
The second risk identified is the eroding image of the MFIs, who used to be perceived as philanthropic institutions, but their commercial operations have raised questions about their true agenda. In reality, compared to commercial banks, the operational and monitoring costs of MFIs, working in areas where commercial banks would never provide coverage, is far greater. Surprisingly, the rates charged by MFIs are still lower than the interest rates charged from unsecured credit card holders by commercial banks.
The third but most worrisome risk relates to the depth of management in the MFI sector. Whether they be large or small, MFIs are mostly operated like a family-run business with decision-making concentrated in the hands of a key person. Historically, people with good academic and professional backgrounds have refrained from joining the industry due to skepticism about the business model and social acceptance issues. Thus, the second-tier management and/or succession planning has remained hugely underdeveloped over the years.
Now that Bangladesh has enacted the Micro-finance Regulatory Act 2006 and established a Micro-finance Regulatory Authority, we expect uniform reporting requirements and performance assessment procedure, proper policy guidelines, a central database of micro-borrowers, and active support for MFIs to become more vibrant for the greater interest of social and economic emancipation.
The micro-finance industry is now at a crossroads, and to take it to the next trajectory we have to increase our standards of reporting as well as processing, to ensure wider coverage with timely recovery, integrate micro-finance into the mainstream financial system and, in the process, set global standards for others to follow.
A few may think otherwise but the fact remains that Yunus is synonymous with micro-credit. But with his departure from the local stage, we can't afford to let loose our grip or lose focus on this very effective poverty reduction and women empowerment tool, especially in rural Bangladesh. Undeniably, BRDB or BKB model could do little with regard to synergizing rural Bangladesh. We need to nourish our micro-finance sector well and carefully as long as it works as a catalyst for `inclusive growth'. Regulators and guardians need to keep their eyes always 'on the balls'.Source: www.syminvest.com
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