Imran 11-Main Body

8/2/2019 Imran 11-Main Body

1/66

Page | 1

Chapter-One

Introduction


2/66

Page | 2

1.1 Introduction:In recent years, microcredit, in its wider dimension known as microfinance, has become amuch favored intervention for poverty alleviation in the developing countries and leastdevelopment countries. There is scarcely a poor country and development oriented donoragency (multilateral, bilateral and private) not involved in the promotion (in one form or

other) of a microfinance program. Microfinance programs claim many achievements as itsimpact and an outside observer cannot but wonder at the range of diversity of the benefitsclaimed.

Although Bangladesh has huge potential for development, it is, for various socio-economicreasons, among the poorest countries in the world. About half of the country's populationlives below the poverty line with 80% in the rural areas. The burden of poverty fallsdisproportionately on women, who constitute half of the total population. Logically,therefore, poverty alleviation and creation of rural employment are top priorities in thedevelopment agenda of the government of Bangladesh (GOB) which has adopted a broadbased approach to poverty alleviation, emphasizing macroeconomic stability, economic

liberalization, and support for a number of government agencies and non-governmentorganizations (NGOs). Substantial progress has been made in implementing the microcreditprogram (MCP), and the scope for its efficient expansion is enormous.

Considering the significance of microfinance program in poverty alleviation in Bangladesh, Ihave selected this topic for preparing my internship report.

1.2 Objective of the Report:The objectives of this report can be divided into mainly two segments such as:

Overall Objective: The overall objective of the report is to comprehensively analyze thesuccess of microfinance in Bangladesh.

Specific Objectives: The specific objectives of this report are to -

Scrutinize the rationale for Microfinance in Bangladesh.

Analyze the development, nature & activities of MFIs in Bangladesh.

Identify the determinants of scaling-up of MF in BD.

Analyze the impacts of MF on poverty reduction, women empowerment &

others.

Determine the major issues & challenges as well as future directions of MFIs

in BD.


3/66

Page | 3

1.3 Scope of the Report:This report covers an enormous area related to microfinance in all over the world, inparticular, in Bangladesh. The scope of this report can be divided in mainly four segments asfollowing:

Regional Scope:As Bangladesh is the formal birthplace of microfinance, actually theevolution and current status of microfinance sector of Bangladesh are emphasized in thisreport. This report covers all areas of Bangladesh but especially the northern & southern partof Bangladesh where poverty is more and no. of MFIs are higher than other countries.

Periodical Scope: This report covers the period from 2000 to 2010. Besides, thereport also shows statistical & graphical information of microfinance since from theevolution of microfinance in Bangladesh.

Institutional Scope:This report considers all the MFIs (Regulated & Non-regulated)operating in Bangladesh. However, it emphasizes the main three big MFIs in Bangladesh

namely Grameen Bank, ASA and BRAC.

Analytical Scope:In this report, the historical information of the MFIs in Bangladeshis mainly presented. Many tables & graphs in this report are shown based on the time seriesanalysis and cross-sectional analysis. This report also contains the empirical results ofvarious studies done by the microfinance scholars who did their studies based on variousstatistical & microfinance models.

1.5 Methodology:This report primarily contains the secondary and published information. The major sourcesof information are the published research reports and papers, unpublished reports fromreputable organizations, data from major institutions such as PKSF, InM, MicrocreditRegulatory Authority (MRA), Grameen Bank, BRAC, ASA, some smaller but growingmicrofinance institutions, network agencies such as Credit and Development Forum (CDF),several international non-governmental organizations (NGOs) operating in the country,commercial banks, Bangladesh Bank (Central Bank) etc. The information was collectedmostly from the websites of various organizations via internet. And some information hasbeen collected from some reputed handbooks on microfinance.

Basically time series analysis and cross-sectional analysis have been done in this report tocompare the performance of the MFIs of Bangladesh. MS Word, MS Excel have been used

for these calculations, graphical presentation and overall, in preparing this report.


4/66

Page | 4

1.6 Data Limitation:A major challenge during producing this report was absence of comparable and up to datedata sets. Credit and Development Forum (CDF) used to publish a consolidated report on thesector but the latest published report presents data of 2006. Microfinance institutions also donot follow same reporting dates: some follow financial year and others calendar year.

Definitions also vary, e.g. microenterprise loan of one MFI may be considered mainstreammicrocredit in another MFI. Lack of availability of programmatic as well as financialinformation for individual financial product is a big challenge for analyzing viability ofindividual product. For example, hardcore poor and marginal/small farmers are merged withmainstream client groups in some MFIs whereas these are separate programs for others.Segregation of income and expenditure data according to product is rare. Therefore, datahave been updated and segregated wherever practicable and estimated in other cases. Anyoneshould not treat information about outreach, institutions or programs presented in this reportas exhaustive.

1.7 Organization of the Report:The organization of the report is as follows:

Chapter 1 presents very brief background about the study, objectives of the study,methodology and limitation of the report.

Chapter 2 provides the definition & characteristics microfinance, difference betweenmicrofinance & microcredit, a brief history of microfinance in the world etc.

Chapter 3 scrutinizes the rationale or need for microfinance in Bangladesh as well as itsimportance in achieving the MDGs.

Chapter 4 reflects on the historical development of microfinance sector in Bangladesh,its current status, time series analysis & other statistics of the MFIs operating inBangladesh.

Chapter 5 deals with literature review of the microfinance scholars across the world andthe results of their studies done with different methodologies.

Chapter 6 presents the main determinants/ success factors that helped microfinancebecome successful in Bangladesh.

Chapter 7 reports on impact of microfinance on poverty reduction, womenempowerment as well as other socio-economic benefits of microfinance in Bangladesh.

Chapter 8 identifies the major issues & challenges being faced by the MFIs of

Bangladesh.

Chapter 9 deals with the findings of the report & recommendations to improve thepresent condition of the microfinance sector of Bangladesh.

Appendix represents the salient features of my internship organization- Institute ofMicrofinance (InM).


5/66

Page | 5

Chapter-Two

About Microfinance &

Related Concepts


6/66

Page | 6

2.1 Definition of Microfinance:Microfinance has evolved as an economic development approach intended to benefit low-income women and men. The term refers to the provision of financial services to low-incomeclients, including the self-employed. Financial services generally include savings and credit;however, some microfinance organizations also provide insurance and payment services. In

addition to financial intermediation, many MFIs provide social intermediation services suchas group formation, development of self-confidence, and training in financial literacy andmanagement capabilities among members of a group. Thus the definition of microfinanceoften includes both financial intermediation and social intermediation. Microfinance is notsimply banking, it is a development tool.

Microfinance activities usually involve: Small loans, typically for working capital Informal appraisal of borrowers and investments Collateral substitutes, such as group guarantees or compulsory savings Access to repeat and larger loans, based on repayment performance Streamlined loan disbursement and monitoring Secure savings products.

The term microfinance is an umbrella term rather than a precise term. It encompasses a

wide array of large and small financial institutions with differing financial products offered atwidely differing interest rates, operating with different business goals, and seeking differentcustomer bases.

Microfinance refers to a variety of financial services that target low-income clients,particularly women. Microfinance is the provision offinancial services to low-income clientsor solidarity lending groups including consumers and the self-employed, who traditionally

lack access to banking and related services. More broadly, it is a movement whose object is"a world in which as many poor and near-poor households as possible have permanent accessto an appropriate range of high quality financial services, including not just credit but alsosavings, insurance, and fund transfers."

More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality and affordable financialservices offered by a range of retail providers to finance income-producing activities, buildassets, stabilize consumption, and protect against risks. These services include savings,credit, insurance, remittances, and payments, and others.

According to James Roth, Microfinance is a bit of a catch all-term. Very broadly, it refers tothe provision of financial products targeted at low-income groups. These financial servicesinclude credit, savings and insurance products. A series of neologisms has emerged from theprovision of these services, name micro-credit, micro-savings and micro-insurance.

The Canadian International Development Agency (CIDA) defines microfinance as, the

provision of a broad range of financial services to poor, low income households and micro-enterprises usually lacking access to formal financial institutions
http://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Solidarity_lendinghttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Social_movementhttp://en.wikipedia.org/wiki/Savingshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Savingshttp://en.wikipedia.org/wiki/Social_movementhttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Solidarity_lendinghttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Financial_services


7/66

Page | 7

2.2 Characteristics of Microfinance:

It is already proved by the pioneer Dr. Muhammad Yunus that, the poor who do not have anypossession to collateral at any types of sources of financial intermediaries in order to obtain alittle amount of loan are bankable indeed. These poor people are micro-entrepreneurs who

have the proven record that they are not only able to repay both the principal of the loanamount and the interest on the principal amount on time but also they can make savings anddeveloping their income generating activities. Thus microfinance gives access to financialand non-financial services to a very low income people in order to start their incomegenerating activities. The individual loans and savings of the poor clients even though very

small but have created a disciplined microfinance which has created financial products andservices that collectively have enabled the low-income people to become clients of a bankingintermediary.The characteristics of microfinance products can be stated as follows (Murray, U. and Boros,R. 2002):

Little amount of loans and savings. Short-term loan (usually up to the term of one year). Payment schedules attribute frequent installments (or frequent deposits). Installments made up from both principal and interest, which amortized in course of time. Higher interest rates on credit Application procedures are simple. Short processing periods (between the completion of the application and disbursement of

the loan). The clients who pay on time become eligible for repeat loans with higher amounts.

The use of tapered interest rates (decreasing interest rates over several loan cycles) as an

incentive to repay on time. Large size loans are less costly to the MFIs, so some lenders

provide large size loans on relatively lower rates. No collateral is required contrary to formal banking practices.

2.3Microfinance products:Since the clients of microfinance institutions (MFIs) have lower incomes and often havelimited access to other financial services, microfinance products tend to be for smallermonetary amounts than traditional financial services. These services include loans, savings,insurance, and remittances. Microloans are given for a variety of purposes, frequently formicroenterprise development. The diversity of products and services offered reflects the factthat the financial needs of individuals, households, and enterprises can change significantly

over time, especially for those who live in poverty. Because of these varied needs, andbecause of the industry's focus on the poor, microfinance institutions often use non-traditional methodologies, such as group lending or other forms of collateral not employed bythe formal financial sector.
http://www.microfinanceinfo.com/microfinance-products/http://www.microfinanceinfo.com/microfinance-products/http://www.microfinanceinfo.com/microfinance-products/http://www.microfinanceinfo.com/microfinance-products/


8/66

Page | 8

A chart is given below to illustrate the types of microfinance products used by poor people:

Figure 2.1: Types of microfinance used by poor people

Products common used in the microfinance sector today is:

Micro savingsIt is a possibility to save money without any minimum balance that allowspeople to retain money for future use or for unexpected costs. In SHGs the members save

small amounts of money, as little as a few Tk a month in a group fund. Members may borrowfrom the group fund for a variety of purposes ranging from household emergencies to schoolfees. As SHGs prove capable of managing their funds well, they may borrow from a localbank to invest in small business or farm activities.

Micro insurance It gives the entrepreneurs the opportunity to focus more on their corebusiness which drastically reduces the risk affecting their property, health or workingpossibilities. There are different types of insurance services like life insurance, propertyinsurance, health insurance and disability insurance.

Micro leasingFor entrepreneurs or small businesses who cant afford buy at full cost they

can instead lease equipment, agricultural machinery or vehicles. Often there is no limitationof minimum cost of the leased object.

Money transferA service for transferring money, mainly overseas to family or friends.Money transfers without opening current accounts are performed by a number of commercialbanks through international money transfer systems such as Western Union, Money Grametc. MFIs also use this product to serve the poor people in the villages.


9/66

Page | 9

2.4 Microfinance vs. Microcredit:In the literature, the terms microcredit and microfinance are often used interchangeably, butit is important to highlight the difference between them because both terms are oftenconfused. Sinha (1998, p.2) states microcredit refers to small loans, whereas microfinance isappropriate where NGOs and MFIs supplement the loans with other financial services

(savings, insurance, etc). Therefore microcredit is a component of microfinance in that itinvolves providing credit to the poor, but microfinance also involves additional non-creditfinancial services such as savings, insurance, pensions and payment services.

Microfinance is a form of financial development that has primarily focused on alleviatingpoverty through providing financial services to the poor. Most people think of microfinance,if at all, as being about micro-credit i.e. lending small amounts of money to the poor.Microfinance is not only this, but it also has a broader perspective which also includesinsurance, transactional services, and importantly, savings.

2.5 Microfinance Cycle:The basic premise under which all MFIs operate on is that microfinance helps to reducepoverty by giving loans to people who would otherwise not have access to loans or financialproducts. The chart below gives a basic overview of the Microfinance cycle:

Figure 2.2: Microfinance Cycle

Source: Internet
http://knol.google.com/k/-/-/uu3zq567rzpa/wwpvzp/mfi-cycle.jpg


10/66

Page | 10

The cycle starts when an MFI qualifies an individual for a small loan. The borrower mustoften prove to the MFI that they possess a skill-set or a basic plan of how they will use theMFIs money to start and sustain a small business. The businesses opened by borrowers

usually produce small mercantile products. Once a loan is repaid, the expectation is that aperson has developed a sustainable business that will eventually pull the borrower out of

poverty and will also help build the local economy. By repeating this process with multiplepeople in a village or region, the increased concentration of businesses in that village orregion will increase its total spending power. This will lead to a reduction of poverty bycreating a demand for more business that will eventually bring more commerce to thecommunity. Thus, whole villages and geographic areas will be pulled out of poverty. Themicrofinance chart above visually portrays only the basic cycle of the microfinance process.

2.5 Microfinance Clients:Typical microfinance clients are poor and low-income people that do not have access to otherformal financial institutions. Microfinance clients are often self-employed, household-basedentrepreneurs. Their diverse microenterprises include small retail shops, street vending,

artisanal manufacture, and service provision. In rural areas, micro-entrepreneurs often havesmall income-generating activities such as food processing and trade; some but far from allare farmers.

2.6 History of Microfinance in the World:Microfinance is not a new development. Some developed countries as well as developingcountries particularly in Asia have a long history of microfinance. During the eighteenth andnineteenth centuries, in number of European countries, microfinance evolved as a type of theinformal banking for the poor. Informal finance and self-help have been at the foundation ofmicrofinance in Europe. The early history of microfinance in Ireland can be traced back to

18th century. It is a history of how self-help led to financial innovation, legal backing andconductive regulation, and creating a mass microfinance movement. But the unpleasantregulations promoted by commercial banking brought it down. The so-called Irish loan fundsappeared in early eighteenth as charities, initially financed from donated resources andoffering interest free loans. They were soon replaced by financial intermediation betweensavers and borrowers. Loans were granted on short-term basis and installments werescheduled on weekly basis. To enforce the repayment, monitoring process was used (SeibelHans D. October, 2005).

Though Professor Dr. Muhammad Yunus and his established Grameen Bank was awardedequally 2006s Nobel Peace prize for their efforts to create economic and social

development from below by providing the first microfinancing to the poor in Bangladesh;knowledge of microcredit has come a long way according to the world history.

Shore bank was the first microfinance and community development bank founded 1974 inChicago. During the mid of 1800s the theorist Lysander Spooner was writing the benefitsfrom small credits to the entrepreneurs and farmers to get the people out of poverty. But itwas at the end of World War II with the Marshall plan the concept had a big impact. Arenowned economical historian Timothy Guinnane at Yale has been doing some research on


11/66

Page | 11

Friedrich Wilhelm Raiffeisens village bank movement in Germany. The bank was foundedin 1864 and had reached 2 million rural farmers by the year 1901. The research means that itwas already proved at that time; microcredit could pass the two tests - concerning peoplespayback moral and the possibility to provide the financial service to the poor. Anotherorganization in Quebec named The Caisse Populaire movement grounded by Alphone and

Dorimne Desjardins, which was also concerned about the poverty, and passed microcreditsthose two tests. They founded the first Caisse between 1900 and 1906 and in order to governthem they passed a law in the Quebec assembly; they risked their private assets andconsequently they must have been very sure about the idea of microcredit.

But todays use of microfinancing term and modern microfinancing shaping has roots in the

1970s by the microfinance pioneer Dr. Muhammad Yunus and his established Grameen Bankin Bangladesh. A new wave of microfinance initiatives introduced many new innovationsinto the sector at that time, many experiment began to the poor with loan by many pioneeringenterprises. The fact was revealed from the experimental programs that, the poor people canbe relied on repay their borrowed amount and thus made possible to provide financial

services to the poor people through market based enterprises without subsidy and that is themain reason why microfinancing was dated to the 1970s (Microfinance news andinformation).

The evolution of microcredit programs for the poor in Bangladesh was embedded from anexperimental project, which was first tried by the father of microfinance Dr. MuhammadYunus in 1976. According to Shahidur R. Khandker (1998), the project was a test whetherthe poor were creditworthy and whether the credit could be provided without physicalcollateral. Later on, Yunuss project was supported with the assistance of the central bank of

Bangladesh and fund provider IFAD. The project became successful almost seven years ofexperimentation and thus Yunus established The Grameen Bank in 1983.

In 1972, BRAC established in Bangladesh as a charitable organization with a view to helprelocate households displaced during the 1971 liberation war against Pakistan. F.H Abed, thefounder of BRAC experienced that the relief work is inadequate to alleviate poverty in thecountry since he understood the causes of rural poverty. Therefore he developed BRAC as aframework for poverty alleviation. Then the government of Bangladesh launched a group-based targeted credit approach based on the Comilla model by following the examples ofGrameen Bank and BRAC. Later on, Comilla model was adapted throughout the nation aspart of the Integrated Rural Development Program (IRDP), which was replaced by the nameof Bangladesh Rural Development Board (BRDB) in 1982 under the Ministry of LocalGovernment, Rural Development and Cooperatives as a semiautonomous governmentagency. In order to increase the income and employment opportunities for the rural poor,BRDB primarily focused on both for mens and womens skills development, training in

group leadership and management, access to credit and savings mobilization, etc. Finally,this program was strengthened in 1988 by the Canadian International Development Agencys(CIDA) fund and renamed as the Rural Development Project- 12 (RD-12). Besides followingthe small group delivery approach of Grameen Bank, RD-12 also adopted BRACs skilldevelopment approach for promoting productivity of the poor (Shahidur, R. Khandker 1998).


12/66

Page | 12

2.7 DEFINITIONS AND KEY CONCEPTS

Micro finance Institutions (MFIs):A microfinance institution is an organization, engaged in extending micro credit loans andother financial services to poor borrowers for income generating and self employmentactivities. An MFI is usually not a part of the formal banking industry or government. It isusually referred to as a NGO (Non-Government Organization).

Empowerment:Empowerment refers to increasing the spiritual, political, social and economic strength ofindividuals and communities. It indicates the expression of self-strength, control, self-power,self reliance, freedom of choice and life of dignity, in accordance with ones values, capable of fighting for ones rights, independence, own decision making, being free, awakening, andcapability.

Economic empowerment:

In our research, we have also emphasized on economic empowerment. As a consequence ofeconomic empowerment, income, savings, employment and self-employment increases andthus reducing unemployment and indebtedness.

Social Empowerment:Social empowerment refers mainly to the literacy rate and social awareness, especially ofwomen who are much oppressed in many parts of the developing countries. We can say, ingeneral, that is related to the participation of people in different community and politicalinstitutions, mobility and decision-making power, access to safe drinking water andsanitation coverage.

Poverty:Poverty is a condition in which a person of community is deprived of the basic essentials andnecessities for a minimum standard of living.

Extreme Poverty/Absolute Poverty:Extreme poverty is the most severe state of poverty, where people cannot meet their basicneeds for survival, such as food, water, clothing, shelter, sanitation, education and healthcare.

Moderate poverty:It indicates the condition where people earns about $ 1 to $2 a day, which enables households

to just barely meet their basic needs, but they still have go for many of the other things education, health carethat many of us take for granted.

Relative Poverty:It means that a household has an income below the national average income.


13/66

Page | 13

Chapter-Three

Rationale for Microfinance

in Bangladesh


14/66

Page | 14

3.1 Need for Microfinance in Bangladesh:

Shahidur R. Khandker (1998) describes that providing the poor with access to financialservices is one of the many ways to help increase their incomes and productivity. In manycountries, however, traditional financial institutions have failed to provide this service

(Adams, Graham, and Von Pischke 1984; Braverman and Guasch 1986, 1989; Hoff andStiglitz 1990; World Bank 1975, 1993) and cooperative programs have been developed to fillthis gap. Their purpose is to help the poor become self-employed and thus escape poverty.Many of these programs provide credit using social mechanisms, such as group-basedlending, to reach the poor and other clients, including women, who lack access to formalfinancial institutions (Huppi and Feder 1990; Von Pischke, Adams, and Donald 1983; Yaron1994). With increasing assistance from the World Bank and other donors, microfinance isemerging as an instrument for reducing poverty and improving the Poors access to financial

services in low-income countries (World Bank 1990; Binswanger and Landell-Mills 1995).

Shahidur R. Khandker (1998) also pointed out by illustrating as- Poverty is often the result of

low economic growth, high population growth, and extremely unequal distribution ofresources. The proximate determinants of poverty are unemployment and the lowproductivity of the poor. When poverty results from unemployment, reducing povertyrequires creating jobs; when poverty results from low productivity and low income, reducingpoverty requires investing in human and physical capital to increase workers productivity.

In many countries, such as Bangladesh, poverty is caused by lack of both physical andhuman capital. Consequently, the best way to reduce poverty is to deal with both problems:increasing productivity by creating employment and developing human capital. Lack ofsavings and capital make it difficult for many poor people who want jobs in the farm andnon-farm sectors to become self-employed and to undertake productive employment-

generating activities. Providing credit seems to be a way to generate self-employmentopportunities for the poor. But because the poor lack physical collateral, they have almost noaccess to institutional credit.

Informal lenders play an important role in many low-income countries (Adams and Fitchett1992; Ghate 1992), but they often charge high interest rates, inhibiting poor rural householdsfrom investing in productive income increasing activities. Moreover, although informalgroups, such as Rotating Savings and Credit Associations, can meet the occasional financialneeds of rural households in many societies, they are not reliable sources of finance forincome-generating activities (Webster and Fidler 1995).

Microcredit programs are able to reach the poor at affordable cost and can thus help the poorbecome self employed. Proponents of microcredit consider increasing the Poors access toinstitutional credit an important means of ending poverty (Yunus 1983). They argue that byvirtue of their design such programs can reach the poor and overcome problems of creditmarket imperfections. In their view improved access to credit smoothes consumption andeases constraints in production, raising the incomes and productivity of the poor.


15/66

Page | 15

It is explicit that microfinancing in Bangladesh is crucial; it has been playing a major role notonly for the economic development, but also indicates the necessity to develop the ruralfinancial markets. It is such an effective tool that can be used as a strategy for the povertyreduction, improve the institutional microfinance system, financial markets, empower thepoor women, etc. ADB report 2000 on The Rural Asia study states that; In spite of the rapid

growth of microfinance services, Rural Financial Markets in Asia are ill-prepared for thetwenty-first century. About 95 percent of some 180 million poor households in the Asian andPacific Region (the Region) still have little access to institutional financial services.Development practitioners, policy makers, and multilateral and bilateral lenders, however,recognize that providing efficient microfinance services for this segment of the population isimportant for a variety of reasons which are mentioned as follows (ADB report, June2000)41 :

Microfinance can be a critical element of an effective poverty reduction strategy.Improved access and efficient provision of savings, credit, and insurance facilities inparticular can enable the poor to smoothen their consumption, manage their risks

better, build their assets gradually, develop their micro enterprises, enhance theirincome earning capacity, and enjoy an improved quality of life.

Microfinance services can also contribute to the improvement of resource allocation,promotion of markets, and adoption of better technology; thus, microfinance helps topromote economic growth and development.

Without permanent access to institutional microfinance, most poor householdscontinue to rely on insufficient self-finance or informal sources of microfinance,which limits their ability to actively participate in and benefit from the developmentopportunities.

Microfinance can provide an effective way to assist and empower poor women, whomake up a significant proportion of the poor and suffer disproportionately frompoverty.

Microfinance can contribute to the development of the overall financial systemthrough integration of financial market.

Shahidur R. Khandker (1998) demonstrated as- by using the microfinance services to thepoor in the developing country like Bangladesh has significantly reduced its poverty. Forinstance about 21 percent of the Grameen Bank borrowers and 11 percent of the BRACborrowers managed to lift their families out of poverty within about 4 years of participation.These services also had a significant positive impact on the depth (severity) of povertyamong the poor. Extreme poverty declined from 33 percent to 10 percent among GrameenBank participants, and from 34 percent to 14 percent among the BRAC participants. Thissignificant improvement of poverty reduction figures only by the two major MFIs (Grameenand BRAC) indicate us, in order to make the poor free from poverty mass microfinancing inBangladesh is crucial.


16/66

Page | 16

MFIs have also brought the poor, particularly poor women, into the formal financial systemand enabled them to access credit and accumulate small savings in financial assets, reducingtheir household poverty. In general, many studies have shown that microfinance have alsohad a positive impact on specific socioeconomic variables such as childrens schooling,

household nutrition status, and womens empowerment. However, researchers and

practitioners generally agree that the poorest of the poor are yet to benefit from themicrofinance program in most developing countries partly because most MFIs do not offerproducts and services that are attractive to this category (Hulme, D. & Paul Mosley. 1996).Thus, to increase the overall impact of microfinance on poverty reduction, it is essential toextend a wide range of services on a continuing basis to the poor who are still excluded fromthe benefits of microfinance (ADB report, June 2000).

3.2 Role of Microfinance in achieving MDGs:

In September 2000, the member states of the United Nations unanimously adopted theMillennium Development Goals (MDGs), a set of eight, specific, measurable, time-boundtargets that challenge countries to improve the welfare of the worlds poorest people. There ismounting evidence to show that the availability of financial services for poor households microfinancecan help achieve the MDGs in Bangladesh.

3.2.1 Eradicate extreme poverty and hunger:Empirical evidence shows that, among the poor, those participating in microfinanceprograms who had access to financial services were able to improve their well-being both atthe individual and household level much more than those who did not have access tofinancial services.

Bangladesh Rural Advancement Committee (BRAC) clients increased householdexpenditures by 28% and assets by 112%. After more than eight years of borrowing, 57.5% of Grameen borrower households were

no longer poor as compared to 18% of non-borrower households.

3.2.2 Achieve universal primary education:Increased incomes, savings and education loan products provide poor people with the abilityto invest in their childrens future, particularly in their education. Studies on the impact of

microfinance on childrens schooling show that:

In Bangladesh, almost all girls in Grameen client households had some schooling,compared to 60% of girls in non-client households. The schooling rate for boys wassignificantly higher - 81% of boys in client households received some schooling, comparedto 54% in non-client households. Basic competency in reading, writing, and arithmeticamong children 11 to14 years old in BRAC member households increased from 12% in 1992to 24% in 1995, compared to only 14% for children in non-member households.


17/66

Page | 17

3.2.3 Promote gender equality and empower women:There is strong evidence that access to financial services and the resultant transfer offinancial resources to poor women, over time, lead to women becoming more confident andassertive. Access to finance enables poor women to become economic agents of change byincreasing their income and productivity, access to markets and information, and decision-

making power. This empowerment is very real, and can take different forms: In Bangladesh, a survey of 1,300 clients and non-clients showed that credit clients weresignificantly more empowered than non-clients in terms of their physical mobility, ownershipand control of productive assets (including land), involvement in decision making, andawareness of legal and political issues.

3.2.4 Reduce child mortality and Improve maternal health:Increased earnings, savings, and, increasingly, insurance allow clients to seek out health careservices earlier, before conditions deteriorate. In addition, many microfinance institutionsactively promote health education. This may take the form of a few simple, preventive healthcare messages on immunization, safe drinking water, and pre-natal and post-natal care. Some

programs provide credit products for water and sanitation that directly improve clients livingconditions. In Bangladesh, a study of BRAC clients found that fewer members suffered from severe

malnutrition than non-clients and that the extent of severe malnutrition declined the longerclients stayed with BRAC.

3.2.5 Ensure environmental sustainability:There has been very little research on the specific impact of microfinance on environmentalsustainability. Recently, new technologies, in particular inexpensive, reliable solar/light-emitting diode (LED) systems, have opened up the possibility of consumer lighting productsthat are cost-competitive with kerosene lighting, even for very poor people. The market for

clean energy products is enormous; Grameen Shakti is a non-profit company, part of theGrameen family, which is distributing clean energy products in remote areas of Bangladesh.As of December 2006, it had installed 77,000 solar home systems and 500 biogas plants.

3.2.6 Develop a global partnership for development:Microfinance alone will not bring about the achievement of the Millennium DevelopmentGoals. Government, donors and key stakeholders will need to work together on a series ofstrategies and activities to reduce poverty and achieve the MDGs, among them: education,health care, housing, transportation, improved agriculture, expanded markets, and access toinformation.

That being said, access to financial services does allow people to improve their own humancapital (schooling, health care) and allows for the potential for improved social capital asclients become more empowered and integrated into markets. Thus access to financialservices provides the poor with the means to achieve most of the MDGson their ownterms, in a sustainable way.


18/66

Page | 18

Chapter-Four

Development of the

Microfinance Sector of

Bangladesh


19/66

Page | 19

4.1 Past History of Microfinance in Bangladesh:The growth in access to credit by the poor took place in several distinct phases over the lastthree decades. The origins of the current microcredit model can be traced back to action-research in the late 1970s, carried out by academics as well as practioners in organizationsthat were created to deal with the relief and rehabilitation needs of post-independence

Bangladesh. The 1980s witnessed a growing number of non-governmental organizations(NGOs) which experimented with different modalities of delivering credit to the poor. Thevarious models converged in the beginning of the 1990s toward a fairly uniform Grameen -model of delivering microcredit. It sparked a sharp growth in access to microcredit duringthis decade. In recent years the standard Grameen-model has undergone more refinements inorder to cater to different niche markets as well as to different life-cycle circumstances.

The 1970s:Experimentation in providing credit to households considered unbankable by the formalfinancial system has its origins a few years after Bangladeshs independence war in 1971.

The independence movement gave rise to a new generation of young activists who were keen

on contributing to the reconstruction of this war-ravaged country. The new government and amyriad of aid agencies that arrived on the scene were unable to cope with the scale ofdestitution and non-governmental organizations emerged to meet the challenges. The earlyyears of the NGO movement in Bangladesh focused on relief and rehabilitation with anemphasis on community development. However, by the mid-1970s, two of the NGOs thatwould subsequently expand in scale, BRAC and Proshika, found that elite capture was a

serious impediment to their development objectives. As a result, a separate focus on the poorthrough a target-group approach was introduced. Moreover, an ideological debate withinboth these organizations began to brew, between those who favored economic tools (credit,

savings etc) to support poverty reduction and those who believed that social mobilizationagainst existing injustices would suffice and financial services were unnecessary.

Around the same time a team of researchers at Chittagong University, led by ProfessorYunus, began an action-research program that provided loans to poor households in a fewvillages. Borrowers were mobilized in peer groups composed of four or five individualswho were jointly responsible for each others repayment. It also included forming

occupational groups but this was dropped in favor of village-based groups. The demand forloans grew rapidly and Professor Yunus enlisted the support of the Bangladesh Bank andcommercial banks to provide the Grameen Project as it was then called with resources.The success of this experimentation paved the way for the establishment of the GrameenBank under a special ordinance in 1983.

The 1980s:In the early 1980s several NGOs experimented with different ways of delivering credit. Oneimportant mode tested was the efficacy of providing loans for group projects compared tooffering loans to individuals with peer monitoring. The broad lesson was that the latter wasmore effective due to incentives and free-rider problems compared with lending to a group.Hence by the late 1980s the predominant model became one of providing individual loans toa target group of poor households, with peer monitoring and strong MFI staff follow-up. TheAssociation for Social Advancement (ASA) is a classic example of this shift. Its initial


20/66

Page | 20

emphasis was on forming peoples organizations mobilized for social action againstoppression. It changed to the target group approach and then toward the provision offinancial services in the late 1980s. Now ASA is the fourth largest MFI in Bangladesh interms of clients and its unique low-cost credit delivery mechanism is being replicated inseveral other countries. ASA keeps paperwork requirements to a minimum, has

decentralized most decision-making to the field and overall has a very lean operation(Chowdhury 2003).

The 1980s and early 1990s were also important in the development of management capacitywithin several of the large MFIs which allowed them to expand their microcredit programs.What is particularly interesting is that the development of the know-how and confidence toimplement large programs arose, in some cases, from the experience of scaling-up programsnot related to microcredit. For instance in the case of BRAC, the first major experience witha nationwide program came about when it implemented an oral rehydration program tocombat diarrheal disease. Thirteen million women were trained to use a simple but effectiverehydration solution and BRAC staff were paid based on how many of their trainees used and

retained this knowledge3.

Early to mid 1990s:The early 1990s was the period of rapid expansion of the Grameen-style microcreditapproach (Ahmed 2003)(See Figure 4.1).The growth was fueled largely by a franchisingapproach whereby new branches replicated the procedures and norms that prevailed in

existing branches. The product that was offered to the client at the time was fairly narrow,focusing mainly on a standard microcredit package offered to all clients. The view was that itwas easier to recruit new staff and train them quickly in a simple product during a phasewhen branches were opened at a rapid rate. This growth was clearly aided by the highpopulation density and relative ethnic, social and cultural homogeneity in Bangladesh.

Figure 4.1: Expansion of MFIs in the 1990s

Source: Ahmed (2003)


21/66

Page | 21

A notable shift that took place during this expansion phase was a greater emphasis on

individual borrower accountability for loan repayment and less reliance on peer

monitoring. Staff follow-up of loans became more rigorous and professional with the

use of computerized Management Information Systems. Donor funds also contributed

to expanding the revolving loan funds for MFIs during this expansion phase. Moreover

this period saw the emergence of PKSF as a wholesale financing institution. Followingthis expansion, a geographical mapping of microfinance suggests that all districts in

Bangladesh have microcredit services, though there are many smaller pockets with

little or no coverage (e.g. Chittagong Hill Tracts). A closer look shows that there is

somewhat greater coverage of poor households in the central and western districts. The

south-east and pockets of the north-east are areas with room for more expansion (PKSF

2003)Mid 1990s onward:Feedback from the field, academic research and international experience contributed to anincreasing emphasis on providing diversified financial services for different groups of

households from the mid 1990s onward. The benefits of a narrow focus on microcreditduring the expansion phase was that it kept costs low, operations transparent and relatively

straightforward management oversight. However, it became clear that the standard Grameenmodel of providing microcredit with fixed repayment schedules, with standard floors andceilings on loans sizes, was not sufficient to meet the needs of the extreme poor or thevulnerable non-poor group.

Moreover, existing microcredit borrowers also required complementary financial andnonfinancial services. The standard practice for MFIs until the late 1990s was to collectcompulsory weekly savings from their clients, holding the money as a de-facto lump sumpension returned when a client left the organization. Access to these deposits was otherwise

limited, which curtailed a potentially important source of consumption-smoothing.Recognizing these limitations an increasing number of MFIs in Bangladesh have introducedan open access current account scheme in addition to the fixed deposit scheme. Moreover,many MFIs have life insurance products whereby outstanding microcredit debts are writtenoff and other benefits are paid following the death of a borrower. Non-credit services canalso take the form of input supply, skill training and marketing support for micro-entrepreneurs. A complementary package to microcredit can also take the form of providingeducation for the children of borrowers. Grameen Bank for instance has a scholarshipprogram for female secondary education and a student loan program for tertiary education.Similarly many MFIs have community health programs, legal literacy training and provideinformation on accessing local resources.

MFIs began to experiment with catering to new niche markets as the traditional microcreditbusiness became standardized (and horizontal expansion slowed) and required less attention.For instance several NGOs began providing larger loans to graduate microcredit borrowers

and in some cases to households who were not part of the microcredit system but whichwanted a microenterprise loan. These loans typically range from 20,000 taka (around $320)to 200,000 taka ($3,200). Innovative solutions are also emerging to address the problem ofaccess to finance for the small enterprise sector. For instance, BRAC established a separate


22/66

Page | 22

financial institution, BRAC Bank that focuses on lending to the smaller end of the small

enterprise sector, with loans averaging 400,000 taka. Moreover, evaluation studies pointedout that extremely poor households were struggling to benefit from the standard microcreditmodel, even if they joined the programs. The main reasons were: (i) minimum loan floors fora first loan that sometimes exceeded their own perceived needs, (ii) fixed weekly loan

repayments could be difficult to commit to in light of sharp seasonality of income, (iii) othermembers of peer-monitored groups sometimes do not wish to guarantee loans for extremelypoor households etc and (iv) residing in remote or depressed areas.

Programs that have been developed to cater for these constraints include (i) introducing moreflexible repayment schedules such as ASAs Flexible Loan Program, (ii) lowering first loan

floors so that amounts as small as 500 taka ($9) can be borrowed, (iii) Grameens programthat offers zero interest loans to beggars, (iv) the Resource Integration Centers program that

specializes in offering loans to a specific vulnerable group - the elderly poor, (v) variousprograms that combine food aid with microcredit and training e.g. BRACs IGVGD program,and (vi) targeting remote areas through for instance ASAs cost-effective mini-branch system

and Integrated Development Foundations work in the Chittagong Hill Tracts.

Figure 4.2: Structure of the Financial System & Microfinance Delivery Mechanism:

Source: Bangladesh Microfinance Review, August 2011


23/66

Page | 23

4.2 Microfinance Sector Structure:In terms of memberships/clients (and consequently portfolio size) the structure of themicrofinance sector is as follows: Three very large MFIs: Three very large organizations ASA, BRAC and Grameen

Bank- dominate the microfinance sector, each having more than 7 million

members/clients in 2008 (ASA 7.28 million, BRAC 8.15 million and Grameen Bank 7.67million) all products combined (see Table 4.1). These three organizations had embarked amajor lateral expansion beginning 2003/04 that led to doubling to tripling their sizes by2008. These three MFIs have achieved spectacular lateral expansion, that is, to includenew clients in same or new geographical areas by enhanced management efficiency,standardized management practices, products and policies, and mobilizing financialresources. The three combined has 8,547 branches, 19.16 million borrowers and loanoutstanding of Taka 125,876 million at the end of December 2008 (ASA Taka 35,735million, BRAC Taka 45,746 million in March 2009 and Grameen Taka 44,396.63million). All three organizations have branch networks throughout the country except in afew remote char and coastal areas.

Large MFIs: The sector has got a group of large MFIs whose memberships vary between50,000 to one million. All of them are PKSF partner MFIs except BURO Bangladesh.Even within the group two organizations, TMSS and BURO-B separate them from theothers and have expanded more than into 40 districts with their networks. Theirexpansion also came during 2005-2008 period and continues.

Medium Size MFIs: Above two groups are followed by organizations with 5-50,000members (3 to 30 branches) which are local or regional organizations mostly financed byPKSF.

Small MFIs: MRA has a cut-off point of 1000 membership and Taka 4 million loanoutstanding for receiving license. Several hundred such MFIs operate in the country

although the exact number is not known.

Very small MFIs: We see even smaller NGOs with very limited resources for loandisbursement, use mostly savings, are still operating which may face extinction for notqualifying for license.

Table 4.1: Structure of MFIs Sector (Three very large MFIs)

Indicators ASA

(Dec.

2008)

BRAC

(Dec. 2008)

Grameen

(Dec. 2008)

Total of

these 3

MFIs

Aggregat

Member (Million) 7.28 8.15 7.67 23.10 3Borrower (Million) 5.88 6.38 6.90 19.16 26.7

Loan outstanding (millionTaka)

35,735 45,745 44,396 125,876 158,80

Savings balance (millionTaka)

11,264 16,306 64,177 91,747 104,59

Branches 3,303 2,705 2,539 8,547 14,44

Source: Compiled by author from CDF/InM


24/66

Page | 24

4.3 Times Series Analysis of Outreach and Portfolio:Here Table 4.1 shows that an estimated 33 million members and 26.78 million borrowers(81.1%) including multiple memberships or so called overlapping are served by the sector atthe end of December 2008. A total of 14,441 branches serve these members/clients. The totalestimated portfolio is Taka 158,807 million of which ASA (22.50%), BRAC (28.81%) and

Grameen Bank (27.96%) account for about 79.26%. The rest 20.74% is under about 700smaller MFIs that shows heavy concentration of portfolio in these three organizations. Theimportant issue is that the three MFIs have become so big that microfinance sector cannotafford any one of them to fail. Due to resource and management constraints the smaller MFIsare not expected to grow fast to increase market share. Such skewed structure is expected tocontinue.

The aggregate time series data between 2003 and 2008 (see Table 4.2 to Table 4.5) showsthat the sector has hugely expanded as reflected by memberships, borrowers and portfolio:membership has increased by 186%, borrowers by 199% and portfolio by 302.4%. Thesavings balance has also proportionately increased by 362%. Table 4.6 to Table 4.7 provides

further insight about the growth pattern: the growth has actually come from the three verylarge organizations. Grameen has expanded 2.45 times in membership, 2.46 times inborrowers and 2.77 times in portfolio size. ASA has expanded 3.1 times in membership, 2.75times in borrowers and 3.09 times in portfolio size. Similarly, BRAC has expanded more 2times in membership, 1.82 times in borrowers and 2.77 times in portfolio size.

The average loan outstanding per borrower was Taka 3,902 in 2003 and Taka 5,928 in 2008,an increase of only 52%. That is, average loan disbursement per borrower was Taka 7,804 in2003 and Taka 11,856 in 2008. That would mean the disbursement size did not reallyincrease as one would have expected. Discussion with industry experts suggest that a numberof factors have caused such situation: a) resource constraints of smaller MFIs; b) risk

aversion attitude of staff members; c) low absorption capacity of borrowers; d) large numberof young new membership or membership switching, that affects gradual growth of loan sizebecause new members (although she/he is experience of borrowing from other MFIs)normally start with smaller loans.

Table 4.2: Aggregate time series data (Grameen Bank included)

Description 2003 2004 2005 2006 2007 2008

Branches (#) 6,837 9,165 9,253 11,368 14,577 14,441

Members (#) 17,754,747 20,681,349 24,373,389 27,420,570 31,367,009 33,018,926

Borrowers (#) 13,457,991 15,617,075 15,617,075 15,617,075 26,119,391 26,787,120

Portfolio (Takamill.)

52,510 64,354 83,651 106,411 133,375 158,807



25/66

Page | 25

Table 4.3: Membership growth of MFIs

Description 2003 2004 2005 2006 2007 2008

ASA 2,341,819 2,996,660 5,988,134 6,455,979 6,663,734 7,276,677

BRAC* 4,065,957 4,858,763 4,837,099 5,310,000 7,370,000 8,150,000

GrameenBank

3,123,802 4,059,632 5,579,399 6,908,704 7,411,229 7,670,203

OtherMFIs**

8,223,169 8,766,294 7,968,757 8,745,887 9,922,046 9,922,046

Total 17,754,747 20,681,349 24,373,389 27,420,570 31,367,009 33,018,926

*data for 2008 are of March 2009; **CDF reported; in absence of up to date data for 2008,figure of 2007 has been repeated for 2008.


Table 4.4: Borrower growth of MFIs

Description 2003 2004 2005 2006 2007 2008

ASA 2,130,982 2,771,627 4,168,821 5,163,279 5,422,787 5,877,440

BRAC* 3,493,129 3,993,525 4,159,793 4,550,000 6,400,000 6,380,000

Grameen Bank** 2,811,421 3,653,668 5,021,459 6,217,833 6,670,106 6,903,182

Other MFIs*** 5,022,459 5,198,255 5,613,209 6,382,901 7,626,498 7,626,498

Total 13,457,991 15,617,075 15,617,075 15,617,075 26,119,391

26,787,120

Borrower tomember ratio (%)

75.8 75.5 77.8 81.4 83.2 81.1

*data for 2008 are of March 2009; ** Estimated: 90% of members;***CDF reported; inabsence of up to date data for 2008, figure for 2007 has been repeated for 2008


0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

2003 2004 2005 2006 2007 2008

Membership growth of MFIsASA

BRAC*

Grameen

Bank

Other

MFIs**


26/66

Page | 26

Table 4.5: Portfolio growth of MFIs (Taka in million)[December]

Description 2003 2004 2005 2006 2007 2008

ASA 11,538 13,776 19,379 24,077 27,764 35,735

BRAC* 11,493 14,491 17,805 24,355 36,344 45,745

Grameen Bank 16,017 20,008 27,970 33,235 36,336 44,396

Other NGO-MFIs** 13,462 16,079 18,497 24,744 32,931 32,931

Total 52,510 64,354 83,651 106,411 133,375 158,807

Average per capitaloan balance (Taka)

3,902 4,121 4,411 4,769 5,106 5,928

*data for 2008 are of March 2009; **CDF reported; in absence of up to date data for 2008,figure for 2007 has been repeated for 2008


Member SavingsTotal savings balance in 2008 was Taka 104,590 million (see Table 5.6).The average savingsbalance per person did not register much growth because almost all MFIs except BRAC havemade savings withdrawal easy. This is also reflected in the withdrawal rate: 70.85%withdrawal in 2007 (see Table 5.7). Besides, the average savings per week has not alsoincreased much, varies between Taka 10-50 per week. MRA has stopped collection of timedeposit, that is, deposit of small savings per week to receive a lump-sum at the end of 3 to 5years. Whereas this type of savings in Grameen Bank, called GPS, is the most popularsavings product among the members.

Table 4.6: Savings balance (Taka in million)

Description 2003 2004 2005 2006 2007 2008

ASA* 2,804 2,828 3,035 7,755 9,538 11,264

BRAC 6,285 7,657 9,159 10,595 13,467 16,306

Grameen Bank ** 13,306 20,717 31,659 44,274 51,918 64,177

Other NGO-MFIs*** 6,471 7,322 8,149 10,397 12,843 12,843

Total (Taka in million) 28,866 38,524 52002 73,021 87,766 104,590

*ASA: Includes security funds beginning 2006; **GB: Includes savings from non-members;***CDF Reported and in absence of up to date data for 2008, the figure for 2007 has beenrepeated for 2008



27/66

Page | 27

Table 4.7: Savings growth (December) Excluding Grameen Bank

Items 2007 2006 2005 2004 2003

(N=535) (N=611) (N=690) (N=721) (N=720)

Net savings per member (Taka) 1,291 1,201 1,082 1,072 1,063

Savings withdrawal rate (%) 70.85 69.75 68 67 63


Key Performance:

The aggregate portfolio quality of has remained high till 2007 as indicated in Table 4.8.Although overall sector information at the end of 2008 is not available at the time ofpreparation of the report but information from major MFIs (ASA, BRAC, Grameen and afew other large MFIs) shows that the portfolio quality has remained good except in Sidr andseverely poverty stricken districts. From 2005 onwards recovery has remained above 99%and the overdue as percentage of outstanding loan was 1.52% in 2007. Although nosystematic study is available but practitioners in the sector reports that loan recovery in 2008-09 period is in decline and portfolio quality is under stress due to economic slowdown,reduced employment opportunities in rural areas, price hike of 2008 and probablyinstitutional weakness created due to over-expansion. Overdue as percentage of loanoutstanding has increased for ASA, BRAC and Grameen between 2006 between 2006 and2008 [Bangladesh Bank 2008].

Table 4.8: Performance Ratios (As of December)

Items 2007 2006 2005 2004 2003

(N=535) (N=611) (N=690) (N=721) (N=720)

Outstanding borrower per credit staff(No.)

180 203 212 202 233

Loan portfolio per credit staff (Tk.) 889,772 920,874 846,656 748,947 798,510

Recovery Rate (%) 99.21 99.12 99.07 98.79 98.76

Overdue - Outstanding loan ratios (%) 1.52 1.63 1.89 6.25 3.63

Source: CDF/InM


28/66

Page | 28

4.4 Microfinance Today:

The fact that the microfinance industry has been able to provide access to credit, currently, tonearly 25 million poor households in Bangladesh is truly remarkable. There are around 535regulated NGO MFIs and about 500 non-regulated NGO MFIs in Bangladesh but the

industry is dominated by three large MFIs (ASA, BRAC, and Grameen Bank) that servearound 22 million or 87 percent of all clients. Table 5.9 illustrates the scale of theseinstitutions. These three institutions combined have over Tk 69649 million in outstandingloans and around Tk 24880 million in savings. The differences between the number ofborrowers and members reflect differences in the variety of services offered by these MFIs.BRAC offers a range of services to their members, while Grameen and ASA focus on theprovision of microfinance services.

Table 4.9: Microcredit Portfolios of the big Three MFIs in Bangladesh (as of

December 2009)Name of

MFIs

Number

ofBranches

Clients

Number

Borrowers

Number

Employees

Number

Loan

Outstanding

Net Savings Recovery

Rate

Inte

RatCha

ASA 3,281 5,912,550 4,573,222 24,638 24,194,815,729 7,807,942,390 99.64% 15%

BRAC 2,661 8,297,985 6,408,802 25,641 45,399,623,699 16,989,298,547 99.24% 15%

GrameenBank

2562 7970616 6426415 23283 54714600 82953620 99.46% 20%

Total 8,504 22,181,151 17,408,439 73,562 69,649,154,028 24,880,194,557

Source: Bangladesh Microfinance Statistics 2009

The largest three MFIs account for 87% of the gross loan portfolio in the microfinanceindustry of Bangladesh. Figure 4.3 shows that percentages which indicate that the largest 3MFIs have a substantial portion in the total outstanding loan portfolio as of 2009.

Figure 4.3: Distribution of Outstanding Portfolio 2009


37%

29% 21%13%

Distribution of Outstanding

Portfolio 2009

Grameen Bank

BRAC

ASA

Others


29/66

Page | 29

Contribution to the Financial System:The microfinance industry of Bangladesh has Tk 190.4 billion of credit outstanding, whichamounts to 7.33% of the Tk 2597 billion outstanding in the countrys entire financial system.

Figure 5.4 shows this statistic below. This is significant relative to the equally large Indianmicrofinance sector, which contributes just 0.64% to the Indian financial system.

Figure 4.4: Microfinance as part of the Financial System


Though there are a few hundred NGO-MFIs operating in the market, the two very largeorganizations occupy the major share. Figure 5.5 indicates market shares of different types ofinstitutions in terms of borrowers served, loans and savings portfolios of these institutions. Itis observed that only 3.68 percent of the institutions (very large and large) are serving75.88% of the borrowers, and have control over 75.87% of loan amount and 75.85% ofsavings.

Figure 4.5: Market Share of Different Types of NGO-MFIs (June 2009)

Source: (NGO-MFIs in Bangladesh, Volume-6, June 2009; Published by-MRA)

7.30%

92.70%

MF as part of the Financial System

MF portfolio

Bank Credit


30/66

Page | 30

4.5 Fund Composition:Previously donor driven NGOs are now increasingly trying to become more dependent onlocal fund with the decline of foreign fund, which stood at 3.10% in 2009. Savings from theclients and surplus income from microcredit operations appeared as two major sources offund during this period. Table 5.10 shows sources of fund of the microfinance sector for the

year 2008 and 2009. As of June 2009, contributions from clients saving and cumulativesurplus were 30.62% and 28.01% respectively. PKSF, the government owned wholesalefunding agency, provides a large portion of loan fund at a subsidized rate. However,contribution of PKSF in total fund has been declining from 18.50% in 2008 to 15.62% in2009. It is observed that commercial banks are now considering microfinance as potentialsector for investment. 18.86% of total fund was contributed by the banking sector in 2009.

Table 4.10: Sources of Fund of NGO-MFIs

Source: (NGO-MFIs in Bangladesh, Volume-6, June 2009; Published by-MRA)


31/66

Page | 31

Chapter-Five

Literature Review


32/66

Page | 32

5.1 Introduction:Over the past three decades, the development community has been increasingly interested inmicrofinance as an approach for reducing poverty, supporting gender equity, encouragingmore equitable income distribution, developing the private sector and promotingparticipatory development. Access to modest financial services and other forms of

microenterprise support are key strategies to reduce poverty - providing the poor withopportunities for self-reliance through entrepreneurship and stabilizing the livelihoods of thepoor during difficult times. Microfinance is one of many tools to reduce poverty.

Microfinance is significant source of finance for poor, lower income people in developingcountries. It provides the funding for these people to run their micro-business and to smooththeir households consumption. Poor, lower income people have difficulties in obtainingfinance from formal financial institutions such as commercial banks, due to barriers such ashigh collateral requirements and complicated application procedures (Yunus, 2001; andHulme &Mosley, 1996). However, there is strong demand for small-scale commercialfinancial services (for both credit and savings) among the economically active poor in

developing countries. These and other financial services help low-income people improvehousehold and enterprise management, increase productivity, smooth income flows, enlargeand diversify their microenterprises, and increase their incomes (Robinson, 2001). Theseeffects were evident from a number of impact studies of microfinance. Based on the recentstudies on this subject, microfinance has significant impact on income, expenditure, assets,educational status, health as well as gender empowerment. This positive impact ofmicrofinance on income was confirmed in studies undertaken by Hulme and Mosley (1996);Mckernan (2002); Khandker et al. (1998); Copestake et al. (2001); Sichanthongthip (2004);Shaw (2000); Mosley (2001); and Copestake (2002).

Most existing studies on the impact of microfinance examine two sets of indicators

economic and social indicatorsat different levels. Despite the variation in the methods usedand the results of studies conducted in various countries, the main impact of microfinanceimpact is on change in income, expenditure, assets, educational status, health as well asgender empowerment. The studies that have examined the impact of microfinance on theseindicators are discussed below:

5.2 Impact studies of microfinance on income:The effect on income has been analyzed at the individual, household and enterprise levels.Hulme and Mosley (1996), conducted various studies on different microfinance programs innumerous countries, and found strong evidence of the positive relationship between access to

a credit and the borrowers level of income. The authors indicated that the middle and upperpoor received more benefits from income-generating credit initiatives than the poorest.McKernan (2002), moreover, evaluated three significant microcredit programs in Bangladeshand discovered that the profit for self-employed activities of households can be increased byprogram participation. These Economic indicators are normally measurements formicrofinance impact as income, level and patterns of expenditure, consumption and assets.


33/66

Page | 33

Social indicators to measure the impact of microfinance became popular in the early 1980s aseducational status, access to health services, nutritional levels, anthropometric measures andcontraceptive use, for example (Hulme, 2000). Hulme (2000) identified levels of assessmentin different units as individual, enterprise, household, community, institutional impacts andhousehold economic portfolio such as households, enterprise, individual and community

programs were also examined at the village-level impacts in the study of Khandker etal.(1998) which showed that they have positive impact on average households annualincome, especially in the rural non-farm sector. Copestake et al. (2001), estimated the effectof an urban credit programme a group-based microcredit programme in Zambia, andfound that microcredit has a significant impact on the growth in enterprise profit andhousehold income in case of the borrowers who have received a second loan.

Sichanthongthips study (2004) also pointed to a positive impact of microcredit on theincome level of individual borrowers. This can be seen from the higher monthly incomeearned after the member accessed credit, in the empirical study of Lao microfinance onSaithani case. Shaw (2000) studied two microfinance institutions (MFIs) in Southeastern Sri

Lanka and showed that the less poor clients microbusiness that accessed loans frommicrofinance programs could earn more income than those of the poor do. Mosley (2001)evaluated the impact of loans provided by two urban and two rural MFIs on poverty inBolivia. He found that the net impact of microfinance from all institutions, at the averagelevel, was positive in relation to borrowers income, even though that net impact for poorerborrowers might be less than the net impact on richer borrowers. Copestake (2002)conducted the case study of the Zambian Copperbelt, applying the village bank model toinvestigate the effect on income distribution at the household and enterprise levels. The studyshowed that the impact on income distribution depends on who obtains the loan, who moveon to larger loans and who exits the program: group dynamics was also an important factor.As he discovered, Some initial levelling up of business incomes was found, but the moremarked overall effect among borrowers was of income polarization.(Copestake, 2002: 743).

5.3 Impact studies of microfinance on expenditure:Expenditure is another indicator to measure the impact of microfinance. Pitt and Khandker(1996 and 1998) estimated the effect of microcredit obtained by both males and females forthe Grameen Bank and two other group-based microcredit programs in Bangladesh onvarious indicators. They showed that the clients of the programs could gain fromparticipating microfinance programs in many ways. It can be seen that income per capitaconsumption could be increased by accessing a loan from a microcredit program such as theGrameen Bank. Khandker (2003) also conducted research on the long-run impacts of

microfinance on household consumption and poverty in Bangladesh by identifying types ofimpact in six households outcomes as outlined below: Per capita total expenditure; Per capita food expenditure; Per capita non-food expenditure; The incidence of moderate and extreme poverty; Household non-land assets


34/66

Page | 34

The author found that the microfinance effects of male borrowing were much weaker thanthe impact of female borrowing and there was decrease in return to borrowing all the time.Moreover, he noted that the impact on food expenditure was less pronounced than the one onnon-food expenditure. Besides, he showed that the poorest gained benefits from microfinanceand microfinance had a sustainable impact in terms of poverty reduction among program

participants. In addition, the author discovered that there was spillover effect of microfinanceto reduce poverty at the village level.

5.4 Impact studies of microfinance on wealth:A further indicator of the impact microfinance is wealth. Montgomery et al. (1996) examinedthe performance and impact of two microfinance programs in Bangladesh. They found thatthere were positive impacts of a microcredit program, such as the Bangladesh RuralAdvancement Committees (BRACs) Rural Development Program (RDP), on bothenterprise and household assets. Clearly, even though total value of household assets had aslight increase after the borrowers obtained last loans, there had significant increase in thevalue of productive assets. Pitt and Khandker (1996 and 1998) also noted that the microcredit

had a positive impact on womens non-land assets. Mosley (2001) also pointed out that therewas positive impact of microfinance on asset levels. He further stated that accumulation ofasset and income status was generally highly correlated, which led to extreme correlationbetween income poverty and asset poverty.

Coleman (1999) investigated the impact of a village bank on borrower welfare in NortheastThailand. He found that there was a slight impact of program loans on clients welfare.However, he discovered that the village bank had a positive and significant impact on theaccumulation of womens wealth, particularly landed wealth but this result included bias

from measured impact (discussed in methodology below). In contrary to the positive results,Mckernan (2002) found an inverse relationship between participation in program and

household assets. Mckernan also found that households with fewest assets benefit most fromparticipating in a program.

5.5 Impact studies of microfinance on educational status:Many impact studies of microfinance have focused on educational status. Chowdhury andBhuiya (2004), studied the impact of a microfinance program, BRAC poverty alleviationprogram, in Bangladesh, and found that both member and nonmember groups of BRAC hadimproved in educational performance. However, the BRAC member households benefitedmuch more than poor non-member households. Furthermore, girls gained more than boys.Holvoet (2004) investigated the effects of microfinance on childhood education byexamining two microfinance programs in South Indiaone with direct bank-borrower credit

and another one with group mediated credit. The author showed that loans to women,through womens groups, had a significant positive impact on schooling and literacy forgirls, whereas it remained mainly unchangeable in the case of boys.

However, in case of direct individual bank-borrower lending, there was no improvement ineducational inputs and outputs for children. Pitt and Khandker (1996) found that a credit tothe participants provided by a microfinance institution like the Grameen Bank, could growschool enrolment for children.


35/66

Page | 35

5.6 Impact studies of microfinance on health:Indicators related health issues are also applied as proxies to examine the impact ofmicrofinance. Chowdhury and Bhuiya (2004) found that microfinance program, led to a goodimprovement in child survival and nutritional status. Pitt and Khandker (1996) also noted thatthere was a rise in contraceptive use and decrease in fertility in case of the participants

obtaining a credit provided by the Grameen Bank. However, there was no evidence to provethat an increase in contraceptive use or a decrease in fertility resulted from the participationof women in group-based credit programs. But fertility reduction was observed andcontraceptive use slightly increased in case of mens participation (Pitt et al., 1999).

5.7 Impact studies of microfinance on women empowerment:Microfinance also leads to the empowerment of women. Hashemi et al. (1996) studied twomain microfinance programs in Bangladesh, the Grameen Bank and the Bangladesh RuralAdvancement Committee (BRAC). They noted that the participation of the programs hadimportant positive impacts on eight different dimensions of womens empowerment: Mobility,

Economic security, Ability to make small purchases, Ability to make larger purchases, Involvement in major household decisions, Relative freedom from domination by the family (especially, womens ownership of

productive assets), Political and legal awareness, Participation in public protest and political campaigning.

In another study, Pitt and Khandker (1998) found that the behavior of poor households wassignificantly changed in case of womens participation in the program credit, in Bangladesh.

It, for example, could be seen that every 100 additional taka credit provided to women by themicrocredit programs, namely the Grameen Bank, BRAC and BRDB, increased yearlyexpenditure for household consumption by 18 taka, whereas that provided to men from thesame programs grew yearly household consumption expenditure by 11 taka. However, thereexists a counter argument that microcredit programs inflicted extreme pressure on women byforcing them down to meet difficult loan repayment schedules (Goetz and Gupta, 1996).

Besides the microfinance impact on the indicators mentioned above, one study tried toexamine how the savings group in Laos affects the behavior of member of a village savingsgroup. It showed that the behavior of the village savings group members was changed as aresult of participating in a program. While previously savings were kept in the form of gold,

livestock, jewelry, deposits in the bank, and savings at home, members now saved in thesavings group (Kyophilavong and Chaleunsinh, 2005).

Thus all the literatures eventually show that microfinance has a positive impact on povertyreduction, health, education, women empowerment and so on.


36/66

Page | 36

Chapter-Six

Determinants of MFIs

Success in Bangladesh


37/66

Page | 37

FACTORS THAT LED TO THE SCALING-UP OF MICROFINANCE:

6.1 Institution building leadership, staff incentives and learning by

doing:It is unquestionable that the vision and persistence of the leaders of the NGO/MFI movement

is a key factor behind the success of the microfinance industry in Bangladesh. Leadershipskills were instrumental at the initial stages in persuading a skeptical public that providingcredit to the poor could become a viable and replicable proposition. These skills were equallyimportant during the process of scaling-up. These included being able to recruit and motivatestaff, decentralizing authority away from the center, building management informationsystems and internal controls as well as having the humility to learn from mistakes.

Effective internal controls are also important in ensuring effective staff performance. First ofall the fact that financial transactions are carried out publicly, in the weekly meetings and inthe branch offices, is a major check against any form of discretionary behavior byfieldworkers. Many NGOs, particularly the ones that have successfully expanded in scale,

have developed measures that include frequently rotating staff within and between branches,regular field visits by senior management, a strong internal audit team and annual externalaudits.

A fundamental part of the scaling up of Bangladeshs NGOs and more specifically the

microfinance movement has been the ability to learn from experiences and adapt programsaccordingly. This learning process takes place both through informal feedback by field staffduring regular interactions with management as well as through a formal monitoring andevaluation process.

6.2 A constructive donor-client relationship:External resources played an important part in the experimentation process, subsequentgrowth in outreach and institutional strengthening of the microfinance industry. At the sametime, the large microfinance institutions have been successful in managing donors. A large

part of these donor investments went to the capitalization of MFIs loan funds, crucial to therapid expansion that took place in the 1990s, as well as into developing institutional capacitythrough management information systems and human resource development. Finally, the1990s have seen dependence on donor resources progressively declining for the large MFIs.

6.3 An enabling macroeconomic and regulatory environment:The early experimentation and later scaling-up of the microfinance industry in Bangladeshwas helped by an appropriate enabling environment. Firstly the macro-economy has been,by and large, soundly managed and one should not underestimate the significance of this.The rate of inflation has been kept to single digits and economic growth over the past decadehas averaged around 5 percent per annum, thereby creating economic opportunities formicrocredit financed investments. Second the Government of Bangladesh has thus farmaintained a balanced approach toward regulating and supervising the activities of the NGOsector. The Central Bank, PKSF and representatives of MFIs are currently working toproduce a set of guidelines and standards that will strengthen the regulatory framework formicrofinance.


38/66

Page | 38

6.4 Population density, ethnic homogeneity and religious tolerance:Aside from the Chittagong Hill Tracts area, Bangladesh is ethnically a relativelyhomogenous country, with a high population density and good communication networks.Moreover this largely homogenous market is also very large in absolute terms. The contrastwith Nepal for instance is striking and the difference in microcredit outreach between these

two countries is partly due to these factors. It is also striking how in Pakistan, Afghanistan,Egypt and certain other Muslim countries, MFIs have found religion to be a factor that hasled to a relatively lower demand for microcredit and MFIs that are more cautious aboutexpanding. In contrast, even conservative religious forces in Bangladesh have been largelytolerant of microfinance activities and the greater economic empowerment and mobility ofwomen. This point was made by Stephen Rasmussen in a personal communication.

6.5 A professional apex body for microfinance:The Palli Karma Sahayak Foundation (PKSF) was created in 1990 and is governed by aboard composed of both public and private sector representatives. It is a public-private apexbody that channels funds for microfinance to MFIs has been critical in the expansion and

improved professionalism of the microcredit industry in Bangladesh. PKSFs core functionsinclude (i) lending money to MFIs which meet certain eligibility criteria to expand theirmicrofinance operations, (ii) capacity building and hands-on assistance to strengthen MFIsand move them toward financial sustainability, and (iii) advocacy on microfinance issues andhelping develop an appropriate regulatory framework for the industry.

PKSF has been instrumental in contributing to the sharp increase in access in microcredit thattook place in the 1990s by expanding the capital base for MFIs to on-lend to the poor. Forinstance, as of December 2003, PKSF loans constitute around 30 percent of ASAs currentrevolving loan fund. PKSF is also widely credited for sharpening the focus of many MFIstoward financial sustainability and also in setting appropriate standards that will ease the way

for a strengthened regulatory structure for microfinance.

6.6 The Policy: Innovation, Design and Specification:There are many overlapping explanations of why the Grameen model worked. They explainhow it produced a product that met client needs, developed relatively low cost deliverymechanisms and generated resources that permitted it to survive and expand. Here we extractfindings from Hulme and Mosley (1996). Jain and Moore (2003) provide a critical approachto many of these explanations.

Targeting:In order to reach those most in need and/or those most able to effectively utilizecredit to alleviate their own poverty, Bangladeshi MFIs have adapted combinations of direct

targeting, using an effective indicator-based means test (e.g. a combination of effectivelandlessness and involvement in manual labor combined with being female), and indirecttargeting, through self and peer-selection.

Screening out bad (non-poor and too-poor/non-viable) clients: Charging market relatedinterest rates and client involvement in group selection.


39/66

Page | 39

Ensuring repayment:Intensive borrower supervision by field staff; peer group monitoring;performance incentives to staff; progressively larger loan sizes; and, compulsory savings.

Reducing costs: Accessing no-interest or low-interest loans from donors; building up lowcost client savings to on-lend; cost recovery by charging market-related interest rates.

Administrative efficiency: Working with groups; transferring transaction costs to clients;standardized products and procedures. Equally important is the heightened ability ofinnovative targeting, screening and monitoring mechanisms.

6.7 Great Man, Great Men, Great (Little) Women:Organizational and policy success is often explained in terms of the exceptional ability andperformance of leaders (Leonard 1991). This has been common for the Grameen Bank (thereis a vast idolizing literature on Mohammad Yunus). Similarly, both BRAC with Fazle HasanAbed and Proshika with Dr Qazi Faruque Ahmed have been seen internationally as achievinggreat results at a massive scale. However, the contribution of the Grameen Bank (and other

MFI) clients must also be recognized. For many observers of the countrys MFIs there isrecognition of the heroic contribution that the clients have made Millions of little women (interms of social status as well as height and body-mass index) have shown extraordinaryagency and capacity to use MFI services, improve the well-being of their households, andrepay their loans.

6.8 A Favorable Environment:There were a number of environmental factors that supported the microfinance industry. Inparticular: The countrys high population densities make it possible to drive down the costs of service delivery.

The basic infrastructure for service delivery (bankbranches with security facilities, roads)are available in all but the most remote areas. There was, and continues to be, a regular supply of new university graduates with few otheremployment opportunities. Levels of law and order mean that fieldworkers and bank branches are relatively secure. Foreign aid donors have had large budgets available to support viable projects.

6.9 The Political Economy of Success:Identifying and establishing a successful policy (or organization) requires much more thansimply getting the right design. In particular, it requires a careful and continuous ana

Documents

Imran 11-Main Body