A research reveals that
NGOs started credit program in mid eighties and their activities increased
noticeably higher after 1990 (CDF, 2000). With the increasing number of
collateral free micro credit disbursement by MFIs, some Nationalized
Commercial Banks (NCBs), and Specialized Banks like BKB and RAKUBhave been
encouraged to provide a considerable amount of their rural credit to the
poor without security. However, the amount is much less compared to the
deposit mobilization from the rural sector of the country.
Today, some of the Private Commercial Banks (PCBs) have also started
direct and linkage programs with NGOs. Total loan disbursement (cumulative)
by these four kinds of institutions till December 2001 was taka 434.55
billion; of which disbursement under Government program was taka 37.77
billion (8.69%), Grameen Bank disbursed taka 154.11 billion (35.46%), other
Banks and MF-NGOs disbursed taka 78.41 billion (18%) and taka 164.26 billion
(37.80%) respectively (figure-1). Recovery rate of all these organizations
excluding formal banks and government sponsored programs stood at 95
Institution-wise Cumulative Loan Disbursement
the non-government organizations are involved in micro-finance activity but
they are not under the same regulatory authority / monitoring agency.
Therefore, there is no single source of information about them. However,
Credit and Development Forum (CDF) an NGO who collects information of
MF-NGOs reveals that 629
MF-NGOs have mobilized about 13.85 million poor people (11.24% of the total
population who are under absolute poverty), among them 11.85 million
are female and only 2 million are male. Out of 13.85 million of poor people
near about 9 million are outstanding borrowers. About 90% of the borrowers
of those MF-NGOs are from rural area and only 10% are from urban area. These
MF-NGOs disbursed taka 164.26 billion with outstanding loan amount of taka
25.88 billion. The outstanding amount of micro-finance extended under
government program is taka 7.46 billion, the outstanding balance of Grameen
Bank is taka 12.73 billion and that of other banks is taka 7.55 billion.
Grameen Bank, BRAC, ASA and Proshika are top four MFIs in terms of loan
disbursement, outstanding loan and saving mobilization (figure-2). It has
been seen that top 4 institutions including Grameen Bank served more than
70% of the market.
Top Four MFIs in terms of Disbursement,
Outstanding loan and
Savings in billion taka.
Initially foreign donation was
the major source of fund for these organizations, contribution of which
stood to near about 50% of the total fund until 1996. But after 1996 it had
declined sharply and became only 17% of the total fund in December 2001
(Figure-3). With the declining trend of foreign donation, the MF-NGOs have
concentrated on accumulating funds from internal sources such as saving
mobilization from their members. Therefore, it has been seen that members'
saving has increased over time and in December 2001 it has contributed 25% of total Revolving Loan Fund. The contribution of service charge in
Revolving Loan Fund has also increased with the decreasing rate of foreign
donation. Now the contribution of service charge in Revolving Loan Fund in
terms of percentage is same as that of foreign donation.
Trends of Sources of Fund over
At present, one of the major sources of funds of the NGO-MFIs
is the savings of its members. They do not accept deposits from the general
public like that of formal financial institutions. The interest rate they
offer to the members for saving mobilization is less than the interest rate
offered by government and commercial banks. In spite of that as of December
2001, the major sources of fund of 629 MF-NGOs were members' savings and
that was 24.13% of the total RLF; PKSF
supplied 23.49% and direct foreign donation was 17.36% (Figure-4). However,
a significant portion of the funding (16.76%)
was actually generated from service charges. Service charges vary from 8% to
37% depending on the method followed by the MFIs.
of Revolving Loan Fund
Though direct donation from international donors comprise only 17.36%
of total Revolving Loan Fund (RLF), MF-NGOs are getting soft loan and
subsidies from other sources like GOB, PKSF and other big national and
international NGOs/banks. Their members' savings, service charges and own
fund (3%) comprise only 44.14% of the RLF that does not seem enough to make
up the cost of their loan operation which is about 50% of their total
expenditure. Therefore, it is obvious that this sector is highly subsidized
by different donor and sympathetic groups. It is also widely believed that
the large MF-NGOs are also engaged in other profitable businesses from which
they earn handsome profit and also use a part of it for cross subsidization
of their micro finance activities. Annual
financial reports of Grameen Bank and some other NGO-MFI show that their
program is not financially sustainable without subsidized loan or donation.
Actually the issue of sustainability in this case is very much related to
the following questions;
Whether these MF-NGOs are business institutions or charity
Can they be the
bankers and social workers at the same time?
NGOs who are serving in the market of micro-finance
should be clear about their identity by asking themselves these questions.
Whether they are business organizations and therefore should they be under
the law of business and follow the rules of business. One may also question
whether NGOs run business should ask for subsidy to be sustainable or
if the NGOs claim to be charity or service oriented voluntary
organizations then they may not bother about service charges, compulsory
saving mobilization etc. But they must be very careful about the
administrative cost, which is generally met from the soft
donations/grants/charity given for the poor.
The MF-NGOs of Bangladesh, especially the bigger ones
are generally pursuing multiple ventures and their legal identity is often
mixed: social organization – bank- business enterprise- all. That is why
recently these questions have been raised and they may merit attention.
The impact of
micro-finance at macro level is not still clear (CPD, Task force Report,
2001), even though it has some impact at micro level on the society both in
terms of economy and social value. There are a few studies on this impact
assessment of micro-finance, findings of those studies are as follows:
The dependency of poor people on the moneylender or richer people has
been reduced substantially in the society and people are getting access to
institutional sources for credit. Even the formal sectors have been keeping
confidence on the poor for lending money, which is a qualitative change in
the rural society due to micro-finance intervention.
Employment opportunities of the poor have increased to a great extent
in terms of both longer working hours and new employment. The targeted
households that are eligible for participation in micro-finance programs
have a higher probability of being self-employed than their counterparts in
The labor force participation rate (LFPR) for more employment
opportunity of the participants was found higher than the non-participants.
Before nineties the wage rate for women labor force did not get importance
because of social backwardness, women labor was sold at a very low
non-bargaining rate. This was equally true in case of male labor force
before the eighties. But with time passing situations have changed
noticeably; it is recognized that there is now a days a serious scarcity of
labor in rural areas, especially in the peak season and this shortage even
hampers agricultural production. The intervention of micro-finance in the
rural market is one of the main reasons for this change. Therefore, the
labor force of rural areas now has the ability to influence rural wage rate.
As the main target group of micro-finance is women, they have gained
a special financial power over men. Though women are dominated by men
culturally, their access to get credit and do their own business has
increased their confidence on their own ability. This is especially true for
the rural poor women of the country. Now more and more rural women move
outside their home after joining micro-finance program. They now go to
office, banks, market and other places without a male company. This is a
positive indicator of women empowerment.
There is a controversy about the impact of micro-finance on poverty
alleviation. The poverty rate of the country did not decrease significantly
in last few years. It did not increase though.
The main focus of micro-finance is to alleviate poverty, but it could
not reach the poorest of the poor till now. One of the reasons might be the
failure to reach the hard-core poor by these programs. Now MF-NGOs are
seriously thinking about this issue and have started some programs to solve
this problem. But it is a challenging work to do, because this group of the
population first needs money for consumption. Without solving these problems
they are not able to invest credit for cash flow, which they need to repay
the loan in time. Therefore, it has been seen that there are big successes
of micro-finance at micro level that do not show any significant impact at
macro level. In the recent literature it is often mentioned as the problem
of "Macro-Micro Mis-match" (Sen, 2001).
To know the real extent
and to quantify the impacts of micro-finance mentioned above thorough study
is needed, which is time consuming and costly. However, government needs to
do that to make a correct decision. There is another problem to assess the
real net positive impact of micro-finance program, which is again impossible
without assessing the real cost involved in operating this financial
service. Different MF-NGOs
are charging different interest rates but none is based on rational cost
involved. A real positive impact of micro-finance program can be measured if
and only if the recipients of this facility pay the full cost of the
services they receive.
Two big provider of
micro-finance are Grameen Bank and MF-NGOs. Grameen Bank follows the Grameen
Bank Ordinance, 1983 and MF-NGOs register under any of the following acts of
the Government of Bangladesh :
Registration Act of 1860
Social Welfare Agencies (Registration and Control) Ordinance of 1961
Act of 1994
who are accepting grants/donation are required to take a certificate of
permission from the NGO affairs Bureau.
There is nothing in the
registration act of any NGO/MFIs that prohibits them to undertake
micro-finance activities with the member clients.
Therefore, there are two types of MF-NGOs operating in the field of
micro-finance. One type of them are those who have started their
organization with a single objective of micro financing, and the others are
NGOs who have other objectives in addition to micro-financing. A large
number of NGOs did not start the organizations with a view to perform micro
financing activities, but later on they either shifted to or have added
micro financing. However,
they need formal and legal permission from the Government in the form of a
special licence for carrying out the micro-finance activities with the
ultimate objective of poverty alleviation. In spite of that, there is no
single authority that provides licence/ permission and keep the information
of all organizations involved in micro financing.
In this context, many agencies like GOB, donor agencies and
policy makers of the country feel that there is a serious need to monitor
the activities of MFIs in Bangladesh. Since, members' savings is most
important source of fund (near about 25%) of MFIs, which also is increasing
as a percentage, therefore, there is a need to protect the interest of small
savers. In addition to that, without a formal legal entity the sustainable
growth of the NGO-MFIs would be hampered seriously in a number of ways.
Among those, the most important is the lack of access to formal sources of
national and international fund for effectively carrying out micro-finance
program for poverty alleviation on a sustainable basis. Therefore, there is
an obvious need for certain form of compatible and user's friendly
prudential norms/indicative guidelines in the shape of a concrete code of
norms/conduct for making this sector more institutionally organized and
sustainable with a specific legal identity.
The Government of Bangladesh has
formed a committee named 'Micro-finance Research and Reference Unit (MRRU)'
in 2000, which includes 11 members from different sectors who are involved
in this program to formulate a uniform policy for this sector. Ensuring
transparency and accountability of MF-NGOs would be the main objectives of
this policy. This committee has also given emphasis on observing uniform
accounting policy and auditing, governance structure of MFIs, policy on
savings and investment, rational interest rate, credit rating etc of the
MF-NGOs. The committee is also discussing the issue of licencing to those
MF-NGOs who are accepting deposits up to a certain amount from non-members
or general public.
current challenge of MF-NGOs is whether they could run the program without
subsidy, because the flow of donor fund is declining over the years. Since
the main objective of micro-finance is to alleviate poverty, the question is
whether they would be able to charge real cost of service on the recipients.
If it charges full cost, what would happen to the other objective of
outreaching the poorest of the poor? On the other hand if
full cost is not charged, would they be financially sustainable in
the long run? And the challenge
for the government is to bring this huge unorganized industry under a
uniform umbrella where this industry would get proper direction and support
to run the business and at the same time serve the people who are the target
group in such a way that they would be benefited in the long run and would
be able to overcome their financial backwardness. Ultimately these
institutions would become autonomous players in the main-stream economy.
NGO-MFIs have to face the realities of declining subsidized fund, they
should take effort to reduce administrative and transaction cost which seems
very high. Most of them do not practice proper bookkeeping and accounting
policies, lack professionalism in financial transaction, therefore, training
and capacity building in accounting and financial management plus greater
transparency in their operation is essential not only to make them
attractive to the donors but also to enable them to tap commercial markets
commercial banks lack experience and expertise to operate in this market;
they can overcome this problem by linking them with NGO-MFIs who already
have a ready set up of operation and experience. This linkage program on one
side can reduce operational cost of commercial banks and on the other side
can reduce the financial problem of NGO-MFIs. Especially, smaller NGO-MFIs
could be encouraged strongly to play the role of brokers between the banks
and the borrowers. Here the banks bear the credit risk by lending directly
to the borrowers and share a part of its spread with the NGO-MFIs. The NGOs
will receive a commission for identifying borrowers and ensuring repayments.
Large NGO-MFIs can also be integrated into this program of poverty
alleviation by encouraging them to establish themselves as banks.
legal framework of formal financial institution can be changed in favor of
the rural poor. Under this framework moveable property, accounts
receivables, credit history or good previous repayment performance etc. are
not useable as security to access credit. But most of the rural poor people
have only these things to offer as security.
These realistic changes in the legal framework can help poor people
to enter into the formal financial market easily.
Therefore micro finance sector
will have to develop a concrete long run vision of a flexible,
self-sustainable, well-regulated and pro-people micro finance industry
capable of facing all these challenges. That means the industry will:
Design its product according to the
market need - what kind of loan poor people really need and which terms and
conditions are applicable to them. They should not just follow Grameen Bank
model, rather they should be innovative in product designing,
Diversify its loan portfolio, not just
depending only on the agricultural sector for investment,
Identify the exact cost involved and
find out reasonable service
charge for each product offered,
Apply internationally accepted
Formulate transparent policy for the
Acquire a corporate legal identity
owned by the clients themselves or focus on a single activity with
corresponding single legal identity.
other side the government and the donors should try to help the industry to
be sustainable by developing infrastructure needed, providing training and
technical assistance, providing correct guidelines and regulation, offering
proper incentive for positive contribution and punishment for the opposite.
It is expected that with the fulfillment of the above vision this
service sector would contribute to our economy by alleviating poverty in
real sense. It would help to generate permanent employment, remove over
dependency on agriculture and help people by eliminating their dependency on
the moneylenders and informal credit suppliers. Poor people would be able to
take care of their health and education by getting the benefit from this
service and they would also help MFI to be sustainable by paying their due
on time. It is also expected that since members' savings is becoming the
main capital of this business, therefore the representative of the members
should have a say in the decision making process of the MFIs for the long
run benefit of the industry.
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