Microfinance (1)

ABSTRACT The world is getting more matured in terms of level of sophistication. At the same time it

becomes a threat due to the difficulty of having areas where further sophistication is possible.

But, now, the most sensitive problem for all is the severe poverty. Micro-credit became a new

phenomenon in the present world due to its recognition of an efficient weapon to fight against

poverty. A current investigation proved that, more than 1.3 billion inhabitants are struggling to

earn a smaller amount one dollar ($1) a day where they are captivated by extreme shortage of

basic needs such as; food, cloth, shelter, treatment and education. However, reducing poverty is

more successful in rural areas than in urban areas because of its random access in remote places.

In every year half a billion US dollar are given to 7.5 million borrowers throughout the country

as a micro-loan to break the vicious cycle of poverty. Commercial banks are historically not

inclined to provide loan to the poor and grassroots people of the society. But commercial banks

involvement in microfinance is very important for fighting against vicious poverty in the

country. An earnest effort has been made to make the micro-credit programs and methodologies

comprehendible with the process of diffusion and usability from a commercial perspective. Such

perspective is important to give micro finance program an institutional modality that will

ultimately ensure long-term existence.

It is also important that commercial banks can change the scenario of microcredit sector because

of their high structural administration and economic power. So, this paper approaches to explore

selected Commercial Banks activities and the way it assists enormously to develop the living

standard of the poor and vulnerable people in Bangladesh and encourages to apply this model in

different countries.

1 Micro finance in the banking industry: A study on some selected banks of Bangladesh.

1.1 INTRODUCTION

Micro finance used as a key element in the development strategy of Bangladesh since the early-

subsidized rural credit Program was dominant state interventions to help with the development

process. In the mid-70s though, neoclassical economists identified these programs as failures.

They pointed out that subsidized interest rates led to an excess demand for credit, followed by

the rationing of credit, thus causing distortions of the market. Further access to subsidized credit

was skewed to the wealthier rural population thereby leading to less optimal allocation of scarce

investment funds. This resulted in a process of financial repression interest rates on savings

deposits were inhibiting mobilization of domestic resources, which was injurious to the countrys

overall economic development.

A number of non-governmental organizations and the GRAMEEN Bank pioneered alternative

credit delivery mechanisms for the rural poor; consisted of small amounts of collateral free,

affordable loans, popularly known as micro credit. These micro-credit programs, unlike previous

state efforts, have been successful in providing commendable access to credit by landless women

and men usually defined as those with a land holding of less than half an acre and in achieving

high repayment rates of up to 98 percent. Impact studies on micro credit programs have

substantiated the important role of credit in the development process of Bangladesh.

The activities of the banking sector in the microfinance activity are a very important concept for

the economy of the Bangladesh. Most of the people of our country are poor and helpless. The

traditional banking does not allow them to take loan because of the collateral based loan

mechanism. So traditional microfinance institutions are specialized in micro finance business

have come long way in this sector. These NGOs and MFIs is the main player in micro finance

industry and may be they will remain the same for their no collateral based loan system and

exotic loan recovery system. But the exorbitant interest charged by these institutions and their

unstructured nature paved the way for the traditional banks to involved in microfinance industry.

Now the commercial banks and government controlled banks and also other specialized banks

are playing an important role in this sector. These institutions are now involved in varied

microfinance activities in Bangladesh.


1.2 AIM AND OBJECTIVES OF THE STUDY

The aim of the paper is to bring out the present scenario of microfinance activity of banking

sector of Bangladesh. The study is based on overall banking sector performance of Bangladesh.

Other objectives are:

1. To reflect the evolution of microfinance in the banking sector.

2. An understanding about the microfinance product offered by the banking sector of the

country.

3. To discuss the microfinance activity of the banking sector.

4. To reflect the current condition of the micro finance activity in banking sector,

emerging issues and challenges.

5. To present the regulation and the policy implication of major constituents such as;

Bangladesh bank, private commercial bank, Government specialized banks and other

public banks.

1.3 METHODOLOGY OF THE STUDY

The review is primarily based on secondary and published information. The major sources of

information are published research reports and papers, unpublished reports from reputable

organizations, data from major institutions such as Microcredit Regulatory Authority (MRA),

Grameen Bank, BRAC, network agencies such as Credit and Development Forum (CDF),

commercial banks, Bangladesh Bank (Central Bank) etc.

1.4 SCOPE OF THE STUDY

The scope of the research is limited to the microfinance in the banking sector of Bangladesh. To

understand the present scenario eight banks have been selected consisting of two public banks,

three private banks and three Islamic banks. The list of the selected banks is:

1. Public banks

a. Agrani bank

b. Sonali bank

2. Private banks

a. Prime bank


b. Standard chartered bank

c. Eastern bank Ltd.

3. Islamic banks

a. RDS of IBBL

b. Social Islami Bank Ltd.

c. Al-arafah Islami Bank Ltd.

This selection of microfinance institutions and banks are based on the level of disclosure, quality

of disclosure, financial parameters etc. The study is based on the policies, products, objectives,

strategies and other qualitative and quantitative information to evaluate the present scenario of

the microfinance in banking sector.

1.5 LIMITATIONS OF THE STUDY

The emergence of Micro finance institutions is not now fully fledged in our country. So it is very

difficult to collect more and potential information about Micro finance institutions in our

country. There are some limitations which are:

1. It is very difficult to collect sufficient information about Micro finance institutions within a

very short time.

2. Lack of harmonious relation & close contact between officials of the Organization.

3. Most of the MFIs in Bangladesh do not provide data due to the accounting practices

followed by them.

4. This report may suffer from statistical error due to the fact that all data used was secondary

5. Lack of sufficient alternative sources prevented verification of information. The analysis

and future projections presented here may vary with opinions of experts in this field of

study, owing to limited economics knowledge on part of the authors of this report.


2 LITERATURE REVIEW

There is plethora of literature on performance of micro finance institution across the globe,

though only few studies have been carried out on the topic related with banking sector

involvement in microfinance. In a study (Shil, 2009) carried out a research about the

commercialization of microfinance and studied the prospects of commercial banks in the

microfinance sector. Both developed and developing countries still have a good market for the

development and advancement of microfinance industry. Because there is a huge market gap

that is required to be filled up to grasp the potential benefits from it. The market is growing, but

the pace is very slow. The main reason is lack of commercialization. Here, most of the NGOs

provide donated funds at a subsidized rate. Transformation rate (from NGO to MFI to

Commercial Bank) is very low. First thing that we need according to our proposed model is

conducive to regulatory environment to support the microfinance operation. Commercial Banks

should be kept free to engage themselves in such operations that are not authorized in many

countries. So, Central Bank may form a task force to conduct a feasibility study to evaluate

whether full-fledged commercial banks can be given the permission to go for microfinance

operation. Grameen Bank, BRAC Bank, Islami Bank Bangladesh Limited and some other

financial institutions are enjoying the facilities and they are making a good fortune, if we take

Bangladesh as a sample. If all banking and non-banking financial institutions avail the option,

the breadth and depth of outreach can be maximized. The need for microfinance is higher in

rural areas than in urban areas irrespective of the status of the country. Most of our unemployed

and unproductive men and women live in rural areas that need works and funds. Sometimes they

do not get work due to shortage of fund. Again, there are ample opportunities in rural areas to

operate successful venture at minimal fund involvement in various agro-based projects.

Indigenous people may also be a target group of microfinance industry who needs training and

funds to expose them off. Thus commercialization of microfinance may work as an effective

tonic here to bring our poor people out of the vicious circle of poverty. From NGOs, we cannot

expect the maximum result so long as they will run by donated fund or soft and grant loans. If

commercial banks come up with their expertise and commercial funds, the situation may be

better. They can use their long trained staff, fund management policies, scattered branches to

ensure outreach and last, but not the least, commercial funds with a commercial motive that leads

not only to alleviate poverty but also to develop wealth-base of the destitute group.


In his study (Shil 2009) tried to persuade the reader about the commercialization of microfinance

through banking sector. He postulated that the commercialization can increase the outreach and

the breadth of the microfinance and the rural and hard to reach people will be largely benefitted

from the microfinance lending mechanism. If the group (target market, loan receivers) is

identified rightly, if commercial principles can be applied equitably and if the poor are rightly

and timely focused, micro finance may work as a strong and timely intervention against poverty

that no laboratory can test and prove. It may work as a cause of smile for a vast majority poor

people who suffer from acute poverty level in terms of hunger, illiteracy, ignorance, slavery,

insecurity and such other in humanitarian condition.

The commercialization of the microfinance by established commercial banks is not a new idea.

The fact is that its a prominent idea and also a better one. Government of Bangladesh is trying

to enforce the commercial banks to open their branches in the rural and distant areas. It will

create a very congenial environment to eradicate poverty and unemployment in in rural and

distant areas. Also commercialization will improve the micro financing sector in Bangladesh.

But some important things which were necessary to fully understand the commercialization of

micro financing sector were not present in Shills findings. Some points are:

1. (Shil 2009) postulated commercialization as a new concept. This is historically not a new

idea. It is practiced in Bangladesh for many years, but in a limited basis.

2. Shil didnt provide a framework for the commercialization to modify or change the

present scenario. Further study is needed to establish a strong framework to strengthen

the commercialization of micro financing sector through banking sector.

3. No clear statistical or historical or factual data are given to understand the present

scenario of commercialization approach of Bangladesh.

4. No specific commercial bank or institutions have selected to replicate the

commercialization process.

(Pine, 2010; Awal, 2006) worked in the relationship and interlink between the banking sector

and the MFIs. Awal (2006) suggests that to facilitate growing partnership between financially

viable MFIs and the banks, the relevant financial authority could act as guarantor on behalf of

MFIs or establish Guarantee funds. He mentions one example of such a guarantor - the Swiss

Agency for Development and Cooperation (SDC), which guaranteed a loan from Sonali Bank,


the largest bank in Bangladesh. The repayment to the bank was excellent, and the guarantee

from the SDC was reduced annually until the next loan was approved by Sonali Bank without

any guarantee necessary. Another fact that should be considered is that according to the CDF

(Awal, 2006), the recovery rate from wholesaling is higher for commercial banks compared to

their recovery rates in direct microfinance involvement.

As Schicks (2007) points out, in recent times there have been commercial banks around the

world entering the microfinance business, which see serving the poor as an investment in access

to lucrative markets. In Bangladesh, this downscaling has taken place as well, but due to

obstacles for these banks in microfinance such as regulation and prudential norms, the mindset

and commitment level of staff or in general a lack of understanding for the microfinance

industry, these banks have not had much success so far in trying it out on their own (Awal,

2006). For example, the recovery rate for Sonali Bank was only 76% in 2006. At the same time

its wholesaling activities to reputable NGO-MFIs were by far more successful and resulted in an

overall recovery rate of 97%.

Awal (2006) sees the main reason for this in their respective comparative and competitive

advantages which lead to synergy in linkage between the banks and NGO-MFIs. By wholesaling

to a NGO-MFI, a commercial bank can rely on the MFIs experience, capacity and

understanding of the market while the NGO-MFI on its part is backed by the commercial banks

resources.

Pines (2010) study found that the achievements in sustainability MFIs are able to reach great

levels of outreach and accommodate demand through innovative product development. Financial

sustainability means turning away from donor grants and soft loans and making use of

commercial funding sources. These commercial funding sources will only be available to

properly regulated and supervised MFIs. Increasing competition as a result of market saturation

will then in turn lead to the development of innovative microfinance products.

Although Bangladesh is the birthplace of microfinance, it is only now taking measures that will

eventually lead to increased commercialization and therefore to competition, ultimately leading

to real innovation of microfinance products that suit the needs of the individual borrower. In

Latin American countries commercialization of the microfinance sector is far more advanced


thanks to regulatory frameworks which further fully commercial microfinance banks such as

Mibanco in Peru or Banco Compartamos in Mexico.

The traditionally hands-off policy of the government of Bangladesh in the microfinance sector

led to the rapid growth of the sector, and only now are the MFIs getting involved with regulation

and its related implications for commercialization, competition and innovation. For this new era

to be successful, all involved parties with their respective interests - the big MFIs as well as the

small ones, and the government -will have to cooperate with each other.

Both (pine, 2010) and (Awal, 2006) have suggested about the formal commercial micro

financing activity and defined that if the formal commercial banks come forward to the micro

financing activity situation would be most beneficial for both the clients and lending institutions.

They identified that commercial banks should help and provide loan to MFIs more and more as

the MFIs loan recovery is much higher than formal commercial banks. But important things to

remember that both researchers didnt provide some important basis of knowledge:

1. The basis of the study is based on micro financing institutions, but it is not based on from

the perspective of from the banking institutions.

2. The dataset doesnt provide enough details about the banking sector involvement in

microfinance activities.

3. The basis of the research was for the whole financial sector, no specific guideline was

provided for an individual institution.

Bell et al. (2002) indicate the need for the involvement of private commercial banks in

microfinance as essential in the fight against global poverty because of their domination of the

financial market. However, although commercial banks possess electronic payment

infrastructure and other necessary resources, the earlier discussions have identified several

factors that have reduced their willingness to enter the microfinance market. Meanwhile,

although MFIs are powerful in their outreach due to their numerous one-on-one relationships

with their customers, they are challenged by reduced accessibility to physical and other relevant

infrastructure present in commercial banking. Moll (2005) anticipates that the extension of MFI

services will include a larger proportion of the rural population, while commercial banks may

eventually compete with MFIs in their goal to reach a greater number of the poor.


In her study Groen (1998) stated that:

When assessed on the basis of achieving both high portfolio quality and significant scale

of outreach to the poor, most of the commercial bank microfinance programs that were

mandated by governments can only be considered as failures. The exceptions were those

programs that charged a commercial rate of interest. They had a higher portfolio quality

than other programs but they were still not profitable. This almost universal failure is not

explained by the different policy contexts across the region. Further, because

microfinance has not been a profitable business, government mandates have been

unsuccessful in encouraging commercial banks to become involved in microfinance. The

banks must have the incentive to design better products for micro entrepreneurs, which

can be profitable. (p. 4)

Groen (1998) argued about the microfinance success depends on regular rate of interest which is

charged by the commercial banks and privatized microfinance institutes. This refers that as we

experience- most of government supported lending institutes and government banks are not so

successful in our country. This is one of the most important findings from her study. She

argued that the private commercial sector can play an important role in the microfinance sector.

The large majority of commercial bankers interviewed had little positive experience of banking

with the poor. They experience non-payment by the poor, look at the high costs, and assume the

problem is with the poor rather than with the design or delivery of their banks products. They

also distrust NGOs that provide financial services to micro entrepreneurs, because they are not-

for-profit institutions and not subject to regulation. As a result, the majority of commercial

bankers perceive microfinance as risky, unprofitable and not fitting with their core business. By

contrast, commercial bankers with a positive perception of microfinance had seen successful

microfinance in practice, undertaken a comprehensive analysis of the size and performance of

the microfinance market, and designed lending and savings products that were profitable and

could reach significant scale. Groen stated that the mindset of the commercial bankers needs to

change. The present commercial banking system is not so happy to provide investment in micro

credit sector as its risk exposure is high and potential defaults rate is also high if the policies and

strategies are not taken accurately. But if the banking trust the micro financing activity and

maintain positive attitudes toward it, the situation and the microfinance sector will rapidly

change. A very conspicuous change in this sector is the information gap and limitation of


potential clients. Nowadays commercial banks are changing their attitudes toward this sector.

More and more banking institutions are trying to maintain positive attitudes and are merging

with microfinance institutions, they are providing loan towards the root level clients. This is a

positive change in this sector.

Groen (1998) provided some policy implications to change the banking institutions attitude. She

had emphasized on governmental influence and some other policy making to change the attitudes

of the banking sector.

The most effective way for governments to encourage commercial banks to become involved in

microfinance is to ensure an appropriate regulatory and prudential framework. The elements of

an optimal policy context are:

Sound macroeconomic policies and basic infrastructure to ensure a growing economy

(especially increasing complexity in the financial sector)

Minimal restrictions to profitable lending, particularly no interest rate caps enhanced

ability to establish a small commercial bank which can focus on this sector (such as a low

minimum capital requirement)

Appropriate prudential regulations for this market including capital adequacy ratios, asset

quality indicators and unsecured loan limits.

Create a small specialized bank or a separate microfinance unit within a large commercial

bank.

Treat savings as equally important to lending.

Charge interest rates to cover all the costs of the lending products.

Ensure excellent MIS and portfolio management.

Recruit staff from outside the bank and/or give staff specialist training.

Find a champion or visionary who will see the program through to success. (p. 6)

These suggestions are really important for Bangladesh context as the micro financing sector

needs much more support from the traditional banking sector. Banking sector of Bangladesh

needs to come forward to improve the unemployment situation, unequal distribution of wealth,

Inflationary situation. Governments and central banks in Bangladesh need to give official

recognition and support to NGOs and self-help groups engaged in credit for the poor, and to

encourage commercial banks to participate in meeting their loan capital requirements. They

should also establish a favorable policy and legislative environment for that purpose.


Obaidullahs (2008) study found that the entire banking and financial system comprising of

private commercial banks and semi-private-semipublic specialized banks and financial

institution leave a large chunk of population untouched by their activities. These are the poor,

poorest of the poor and marginalized people who do not enter into the market at all. Some non-

governmental noticed that there are two stumbling blocks which hinder the access of poor people

to the banking and financial system:

High cost of financing

High cost of processing

System of collaterals.

The urban concentration of modern commercial banks is another stumbling block. It is well

known, hence needless to point out that modern commercial banking developed hand to hand

with industrialization and urbanization. Hence, most banks are found in urban areas. The micro

financing institutions, on the other hand, aspire to take financial services to their clients in the

rural areas, where they come from. They also wish to keep the cost of processing as low as

possible, in many cases, eliminating the hugely costly paper work altogether. The system of

collateral has resulted into a situation where banking and financial system functions for the

benefit of rich only. There is credit for you if you can produce collateral only. Be it a house,

land, jewelry, factory, raw material, semi-finished products, or just claims to some ownership.

No collaterals and No credit. It is that simple. That means that the banking and financial system

makes a circuit of wealth amongst the rich only. Since poor people are known to have to access

to any kind of assets, they cannot get credit from the banks with the result that they are left out.

From the above studies we can refer that Banking sector play an important role in microfinance

activities. Without the proper banking sector intervention microfinance will not be fully fledged

in any economy. It is really an important concern for our countrys perspective. So government

interventions and commercial banks support are must to help this sector.

Some guidelines for future studies are given below:

1. The specific sector analysis is important for to understand the microfinance activities of

banking sector.

2. Specific bank analysis is not provided by any researchers which is so frustrating.


3. Every researcher tried to view this topic as a whole but individual analysis is very

important for to understand the need of microfinance activity by the bank.

4. Proper guideline is not provided by the government to regulate the microfinance activity

by banking sector which is very important.

5. Banking institutes must provide dataset for the researchers for much more detail activity

on this topic.


3.1 MEANING OF MICROFINACE

Microfinance refers to a variety of services provided by the various traditional microfinance

institutions and other bank and non-bank financial institution. This institution provides loan and

other services to the rural and poor people who are unable to take loan from the traditional

banking sector for various economic and non-economic factors. Microfinance products tend to

be for smaller monetary amounts than traditional financial services. These services include loans,

savings, insurance, and remittances. Microloans are given for a variety of purposes, frequently

for microenterprise development. The diversity of products and services offered reflects the fact

that 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, and because 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 by the formal financial sector.

3.2 A BRIEF HISTORY OF MICROFINANCE

The origin of the current microcredit model can be traced back to action research in the late

1970s, carried out by academics as well as practitioners in organizations that 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) experimenting with different

modalities of delivering credit to the poor. The predominant model become one of providing

individual loans to a target group of poor households, rather than providing loans for group

projects which suffered from a free-rider problem. The various models converged around the

beginning of the 1990s toward a fairly uniform Grameen-model of delivering micro credit. A

franchising approach whereby new branches copied the procedures and norms that prevailed in

existing branches fueled the Grameen-style growth. From the mid-1990s onward, it became clear

that the standardized model of providing micro credit with fixed repayment schedules and with

standard floors and ceiling on loan size were not sufficient to meet the needs of the extreme poor.

In recent years, the standard Grameen-model has undergone greater refinement in order to cater

to different niche markets as well as to different life-cycle circumstances.


The early 1990s was the period of rapid expansion of the Grameen-style microcredit approach.

The growth was fueled largely by franchising, whereby new branches replicated Case Studies

in Scaling up Poverty Reduction the procedures and norms that prevailed in existing branches. It

was clearly aided by the high population density and relative ethnic, social, and cultural

homogeneity in Bangladesh. A notable shift occurred during this expansion phase to placing 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 helped in varying degrees to

expand the revolving loan funds for MFIs, particularly during expansion phases of the various

institutions.

Moreover, PKSF emerged during this period as a wholesale financing institution. Following this

expansion, a geographical mapping of microfinance suggests that all districts in Bangladesh now

have microcredit services, although 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 southeast and pockets of the northeast

still have room for expansion of coverage.

Feedback from the field, academic research, and international experience contributed to an

increasing emphasis on providing diversified financial services for different groups of

households from the mid-1990s onwards. The benefits of a narrow focus on microcredit during

the expansion phase was that it kept costs low, operations transparent, and management

oversight relatively straightforward. However, it became clear that the standard Grameen model

of providing microcredit with fixed repayment schedules, and standard floors and ceilings on

loans sizes, was not sufficient to meet the needs of the extreme poor or the vulnerable non-poor.

Moreover, existing microcredit borrowers also required complementary financial and

nonfinancial services. The standard practice for MFIs until the late 1990s was to collect

compulsory weekly savings from their clients, holding the money as a de facto lump sum

pension, which was returned when a client left the organization. Access to these deposits was

otherwise limited, which curtailed a potentially important source for smoothing consumption.

Recognizing these limitations, an increasing number of MFIs in Bangladesh have offered savings

accounts that clients can withdraw from more freely, in addition to the fixed deposit scheme.


Moreover, many MFIs have life insurance products, whereby outstanding microcredit debts are

written off and other benefits are paid following the death of a borrower. Noncredit services can

also take the form of input supply, skills training, and marketing support for micro-entrepreneurs.

A complementary package to microcredit can also take the form of providing education for the

children of borrowers. Grameen Bank, for instance, has a scholarship program for secondary

education for girls, and a student loan program for tertiary education.

Similarly many MFIs have community health programs, legal literacy training, and information

on how to access local resources.

3.3 TYPES OF MICROFINANCE ACTIVITIES IN BANGLADESH

In Bangladesh there are mainly four types of institutions involved in micro-finance activities.

These are

1) Grameen Bank (GB), a member owned specialized institution,

2)Around 1500 Non- Governmental Organizations (NGO) likes BRAC, Proshika, ASA, BURO-

Tangail, BEES, CODEC, SUS, TMSS, and Action- Aid etc.

3) Commercial and Specialized banks like Bangladesh Krishi Bank (BKB), Rajshahi Krishi

Unnayan Bank (RAKUB) and

4) Government sponsored micro finance projects/ Programs like BRDB, Swanirvar Bangladesh,

RD-12 and others which are run through several ministries viz., Ministry of Women & Children

Affairs, Ministry of Youth & Sports, and Ministry of Social Welfare etc. (Source, BB report

2012)

3.4 HISTORY OF MICROFINANCE IN BANKING SECTOR OF BANGLADESH Having a bank account and credit card seems normal to many people, but for more than 2.5 billion

people in the developing world, it is almost unimaginable. Excluded from the formal financial sector,

they have no access to savings or current accounts, credit or other basic types of financial services.

Ending this exclusion has long been seen as a way of lifting the poorest people out of poverty.

Microfinance took off around 30 years ago with the launch of Grameen Bank in Bangladesh,

founded by the banker, economist and Nobel peace prize winner Muhammad Yunus, and was

based originally on the idea of providing small loans to poor people to enable them to invest in

their own livelihoods.


NGOs and large banks are not obvious stalemates but, as this alliance has shown, they can work

together successfully where they share a common interest. In fact they need to because no single

institution has all the skills and capacity required for a project as ambitious as expanding

financial services to several billion new people around the world.

Microfinance organizations don't only provide money, they also provide access to ideas,

technology and new business ventures for their members. One of the best examples is the

introduction of cell phones to rural villages in Bangladesh. Communication between families in

different villages and among suppliers and markets in different areas were very difficult. Days

were often wasted traveling back and forth to get information. To fill the need, Yunus's Grameen

Bank leased a cell phone to one woman in each village. The women made money by charging a

small fee for use of the phone. This allowed the women to make a living and made

communication easier among villages. Introducing cell phones is just one of many examples of

non-lending efforts made by microfinance institutions to improve the lives of their community's

impoverished citizens.


4.1 CURRENT SCENARIO OF MICRO FINANCE ACTIVITIES OF SELECTED

BANKS

Microfinance sector has a vital role in financial deepening. Increase in financial deepening is one

of the targets of the monetary policy pursued by the Bangladesh Bank as it helps poverty

reduction through availability of money in the informal sector, especially in the rural sector. It is

found that an expansionary monetary policy contributes to higher monetization in informal sector

through activities of MFIs. Faced with depleting donor funds, MFIs have to depend on their

retained earnings, clients savings and borrowings from the banking sector. Expansionary

monetary policy is represented by lower (weighted average) interest rates on credit and larger

advance of the scheduled (member) banks.

In general, government commercial bank and some specialized bank practice micro financing

activity in Bangladesh. Private commercial banks activity is very negligible in direct micro

financing intervention, but they have strong influence on the stream of financing towards micro

financing institution.

On the other hand, RDS of IBBL is showing its strong resilience and intervention in micro

finance activity all around the country. But other Islamic banks are lag behind from this sector

due to their lacking of strong financial position and administrative power.

4.1.1 Financial Products of commercial banks for microfinance in general

Various kinds of financial and non-financial products are arrived in microfinance sector.

Government and non-government banks provide this variety of financial products to their clients

depending on their own strength and microcredit policy. But usually most of the MFIs and

commercial banks follow these lines of products:

Loan Products


Most of the MFIs and commercial banks work in rural and urban areas with poor in general and

extreme poor in exception. So they have clients of these two categories both in the rural and

urban areas. This being the operational functions the loan products is equally available for all

intended poor and extreme poor members and there is no discrimination in the two sectoral areas.

The Loan Products of banks for microfinance are:

Rural Micro Credit for providing credit support to the rural poor members

Urban Micro Credit for providing loan assistance to the urban poor

Agricultural Credit Livestock, Poultry & Fishery, crops

Off Farm Activity Loan

Education Loan

Housing Loan

Food processing

Health Service Loan for supporting emergency health needs- accidents, delivery and

emergency treatment for any epidemic and/or chronic health disease

SME / SEL (Small Enterprise Loan)

Women Entrepreneurship Loan

Transport Loan for procuring Rickshaw and Rickshaw Van, Push Cart, Bullock Cart,

Indigenous Local Public Transport (Human Huller) etc.

Savings Products

The Savings Products are:

Weekly / Mandatory or Compulsory savings and varies from Taka 10 to 20 or more across

the MFIs and CDCs and the minimum amount is Taka 10 per week

Voluntary Savings is also practiced with the wisdom of building future capital for emergency

and unforeseen factors and there is no fixed rate where a member can deposit according to

her/his capacity

Emergency / Risk Covering Savings deduction @ 1% at source during loan disbursement

and payable at the time of leaving the group on bonafide ground should the emergency


savings remains unutilized. However, any adjustment against loan loss on genuine ground

from this savings fund will be deducted prior to refund of the risk fund

Insurance

The interface with the insurance companies in each town under the study reveals that there is no

insurance scheme or product for the poor and neither extreme poor nor they can avail any

existing insurance facility/products for technical reasons of ineligibility. The big and national

MFIs like BRAC and ASA have both Life and Loan Insurance for their clients. But their

insurance products do not have any legal entity in terms of the insurance law nor can they

practice `it without concurrence of the appropriate body of the government.

Remittances

In view of the extensive work force from Bangladesh working abroad, especially in the Middle

East the Remittance function has become an important financial service for the families whose

male member mostly works outside the country. While Banks, big and medium MFIs have

remittance services but the poor and extreme poor can not avail the remittance services for there

is no wage earner in their family.

Non Financial Products

The MFIs and MFNGOs in practice do have some non-financial services extended to the

beneficiaries. These are, Education and Training, Water and Sanitation, Advocacy and Policy

Lobbying, Campaign with Right Based issues for poor and extreme poor, Financial Literacy ,

Health (especially primary health, mother and child care) etc.

4.1.2 Current scenario of microfinance activity of selected banks:

Name of

Bank

Nature

of bank

Forms of

intervention

Interest

ceiling

Target people Name of

products

Repayment

period

Agrani bank public Direct and

indirect

8%-10% Net annual

income

(10000-50000)

Agricultural

loan, farming,

education.

Maximum

18 month or

12 month.


Sonali bank Public Direct and

indirect

8%-12% Farmer,

fisherman,

rural women.

Pond fisheries

scheme, off -

farming

project,

Swanirvar

credit scheme.

Maximum

18 month or

12 month.

Prime bank

LTD.

private Indirect 12-13% MFIS &

Other micro

lending

institution.

N/A Medium to

long term

Standard

chartered

bank

Foreign-

Private

Indirect Not

certain

ASA and other

MFIs

N/A Long term

financing

Eastern

Bank LTD.

Private Indirect 12%-

13%

MFIs N/A Medium to

long term

RDS of

IBBL

Private Direct Profit

margin

rate-

12.5%

Hardcore

poor,

poor,Farmer,

Sanitation

Bai-Muajjal,

Murabaha,

45

installments

within one

year.

SIBL Private Direct N/a MFIs,

Farmer,

fisherman,

rural women.

N/A Maximum

18 month or

12 month.

4.1.3 Overview of Public Banks in Microfinance

Public banks follow mostly the same policy for providing the microfinance. All the public banks

are working together to find a solution to eliminate poverty and unemployment from the country.

Sonali Banks performance overview has been taken as a sample to understand the public banks

activity in microfinance.


4.1.4 Sonali Bank Performance

Presently, 32 Micro Credit projects/programs are being run by the Bank. Amongst the

programs, Bank-NGO Linkage wholesale credit program, Goat rearing, Lamb rearing, Fruit,

Herbal, Medicinal and Nursery development credit scheme, Loan program for Disabled

persons, Swanirvar, different types of Credit through BRDB-UCCA ( Corp, Irrigation &

Poverty Alleviation), ADB financed Rural Livelihood project (RLP) in 152 Upazillas, Daridro

Bimochone Shahayta Rin Karmachuchi, Rural small business & Small Farming loan scheme ,

BARD Comilla - SB & RDA Bogra - SB Functional Research project etc. deserve special

mention in channelizing the financial resources for poverty alleviation and rural socio

economic development of the country. Credit for Urban Women Micro Enterprise

Development (CUMED) project without collateral up to Tk. 5.00 lacs operating in 9 selected

branches in Dhaka city, now CUMED has been extended in Dhaka city more 17 branches in

addition to existing 9 branches, Chittagong two branches, MoulaviBazar 3 branches and in

total 92 branches including all District branches of all over the country. Micro Entrepreneur

development credit program Unmesh operating in Moulvibazar district, now this credit

program has been extended all over the country. Daridro Bimochone Shahayta Rin

Karmachuchi now has been extended all over the country in the year 2010. In the year 2007 a

special credit program named ` SIDR ' has been introduced for SIDR affected areas in which

there are a provision of collateral free loan upto Tk. 20,000.00.

More over to make the self dependency especially for the women Micro credit Division has

been introduced a now Loan program in the year 2010 named; Jago Naree Grameen Rin"

through 250 Rural branches all over the country with a provision of collateral free upto Tk.

25,000.00.

Up to December, 2010 a total amount of Tk.422426 Lacs has been disbursed under various

projects/programs monitored by this Micro Credit Division, whereas it was Tk. 386529 Lacs

Up to Dec. 2009. On the other hand total recovery position stands at Tk. 482839 Lacs as on

December 2010, whereas it was Tk. 463854 Lacs up to Dec. 2009. The present outstanding

position of Micro Credit is Tk. 98263 Lacs.


Features :

SL. Project/Programs Target group Loan size in Tk. Rate of

Interest

A. Bank's own Program

1 Bank-NGO Linkage wholesale

Credit.

Poor people According to project size 13

2 Credit for Urban women Micro

Enterprise Development-

CUMED

Urban women

Entrepreneurs

Highest - 5,00,000 11

3 Goat Rearing Small & Medium

Entrepreneurs

According to project size 12

4 Swanirvar Poor Landless

people

Highest - 40,000 11

5 Unmesh Micro

Entrepreneurs

Highest - 50,000 11

6 Daridra Bimochane Sahayta Rin Hard core poor Highest - 50,000 10

7 Rural small Business Small

Entrepreneurs

Highest - 50,000 11

8 Small Farming Loan Small

Entrepreneurs

Highest - 50,000 11

9 Loans for SIDR affected Area SIDR affected

People

Highest - 20,000 08

10 Marginal and small Farms

System Crop Intensification

Pro.- MSFSCIP

Marginal, poor &

small farmer

Highest - 10,000 09

11 Crop Go down credit project Small & Medium

farmer

Highest - 10,000 09

12 Herbal, Forestry, Medicinal and

Nursery development Credit

Poor energetic

youth

Highest - 25,000 10

13 Loan to Salt Growers Actual Salt

producer

Highest - 44,000 per acre 4+6=10


14 Loan for disabled people Disabled people Highest - 50,000 08

15 Sonali Bank-BARD, Comilla

Priogik Gabesana Rin Prokalpa

Bittahin rural male

& female

Highest 10,000 09

16 Sonali Bank-RDA, Bogra

Priogik Gabesana Rin Prokalpa

Bittahin rural male

& female

Highest - 10,000 09

17 Jago Nari Grameen Rin

Karmachuchi

Bittahin rural

female

Highest - 25,000 09

B. BRDB-UCCA

1 BRDB Crop Lending Small & Medium

farmer

Highest 8,000-15,000 10

2 Shrimp Culture Small & Medium

farmer

Highest 2,333-28,000 10

3 Women Development Program Co-operative poor

female member

Highest 1,500-20,000 10

4 RLP (Rural Livelihood program) Small & Medium

farmer

Highest 5,000-20,000 6.25

Source: website of Sonali Bank

4.1.5 MICROFINANCE ACTIVITY OF ISLAMIC BANKS

Islamic banking has been thriving in the vibrantly growing Bangladesh economy, by now

comprising a fifth of total banking sector assets and liabilities. Islamic microfinance services in

the economy are also growing healthily; with avid participation of the Islamic banks in the

financial inclusion campaign. According to available data, Islamic microfinance amounting to

Taka 46.2 billion as of end December 2011 comprised 8.38 percent of total Islamic financing,

increasing sharply from a mere Taka 2.8 billion or 0.93 percent of total Islamic financing as of

end of December 2009. The number of microfinance clients has risen to 448734 as of end of

December 2011, from 211197 as of end of December 2009. In other words, the client base has

literally doubled over the last two years.


In order to reach a greater number of people, new models of microfinance are being studied and

developed by the IDB, Muslim Aid and a nonprofit think tank in the United States, the Institute

of Halal Investing (IHI). In the early days of Islamic microfinance, the loans were usually given

with no fee (qard hasan) and any costs incurred were covered with sadaqa and loan forgiveness

with zakat. While using qard hasan is an easy method to ensure Shariah compliance, it is not a

sustainable model. Even when repayment rates are between 97% and 99%, comparable to the

most successful microfinance institutions (MFIs), the reliance on voluntary contributions makes

the continuing operation of the organizations uncertain. As one of the early adopters of

microfinance, Bangladesh was also one of the first to introduce Islamic microfinance. A recent

study of three Islamic MFIs in Bangladesh, which have existed for between 10 and 12 years,

show disappointing results: the three MFIs disbursed only $530,000 in financing in 1999

(compared to $376 million disbursed by the Grameen Bank in the same year) and most of this

was based on murabaha. Another early experiment in Islamic microfinance occurred in

Hodeidah, Yemen starting in 1997 that also used murabaha starting in 1997. Murabaha is a

transaction where the bank buys a good for the customer and charges the client the cost of the

good plus a markup where the amount including the markup is repaid in a fixed number of

installments. Many organizations recently entering Islamic microfinance combine a Shariah-


based microfinance program with zakat to help those too poor to be able to use microfinance.

While the track record of halal microfinance institutions using profit-and-loss sharing products is

mixed, all the new microfinance programs include the use of mudaraba and musharaka to

provide financing to micro businesses and allow micro entrepreneurs to save. Some microfinance

providers use an individual methodology while others use the group methodology that has been

successful in conventional microfinance like the Grameen Bank.

4.1.6 ROLE OF COMMERCIAL BANKS IN MICROFINANCE

While a commercial bank is a financial institution that offers a broad range of deposit accounts,

including checking, savings, and time deposits, and extends loans to individuals and businesses.

The decision as to whether the commercial banks be involved in microfinance is a sensitive and

debatable issue which requires a deep analysis of many factors. Primarily, the microfinance

customers are large in number, scattered in far-flung areas with very minute transaction sizes.

Only government or state bank alone cannot reach out to millions of potential Microfinance

beneficiaries; a whole well knitted network with almost doorstep reach is required, which is only

possible when the commercial banks will be involved in microfinance. In Pakistan it is estimated

that as many as 5.6 million households need microfinance services but these services reach only

to less than 1 percent, most probably because of the absence of commercial banks from the

microfinance sector. (Source: Pakistan microfinance Network PMN)

These way poor person just needs to visit his local commercial bank to get access to

microfinance benefits, which will help reduce many economic problems. One criticism over

involving the commercial banks in microfinance is that commercial banks will charge higher

interest rates, further lower the standard of living and will exploit the public. The ground realities

are totally different; empirical evidence has demonstrated that participants in microfinance

programs have improved their living standards at both the individual and household level, and

that this has provided increased educational opportunities for children. For example, the clients

of the Bangladesh Rural Advancement Committee increased household expenditures by 28% and

assets by 112%. It was also demonstrated that Bangladeshi children were sent to school in larger

numbers and stayed for a longer time - almost all girls in Grameen Bank (A commercial bank!)

client households had some schooling, compared with the rate of 60% in non-client households.

(Source: World Bank group, 30 August 2005)


No doubt on the other hand the loans provided by the commercial banks to the microfinance

beneficiaries are a bit expensive, its not to discourage the poor but there is a sound reason

behind it; providing financial services to poor people is quite expensive, especially in relation to

the size of the transactions involved. A $100 dollar loan, for example, requires the same

personnel and resources as a $2,000 one thus increasing per unit transaction costs. Loan officers

must visit the client's home or place of work, evaluate creditworthiness on the basis of interviews

with the client's family and references, and in many cases, follow through with visits to reinforce

the repayment culture.

It can easily cost US$25 to make a micro loan. While that might not seem unreasonable in

absolute terms, it might represent 25% of the value of the loan amount, and force the institution

to charge a "high" rate of interest to cover its cost of loan administration. If commercial banks

are to be involved in the micro finance by no means it would be a wrong decision for them as

regard to their primary aim, profitability. Yes it can. Data from the Micro Banking Bulletin

reports that 63 of the world's top MFIs had an average rate of return, after adjusting for inflation

and after taking out subsidies programs might have received, of about 2.5% of total assets. This

compares favorably with returns in the commercial banking sector and gives credence to the

hope of many that microfinance can be sufficiently attractive to mainstream into the retail

banking sector. Many feel that once microfinance becomes mainstreamed, massive growth in the

numbers of clients can be achieved.

On the whole microfinance is not an area commercial banks want to overtake. The majority of

commercial banks that undertook microfinance lending were because it was required of them by

their governments. A great deal of microfinance undertaken by commercial banks was found,

but it was undertaken because of government mandates to lend to this sector rather than for

business reasons. So their involvement in microfinance is not as an active partner but somewhat

passive. Commercial banks in Bangladesh provide loan to the MFIs. They do not actively

participate in the marketplace of microfinance. Some example of banks passive financing is

given to understand the real scenario:

A syndicated term loan agreement for Taka 2 billion (Taka200 crore) favoring BRAC was signed

recently at a city hotel under the lead arrangement of Prime Bank Limited Presided over by

Prime Bank Managing Director M Shahjahan Bhuiyan. The syndicated term loan has been


sanctioned for the micro-credit lending program of BRAC, which one of the worlds largest non-

government organizations (NGOs) is operating in the country. By arranging this syndicated term

loan facility, Prime Bank Limited has created an opportunity for local and foreign commercial

banks to demonstrate their shared commitment to meet the challenge of the International Year of

Microcredit, 2005. (Source, The Financial Express, Bangladesh)

Standard Chartered Bank will provide Taka 100 crore loan to ASA, one of the leading

Microfinance Institutions (MFI) of Bangladesh. The bank will provide the money to the non-

governmental organization for micro-credit disbursement in the country. Recently, an agreement

was signed between Standard Chartered Bank and ASA regarding the big loan. According to the

agreement with Standard Chartered Bank, ASA will disburse the amount among 60,000 loan-

seekers and their families across the country.

This kind of loan from any foreign bank is first of its kind and also the biggest in amount.

Earlier, the Bangladesh Bank had initiated a Taka 500 crore project for implementation through

the BRAC Bank to disburse loan among the landless farmers of Bangladesh. But, this is for the

first time a microfinance institution is getting TK 100 crore loan from a foreign bank for micro-

credit operation and till now it is the biggest one.

On the agreement signing ceremony Chief Executive Officer of Standard Chartered Bank in

Bangladesh Jim McCain said, It is the part of Standard Chartereds largest initiative to provide

micro-credit facility to the people of Asia and Africa. I hope poor people in this region will be

benefited from this program.

The involvement of commercial banks in micro finance is important because all those micro

finance programs, which were directly run or backed by the government, faced a total failure.

Sustainability and scale in microfinance by commercial banks were only found in the market-

based programs when assessed on the basis of achieving both high portfolio quality and

significant scale of outreach to the poor, most of the commercial bank microfinance programs

that were mandated by governments can only be considered as failures. The exceptions were

those programs that charged a commercial rate of interest. They had a higher portfolio quality

than other programs but they were still not profitable. This almost universal failure is not

explained by the different policy contexts across the Asia-pacific region. Further, because


microfinance has not been a profitable business, government mandates have been unsuccessful in

encouraging commercial banks to become involved in microfinance. The banks must have the

incentive to design better products for micro entrepreneurs, which can be profitable.

The types of commercial bank involvement in microfinance can be classified as; government-

subsidized lending programs channeled through the banks, government mandated lending targets

met by banks subsidizing interest rates, government-mandated lending targets with banks

charging commercial interest rates and microfinance as a profitable business. Only the last one

"micro finance as a profitable business" has seen success. Thus the involvement of commercial

banks in micro finance sector should not be based on any government mandate, subsidy or target.

The sole benefit of the society as well as commercial banks is the adoption of micro finance as a

business. (Source: The Role of Commercial Banks in Microfinance: Asia-Pacific Region Ruth

Goodwin-Groen, 1998)

Involving commercial banks in micro finance would be a step to take these services at the

doorstep of the potential customer, because if only some government agency or state bank is

involved the extensiveness as regard to area covered cannot be brought. On the other hand

commercial banks need not to make any special arrangements to cater for micro finance

operations. Only a new "micro finance" counter might be needed in the existing branches. Thus

there would be no high setup cost for the commercial banks to venture into this sector.

4.2 COMPARATIVE STUDY AND ANALYSIS OF MICROFINANCE SECTOR

Though world has suffered from a serious recession in recent years, Bangladeshs microfinance

sector shows strong resilience and continues to contribute towards enhancement of

macroeconomic growth. Bangladesh microfinance sector is mature now and its assets constitute

around 3 percent of GDP in 2011. Total outstanding loan of this sector (only licensed MFIs) has

increased by 20.0 percent from BDT 145.0 billion in June 2010 to BDT 173.8 billion in June,

2011 disbursed among 20.7 million poor people, helping them to be self-employed and

accelerating overall economic development process of the country. The total savings has also

increased by 23.25 percent to BDT 63.3 billion in June 2011 compared to previous year from

26.1 million clients, over 93 percent of them are women. (Source, MRA-MIS-2011)


TABLE: Basic Statistics of NGO-MFIs in Bangladesh (As of 30 June 2011)

Particulars June, 2008 June , 2009 June, 2010 June, 2011

No. of Licensed NGO-MFIs 293 419 516 576

No of Branches 15,077 16,851 17,252 18,066

No. of Employees 98,896 107,175 109,597 111,828

No. of Clients (Million) 23.45 24.85 25.28 26.08

Total borrowers (Million) 17.79 18.89 19.21 20.65

Amount of Loan Outstanding

(Tk. Millions ) 134,680.96 143,134.03 145,022.66 1,73,797.60

Amount of Savings( Tk.

Millions) 47,386.19 50,610.04 51,362.93 63,304.44

Source: MRA-MIS Database-2011

Table shows the overall trend of microfinance statistics in Bangladesh. This sector has created

direct job opportunities for over 111,800 people; 80 percent of them are male and 20 percent are

female. At the end of June 2011, the sector had outstanding loans of BDT 173.8 billion disbursed

to 20.7 million borrowers, and had accumulated BDT 63.3 billion as savings from around 26.10

million clients over 93 percent of them are women through more than 18,000 branches, by

576 NGO-MFIs licensed by MRA.

TABLE: Size-Wise Loan Outstanding and Savings Compositions (As of 30 June 2011)

Categories Range of

Borrowers

No of

MFIs

No of

Borrower

Total Loan

Outstanding

(BDT

Million)

% of Total

Outstanding

No of

Savers

Total

Savings

(BDT

Million)

% of

Total

Savings

Very

Small

Up to 1000 85 63973 492.48 0.28 87660 192.20 0.30

1001-2000 177 244974 1566.68 0.90 351054 741.81 1.17

2001-6000 120 422745 2914.21 1.68 566864 1282.30 2.03

6001-

10000 46 364848 2987.90 1.72 469938 1128.09 1.78

Small 10001-

50000 103 2218532 19946.10 11.48 2861318 6738.03 10.64

Medium 50001- 23 1571226 13805.22 7.94 1875363 4713.86 7.45


100000

Large 100001-

1000000 19 4600621 39483.64 22.72 5527971 14652.13 23.15

Very

Large

1000001-

Above 3 11162371 92601.36 53.58 14274780 33856.028 53.51

576 20649290 173797.60 100 26014948 63304.44 100

Source: MRA 2011

Table shows the market scenario of NGO-MFIs in Bangladesh. The top three MFIs contribute 54

percent of total loan outstanding as well as savings of the microfinance sector in Bangladesh.

Two of the largest MFIs, viz., BRAC & ASA, are each serving over five million borrowers.

There are a few more developing fast. On the other hand the smallest 428 NGO-MFIs have

contributed only 4 percent of total loan outstanding and 5 percent of total savings. Institutional

concentration ratio is highly skewed in favor of large MFIs: just 22 institutions are in control of

76 percent of the market share while three largest organizations have control of over 50 percent

in terms of both clients and total financial portfolios.

Fund Composition of the Microfinance Sector in Bangladesh TABLE: Selected Indicators of NGO-MFIs in Bangladesh

Source of Fund

Jun-08 Jun-09 Jun-10 Jun-11

(Million

Tk.) (%)

(Million

Tk.) (%)

(Million

Tk.) (%)

(Million

Tk.)

(%)

Clients' Savings 36,397.32 29.66 40,526.91 29.73 47,436.35 31.15 63295.88 34.46

Loan from PKSF 22,708.58 18.50 22,666.20 16.63 24,484.12 16.08 31767.84 17.30

Loan from Commercial

Banks 23,487.03 19.13 23,896.37 17.53 23,006.41 15.11

23577.85 12.84

Donors' Fund 4,549.07 3.71 4,110.29 3.02 4,109.29 2.70 7008.37 3.82

Cumulative Surplus 31,170.02 25.39 36,261.74 26.60 42,339.27 27.80 50298.66 27.38

Other Funds 4,435.49 3.61 8,847.97 6.49 10,907.40 7.16 7727.32 4.21

Total 122,747.51 100 136,309.48 100 152,282.84 100 183675.92 100.00

Source: MRA-MIS-2011


It has been observed that although the commercial banks are recently considered a potential

source of fund of microfinance, their share of the total source of fund did not increase over the

last three years. MRA has been putting in efforts to increase loans from commercial banks to the

sector by introducing the banks to the NGO-MFIs. However, borrowing cost from commercial

banks is very high due to high interest rate charged and inflation which discourages NGO-

MFIs to avail this as a source of fund. Previously donor driven NGOs are now trying to rely

more and more on local sources of fund with the decline in foreign funding, which stood at only

3.82 percent in June 2011 which is around 70 percent higher compared to previous year. (Source,

MRA-MIS-2011)

From the above dataset we can understand that the commercial banking sector has not evolved or

has not able to cope up with the need of the microfinance sector. In Bangladesh, private

commercial banks are providing loan to the microfinance institutions instead of participating in

the market place of microfinance sector directly. Government commercial banks are providing

loan and other services to the poor and root level people but were not so successful as the

microfinance institution because of some inherent constraints of governmental sector which

prevails in Bangladesh.

Comparison on the basis of interest taken by different organization in providing loan to the

MFIs

Borrowing from PKSF @ 7.0% and 4.5% subject to the organization classified

Return on Savings of small savers and groups @ 5 % to 6%

Borrowing from Central Bank @ 2% to 5% based on the program (SAL) and other

term loans at bank rate ( annually in particular and half yearly in general fixed by the

Central Bank)

Provision of Loan Fund / Seed Capital of a development project @ 5% to 6% for on

lending to the project beneficiaries as agreed upon in the project document

Borrowing from Commercial Banks by the MFIs @ 11% to 13% from private banks and

10% to 12% from government banks. (CDC, 2012)


4.2.1 Financial Service Providers catering the needs of Poor and Extreme Poor

Financial Service Providers

Availability Accessibility Acceptability Affordability Remarks

MFIs ++++ +++ +++ +++

MRA registered semi formal organization to serve the poor & extreme poor, i.e. Banking with the Poor

Banks ++++ ++ ++ +

Formal financial institution operating on commercial approach. Serves micro credit under government directives

Cooperative ++ + + +

Registered with concerned government body but do not serve poor and extreme poor

Insurance Company + + + +

No product for poor and extreme poor

Moneylender +++ ++ + +

Meets the emergency financial need of people at any time under stringent terms and conditions. So poor and extreme poor seldom avails under compulsion

Financial Service Providers

Availability Accessibility Acceptability Affordability Remarks

Friends and Relatives ++++ +++ +++ ++++

Subject to relationship based on trust and faith fund needs are supported for repayment on an agreed date but no cost


involved

Pawn Shop ++ ++ ++ ++ Operate in market mostly for trade and commerce

MF NGOs ++++ +++ +++ +++

Informal organization working for and with the poor and extreme poor, i.e. Banking with the Poor

Result

Financial Service Providers are available for lending in UPPRP towns

MFIs and NGOs cater the needs of the poor and extreme poor commensurate to demand upon qualification in terms of set criteria

MFIs and NGOs are mostly preferred by the poor and extreme poor for banking with them at their door step

Friends & relatives occupy the first priority but very limited to poor and extreme poor for classified reasons

MFIs and NGOs although are catering the financial needs of poor and extreme poor, their terms and conditions are not always conducive

Scale: + = Poor, ++ = Modest, +++ = Good, ++++ = Excellent (source, CDF website)

The data analysis and review on supply of and demand for credit envisages that for the poor and extreme poor access to financial services is available to the MFIs and NGOs only. It is difficult and hard for the poor and extreme poor to approach other formal and informal sources for credit access due to technical constraints of security of the loan amount and their weak status as a customer of formal and semi formal credit organizations.

4.3 IMPACT OF MICROFINANCE ON ECONOMIC DEVELOPMENT

Micro finance can play vital for economic development in Bangladesh. It can improve the

economic condition day by day. During 1988, a number of non-governmental organizations and

Grameen bank pioneered alternative a credit delivery mechanisms for the rural that consisted of

small amount of collateral-free, affordable loans, popularly known as micro credit. These micro

credit programs have been successful in providing commendable access to credit by landless

women and men, and achieving high repayment rate of up to 98%. Impact studies of micro credit

programs have substantiated the important role of credit in the economic development process of

Bangladesh. The higher rate of growth in per capita income observed for micro credit recipient

when compared of that of non-recipients. An increase of self-employment, generated by the poor

with greater access to credit, has also increased rural wages due to a reduction in the rural labor

supply as reported by a World Bank study on the impact of Grameen Bank (1995).


Most of the MFIs in Bangladesh are not run on commercial or profit considerations.

Commercialization is partly a cost, revenue and profitability function and partly it is a function

of intention of the MFIs enabling legal, institutional, social and overall economic growth. It is a

gradual process and can be attained by the MFIs over a period of time under an enabling

economic environment. An individual MFI will have to undergo the process of sustainability

institutionalization for economic growth. Economic growth of micro finance sector will enable

the constituent MFIs to operate in an open market environment with access to money and capital

market. MFIs are interested to attain viability and recognized institutional status. The

government is keen to ensure an enabling legal environment. MFIs help of shifting from

traditional farm activities towards non-farm activities which are the main potential sources of

productivity and growth in rural economy such Bangladeshs. Prospect is emerging for economic

growth of micro finance in Bangladesh.

The impact of micro-credit has some impact at the level on the society both in terms of economy

and social value. There are a few studies on this impact assessment of micro-credit; findings of

those studies are as follows:

1) Women empowerment:

In the 1990s micro credit has become a key strategy for womens empowerment. Micro credit

programmed diverts resources and the attention of women themselves from other more effective

strategies for empowerment and poverty alleviation. Advocates for micro-credit place great

emphasis on lending to women. Micro credit provided by government departments /agencies

/NGOs /MFI institutions has given many benefits for village women, by increasing their

mobility, income generation, decision-making in the family and community. Woman use loans to

purchase:

Consumer goods, including food, radio-cassettes, televisions, etc. Medical care, Materials and labor for building tube-wells, toilets and house improvements Education for sons and daughters Supplies for their personal income-generating activities, including poultry or animals,

materials for jute work or other handcrafts


Materials for income generation activities for their men folk, including purchases of land, animals, rickshaws or boats, or setting up tea-stalls or other small trading

enterprises, and

Capital to loan to other villagers at a profit.

As the main target group of micro-finance is women, they have gained a special financial power

over men. The women participation in micro credit programs helps to increase women

empowerment. Credit programs participate leads to women taking a greater role in household

decision making, heaving greater access to financial and economic resources, heaving greater

social network, heaving greater bargaining power vis--vis their husband and heaving greater

freedom of mobility. 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.

2) Shift in the occupational pattern:

There has been a shift in the occupational graph from agricultural waged labor considered

socially inferior to self- employed petty trader. Micro-credit has succeeded in graduating the

poor from poverty level to a self-sustained position.

3) Builds Trust among Poor:

Micro credit helps to build trust among poor. The working of the Grameen is largely through

trust. It believes in the enormous potential of each and every human being given enabling

environment, even the poorest of the poor can peel off doubts and start exploring their abilities to

find a life with full human dignity.

4) Spurs social change:

Micro credit helps solve a host of intractable, long-term social ills related to poverty. In

Bangladesh the use of contraception is one of the first behaviors to change. In fact formation of

groups of women to meet regularly helps in discussing new ideas and sharing information, this

serves as a potent factor in bringing about broad based social change, otherwise women are


isolated. In Bangladesh micro-credit has led to an increase in participation of people in the

mainstream economic and political process of society, and overall human development.

5) Very low default rate:

The default rate is astonishingly low compared to what Bangladesh commercial banks suffer.

It is about 2% as compared to about 70% for agricultural loans and 90% for industrial loans.

Yunus Says The difference lies in the psychology of the borrowers. The rich can evade the

consequences of non- payment, the poor cannot. They value loan sharks so much; that they are

only too grateful for once aims a lifetime opportunity to improve them. Micro credit has

graduated the rural poor from the informal capital market controlled by the moneylender and

local elite to institutionalized banking.

6) Positive impact of female participation:

Independent studies show that micro credit has a host of positive impacts on the families that

receive it. Micro credit not only affects the welfare of participants and non-participants, but also

the aggregate welfare at the village level. In fact even in disaster situations and post conflict

areas, it has helped rebuild economic activities and livelihoods. This was successfully

demonstrated during the floods in Bangladesh in 1998.

7) Reduce dependency on money lender:

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-credit intervention.

8) Create new employer:

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-credit programs have a higher probability of being self-employed than their

counterparts in non-program villages.


9) Increase labor participation:

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 nowadays a serious

scarcity of labor in rural areas, especially in the peak season and this shortage even hampers

agricultural production. The intervention of micro-credit 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.

4.4 IMPACT OF MICROFINANCE ON EMPLOYMENT

Lack of income security is one of the fundamental challenges for the poor in both urban and rural

areas. While there are greater opportunities for employment in the urban areas than in the rural

areas, the high cost of living makes it difficult for families to save. Wage differentials between

the formal and informal sectors are significant with a majority of the poor engaged in the

informal sector in both rural and urban areas. A relatively small percentage of the educated elite

have access to salaried jobs and income security by gaining employment in the government and

the private sector; however, income security and fair wages is a dream for the vast majority of

the Bangladeshi population who rely primarily on daily or seasonal income from various types of

economic activities in both rural and urban areas. In the rural areas, the poor who own

agricultural land or are able to rent land for cultivation eke out a living with limited access to

capital for purchasing essential agricultural inputs. The landless poor have to sell their labor and

skills as agricultural workers in different types of farm and off-farm activities. The poor in urban

areas are engaged in daily labor in the construction, transport, manufacturing, service and trading

sub-sectors.Poor rural women either work as agricultural labor or do home-based income

generation activities, including paddy husking, small livestock rearing, pond-fish farming or

handicrafts depending on the income to invest in these activities. In urban areas, the vast

majority of poor women are engaged as domestics in the homes of the upper middle class and the

wealthy. The emergence of garment factories in cities such as Dhaka have provided employment

opportunities for many women who face grueling working conditions but are able to earn a


living and save a small amount to send to their families. Lack of employment opportunities and

the inability to initiate economic activities in the rural hinterland force large numbers to migrate

to the big cities, especially Dhaka. Seasonal migration is witnessed during low seasons when

there is limited work available in the agricultural sector. After each flood or typhoon, families

who have lost their meager assets move permanently in search of employment to urban areas.

Such migration puts tremendous stress on the scarce resources and infrastructure in the urban

areas. Lack of adequate clean water, sanitation, electricity, police protection, and other essential

support systems have led to unsafe conditions for the population in these slums.

In these circumstances, self-employment in ones own business activity or in a family business is

an alternative for a poor household. These income generation activities may be initiated either as

the primary or a supplemental source of income for the individual and household. The main

constraint to self-employment in income generating activities that can be developed into

microenterprises is the lack of capital for investment. The poor do not have adequate savings or

productive assets that can be invested, nor do they have access to loans from the formal financial

sector. While some borrow from moneylenders at high rates of interest, these borrowings are

limited to essential needs and emergencies. Few are able to take the risk of borrowing from

moneylenders for investment purposes.

Microfinance is therefore an essential instrument or tool for enabling the poor who have the

confidence and risk to transform their skills and existing resources into sustainable income

generating activities. They can either be developed as the primary source of household income,

or contribute as supplemental or seasonal income.

The success of microcredit Bangladesh has led to using it as a major tool in national poverty

reduction strategy by both the government and non-governmental organizations. The popularity

of microfinance has made it the core activities of hundreds of microfinance institutions in

Bangladesh. As we will see later in the report that due to support from the government and

acceptance by people, microcredit has become the main form of rural finance. The case of

microfinance in Bangladesh is a good example of non-government organization led operations

where the government directly and indirectly provided major policy and material support to

make it probably the largest microfinance sector in the world. We have also discussed the

possibility of rising poverty in Bangladesh due to external factors and no fault of the poor.

Microfinance may need to bear more responsibilities in this environment. Income inequality


persists in the rural household process. The impact of the MF program in reducing the inequality

of income distribution can be assessed by its influence on womens access to and control over

household income and expenditure. It is found that women have relatively lesser control on

income and expenditure decisions, parti

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Microfinance (1)