The New Nation - Internet Edition

Dr. Salehuddin Ahmed

Financial services for the poor have proved to be a powerful instrument for poverty reduction enabling the poor to build assets, increase incomes and reduce the vulnerability to economic stress. Today, access to credit is recognised as a 'right' of people globally. About threedecades ago the innovative experiment by Professor Muhammad Yunus in village Jobra of Bangladesh resulted in the formation of the world famous Grameen Bank, the pioneer of microcredit. The award of the Nobel Peace Prize 2006 to Professor Yunus and the Grameen Bank has brought microcredit at the centerplace of programmes of eradicating poverty from the face of the earth and thereby bring peace around the globe. Over the years, there has been phenomenal growth in activities of microcredit in many countries of the world and a transition in the paradigm and modalities of microcredit. Microcedit Summit Meeting first held in Washington DC, USA in February 1997 launched a global movement to reach 100 million of the world's poorest families, especially the women of those families, with credit for self-employment and other financial and business services by the year 2005. The UN declared 2005 as the "International Year of Microcredit". The Global Microcredit Summit held in Halifax, Canada in November 2006 set the goal of reaching 175 million of the world's poorest families with microcredit by 2015. Now is the time to reflect on the experiences of Bangladesh, the birthplace of microfinance and the country with the biggest and most vibrant micro finance sector.

Money begets money. More than 200 years back Adam Smith in his famous book "The Wealth of Nations" said "Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little". It is very difficult for the poor to get small working capital from formal banking system for various reasons. Microcredit enables the poor to take a great leap forward.

About bare minimum of freedom-food, drink, health, clothing, the philosopher Bertrand Russell said, "Now I shall regard it as a priori justifiable to deprive one person of comforts to supply another with necessaries. It may not be politically expedient, it may not be economically feasible, in a given community at a given moment; but it is not objectionable on the growld of freedom, because to deprive a man of necessaries is greater interference with freedom than to prevent him from accumulating superfluities." We must all now act to give the poor the bare Among other factors, the basis of emergence of microfmance (specially in the semiformal sector) is the mismatch between, supply perspective (mostly formal sector) and the demand factors (need of microfmance) which may be summarised in the table 1 below:

Two decades of development practice in Bangladesh have established that microcredit, savings and other financial services are important tools to fight poverty. On-going efforts to at least contain poverty is thus crucial alongside specific poverty eliminating strategies. There is an argument to be made therefore, that fmancial services should be made accessible to all kinds of poor in Bangladesh. These efforts should aim not only to address the needs of today's poor and the poorest, but also to address the needs of tomorrow's poor as well.

During the late 1970s, when the 'Jobra' experiment was underway under Professor M. Yunus, the Dheki Rin Prokolpa was initiated by the Bangladesh Bank in collaboration with the Swanirvar Bangladesh, and several other pilot schemes were initiated by a handful of the NGOs which were active then. At that time, it was difficult to conceive that these initiatives would lead to a major microcredit movement, which would make Bangladesh known to the rest of the world. In 1979, Bangladesh Bank (the Central Bank) sponsored the Grameen Bank Prakalpa '(Grameen Bank Project) in order to help consolidate Professor Yunus' model and replicate Grameen model to other parts of the country. Under the aegis of Bangladesh Bank, some nationalised banks and specialised government banks provided fund for the project, which became successful for replication in different parts of the country. In 1983, through a special enactment Grameen Bank Prakalpa was converted to a specialised bank named Grameen Bank. Even during the 1980s, in spite of Grameen Bank's success, the main discourse amongst development practitioners in Bangladesh centered around the desirability of microcredit programme as opposed to conscientisation. By 1990, unhindered experimentation in the fields led to a quiet resolution of the debate and the country experienced a massive expansion of microfinance activities during the 1990s.

This rapid expansion drew attention from all important quarters-policymakers, academia and development practitioners-each trying to grapple with the unfolding stream of issues and trying to shape the course of the social and economic dynamics initiated due to introduction of microcredit. With a view to meet the demand for fund for re-Iending by the development partners (NGO-MFIs), and due to an urge to coordinate the flow of such funds to appropriate use, the Palli Karma-Sahayak Foundation (acronym PKSF and the full Bengali name c.an be translated in English as "Rural Employment Support Foundation") came into being in late 1990. Over the years, its share in the revolving loan fund of the MFIs increased- from 9 percent in 1996 to 23.64 percent in 2001 (see Table 3). PKSF contributed significantly to the expansion of microcredit programmes in Bangladesh. Gradually, PKSF's share in the total market has decreased a bit, reasons could be the increase in share by the local banks. In recent years MFIs have moved from the margins of the financial system towards the mainstream. It is now more widely accepted that populations traditionally excluded by the formal financial sector can, in fact, be a profitable market niche for innovative banking services. Much remains to be done, however, to integrate microfinancial systems, and for orthodox financial institutions, notably commercial banks, to recognize its full potential.

Microcredit programmes (MCP) in Bangladesh are implemented by various formal financial institutions (nationalised commercial banks and specialised banks), specialised government organisations and semi-formal financial institutions (nearly 700 NGO-MFIs). The growth in the MFI sector, in terms of the nwnber of MFI as well as total membership, was phenomenal during the 1990s and continues till today. The total coverage of MCP in Bangladesh is approximately 24.25 million borrowers. Table-2 gives the coverage of major institutions in the formal and semiformal sectors.

There is debate, however, on the extent of overlap- one borrower taking loan from more than one micro finance institution and the extent of overlapping may be as high as 40% (PKSF, 2006). The effective coverage would be around 17.32 million borrowers. Out of 17.32 million borrowers covered by MCP, about 62% are below poverty line and so about 10.74 million poor borrowers are covered by MCP. It is estimated that 42% of the total population of 131.45 million lies below the poverty line, which means 55.21 million people. Among this poor people 53% are economically active poor, the nwnber would be 29.26 million who are the target group of microcredit operation. Therefore, there is still scope of extending the coverage of microcredit programme to an approximate 18.52 million borrowers.

NGO-MFIs are the major providers of microcredit in Bangladesh. Table 3 depicts the sources of fund of NGO-MFIs in Bangladesh.

Sources: CDF Statistics, Various Volumes.

Of the various employment activities (mainly self-employment), small-scale business/trade is the most important, accounting for more than 40% of fund disbursed by the MFIs. On the other hand livestock, crops, food processing, transport, and housing sectors were getting relatively small portions of fund. This is shown in Table-4.

The table shows that a transformation is taking place in the economic activities of the poor households in the rural areas. In the initial years of microcredit operation during eighties, the traditional sector including fisheries and poultry accounted for a larger segment of selfemployment activities of the poor. BIDS surveys conducted during 1997 to 2000 on PKSF funded MFIs, show the predominance of small-scale trade and lately medium and large-scale trading has assumed prominence.

There are, however, some weaknesses of the non-farm sector; many of its activities are unable to accommodate a workforce round-the-year and also over a period of two or more years (BIDS, 2001). This aspect combined with the market constraints to the expansion of self employment has prompted the efforts of MFIs to finance microenterprises for the borrowers graduating form income generating activities (IGAs).

In most of the countries around the world donors, business houses, private individuals and governments are providing funds to various domestic micro finance institutions (MFIs) to carry out micro credit programs (MCPs). The present mechanism of channeling funds to MFIs, especially government and donor funds, has proved to be inefficient. The total cost of providing funds directly to microcredit programs (or "retailers") is usually high when the cost of feasibility studies, appraisal missions, monitoring, evaluation, reporting and so on are included. This is particularly true in cases where the funding agency does not have a permanent office or adequately trained personnel near the MCP being funded. It is very difficult to give figures on how much donor funds go to the poor. Some estimates suggest that about 10% to 25% of donor funds actually reach the poorest, while the rest is spent on administration, overhead, training, institution building and consultants. (Yunus, 1999).

Autonomous Microcredit Apex/Wholesale Funds (MAFs) are a special kind of apex or second-tier funding institution that provides loans to "retail" microcredit programs (MCPs) for on-lending to borrowers. They receive their funds, at least initially, as grants from government and private institutions with an interest in alleviating poverty through micro credit. They also provide loans and training for institutional development to MCPs, and can play a role in initiating a self-regulatory regime to oversee the growth of the field in a country.

A major advantage of autonomous micro credit funds is their ability to screen and monitor microcredit programmes according to standard criteria, compared to inconsistent "ad hoc" criteria imposed on individual MCPs by donor and government agencies. Funding and support based on uniform standards that are not influenced by politics effectively create a level playing field, while standard monitoring requirements contribute to more professional MCPs.

The core objective of the national MAFs should be "reaching the poor, and especially the poorest, with fmancial services through sustainable MCPs under viable institutional arrangements." While national microcredit apex funds (MAFs) may engage in providing a number of diverse services to promote development of MCPs in their respective areas of operation, two major functions should be focused on: financial intermediation and development of sustainable institutions.

Palli Karma-Sahayak Foundation (PKSF) in Bangladesh, since its establishment in May 1990 by the Government, has been working as an apex microcredit and capacity building organisation for eradicating poverty initially in the rural areas and subsequently in urban areas.

The basic operational strategies of PKSF (Rural Employment Support Foundation) are the following:

· It does not directly lend money to the landless and the assetless people rather reaches its target groups through its Partner Organisations (POs); .'

· It provides greater thrust to institutional development, both its own capacity as an apex organisation as well as the capacities of POs;

· It favours no particular model; instead, innovations and different approaches based on experience are encouraged;

. It acts as an advocate for appropriate policies and regulations useful for the microcredit sector.

As of September 2006, PKSF has disbursed a total amount of about US$ 548.18 million among 7 million poor borrowers about 92% of whom are women. PKSF's loan recovery rate is over 99%. Independent evaluation studies have shown that PKSF's microcredit programme implemented through its POs has helped alleviation of poverty.

PKSF working in Bangladesh, the largest apex fund in the world, has successfully contributed to the growth and achievements of micro credit in Bangladesh. Similar organisations like the Pakistan Poverty Alleviation Fund (PP AF) in Pakistan, Rural Microcredit Development Corporation (RMDC) in Nepal, National Development Trust Fund (NDTF) in Sri Lanka, FONCAP in Argentina, Local Initives Department (LID) in Bosnia-Herzegovina and Peoples' Credit and Finance Corporation (PCFC) in the Philippines are some success stories of apex fund around the globe.

Targeting the Poorest Versus Achieving Financial Sustainability: The Dilemma in Microcredit: 7.1 Normally, the MFIs have been successful in expanding their outreach by providing microcredit to increasing numbers of borrowers who are near the poverty line, not well below that. The MFIs adopt this approach to reach financial viability within a reasonable time frame. If the MFIs are to borrow (from PKSF and other sources) at a rate close to market rate of interest, the effort to increase outreach by including the poorest and reach financial viability as well may become difficult and delayed. The partner organisations (POs) of PKSF have achieved financial viability at the present (subsidised) rate of service charge of PKSF. Therefore, in the context of Bangladesh there seems to be a trade-off between outreach and sustainability of MFIs and they should strike a judicious balance between the two which may enable them to achieve financial sustainability.

Experiences suggest that the financial needs of the poor are best served by encouraging a broad range of institutions to provide efficient and responsive lending, savings, insurance, and other financial services that poor people need to build their business, increase income and assets, and reduce risks. Poor people need sustained access to an evolving set of financial products and services. These can only be provided by financially sustainable institutions, dealing with diverse segments and products, each in the position to increase outreach and grow with their clients.

The MFIs have some scope to expand horizontally-devising ways to include more people from the target group. More important is, as older bqrrowers graduate to higher income brackets, new products need to be devised to meet their changing needs. These new products may also help the MFIs to expand vertically by tapping borrowers outside the target group. A possible way to expand horizontally is to include more men. Research in Bangladesh and elsewhere show that men usually borrow larger amount. However, their repayment record is not as good as women. Including more men will allow MFIs to attain sustainability quickly, but it will also mean that the repayment performance of an institution will suffer as well. As the micro credit movement matures it faces the varied requirements of the borrowers and the need to offer a larger package of products.

It is fair to say that donor funding and enthusiasm for microcredit will diminish in the future. This means that MFIs have to look for new avenues to fund their activities, potential source of fund will be to mobilise saving deposits of members and non-members. Another alternative is to try to tap commercial source of funding such as commercial banks, the local stock market and financial market. This option might be open only to large and well-established MFIs and may not be feasible for small MFIs.

Research in Bangladesh and other places show that a crucial element for the success of a credit granting NGO-MFI is the quality of leadership and management. The governance of NGOs is increasingly being discussed nowadays. Research findings indicate that governance and financial sustainability are closely interrelated. Weak governance and management characterise many micro finance NGOs in Bangladesh. It is commonplace to find friends, close relatives, retired bureaucrats, and such other persons in the governing bodies. They are mere onlookers and remain uninvolved with the board's business. The chief executives are said to overpower the boards. If this is the situation, good governance will not occur by just inducting good people in the governing body. The essence of governance is to ensure an overall system of structuring accountability and transparency in an organisation. An individual member may be considered as sustainable when he/she is capable of meeting..the basic needs of his/her family without borrowing money/capital from the project or any other sources like banks etc. for consumption purposes. However, loans can be taken for IGAs.

Most people are of the opinion that a member's sustainability should be judged by two separate but inter-dependent criteria, viz, (i) social development and (ii) economic development. Controversies, however, exit as to which of the two criteria should go first. Some people argue that economic development is a pre-condition for social development while some others consider social development as a prerequisite for economic development. Most people, however, are of the opinion that the two interactive and therefore be pursued simultaneously. Sustainability of borrowers is also linked with some program challenges of MFIs, like devising appropriate micro insurance schemes and social protection schemes, providing other financial services to the poor.

The MFls in Bangladesh usually charge flat rate of 12 to 15% per annum from the microcredit borrowers. The effective rate becomes about 20 to 28% at the borrowers' level.

Recently, there has debate whether this rate is too high or not. The critics of service charges of MFls compare, somewhat erroneously, with interest rates of the conventional formal banking system. Microcredit is "banking at the doorstep" of the poor borrowers. The monitoring and supervision are quite intensive and costly. Therefore, the comparison with formal banks is not proper. There are several other factors like risks associated with collateral free loan, provisioning for doubtful and bad loans, compulsion to build up MFI's equity and attaining financial sustainability also are determinants of service charge of micro credit programs, Bangladesh micro credit sector has relatively lower rate of service charge compared to many other countries. However, social obligations, political realities and credit at a competitive rate may require consideration of reducing the rate by MFls. But that should not be done by resorting to capping the rate. The actions to increase efficiency in the credit operation of MFls, information flow at grassroots level regarding charges of various MFls, increasing the loan size for the borrowers and healthy competition among MFls may lead to competitive rates acceptable to all concerned.

This issues 'has come to the forefront because MFIs are providing financial services and products to the poor, outside the formal banking system.

In view of the history of MFIs (most of which are NGOs), it can be argued that the conventional regulatory framework such as that of formal banks and financial institutions is not appropriate and hence not required under the circumstances prevailing in many countries. This is particularly in view of the fact that many MFIs are not accepting deposits with checking facilities. The unique features of MFIs in the field of social and financial services with the core objectives of poverty alleviation differentiate the industry from the formal financial sector and further justify this proposition. However, that does not in any way downplay the importance of having some strategic monitoring measures that are compatible and appropriate to MFIs' objectives, institutional operation and development culture.

Keeping this in mind the government of Bangladesh formed an Unit 'Microfinance Research and Reference Unit (MRRU)' in 2000 under the supervision of a National Steering Committee headed by the Governor of the Bangladesh Bank to formulate some guidelines and suggest a regulatory framework for this sector. Initially this Committee prepared a set of guidelines which were implemented by the Unit. Those guidelines helped the sector to get prepared for future regulatory environment that would be in place and to build up a friendly communication between the sector and the policy makers. At later stage, the Committee prepared a draft of a regulatory framework after consultation with the sector representatives and submitted that draft to the government for final approval. The government passed the law, , Microcredit Regulatory Authority Act 2006' in July 2006 on the basis of those suggestions given by the Committee. Under this law the government has established a separate Microcredit Regulatory Authority (MRA) and constituted its Board of Directors with the Governor of the Bangladesh Bank as the Chairperson.

According to this new law all active MFIs can apply for license from the Authority immediately. No MFIs will be allowed to work within the country without getting license from the Authority. According to the Lawall institutions who have micro credit operation should separate their financial operations from other development works and keep their accounts separate. The Authority has been given power to monitor and supervise all these MFIs who will get license from it. The Authority also has the power to prepare detail rules related to the operations of microcredit including conditions for spending any income, area of operations, guideline of internal and external audit of accounts, collection of deposits, and use of earned profit etc. The Authority has the mandate to take punitive measures if any institution does not comply with any of the provisions of law and rules. The former MRRU has been transformed into a Secretariat of the Microcredit Regulatory Authority. Applications for license have already been received from many MFIs for license and MRA has already issued licenses to several MFIs. Preparation of other rules based on the law is under process.

It is expected that microcredit sector of Bangladesh will be under an accountable and transparent systems in near future and all licensed MFIs will be working in an environment of fair competition which will ultimately benefit the final beneficiaries, the poor people of the country who largely remains out of the benefit of formal financial market.

Microcredit, originated in Bangladesh has spread allover the globe. Today within the global coverage of microcredit Bangladesh's achievement stands out prominently. According to the Microcredit Summit Campaign Report 2006 about 82 million poorest clients have been reached by microcredit in 2005 around the world. Out of that 74 million poorest clients are in Asia and the Pacific Region. Bangladesh alone covered 10.74 million poorest clients (14%). The Poverty Reduction Strategy Paper (PRSP) of the government of Bangladesh has (Unlocking Potential: National Strategy for Accelerated Poverty Reduction) outlined some important roles for micro credit. The policy makers have recognised the importance of microcredit in Bangladesh and have pledged their support to this programme. With combined efforts of the governments, MFIs, donor agencies and above all the peoples of the nations through multi pronged approach poverty will be removed form the face of the earth and thus peace in its true sense will be restored around the world.

As the microcredit movement matures, we get a clearer idea of what its strengths are and what are its limitations. To move forward, we need to be more effective, and increase outreach, design products to include the poorest, and also provide finance for growth and employment oriented small and medium enterprises (SMEs) which are needed to spread the poverty alleviation net wider, so that significant decline in poverty takes place. We also need to have transparency in the management systems of the microfinace institutions and prepare for the eventuality of decreased donor funding and move towards sustainability.

(The writer is the Governor, Bangladesh Bank (Central Bank)