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Occasional Paper Occasional Paper MICROFINANCE IN BANGLADESH Past, Present and Future Institute of Microfinance (InM) September 2011 MICROFINANCE IN BANGLADESH Past, Present and Future Rashid Faruqee1 S. Badruddoza2 1 Dr. Rashid Faruqee is a Visiting Fellow at the Institute of Microfinance (InM), and was Lead Economist, the World Bank. 2 S. Badruddoza is a Research Associate at InM. The authors thank Prof. M. A. Baqui Khalily for his valuable comments and suggestions. This paper is an outcome of a desk study. This publication has been supported under the PROSPER (Promoting Financial Services for Poverty Reduction) Programme funded by UKaid, DFID. However, any opinions expressed in the document are the authors' own and do not necessarily reflect the views of either InM or DFID. MICROFINANCE IN BANGLADESH: Past, Present and Future MICROFINANCE IN BANGLADESH Past, Present and Future Abstract Bangladesh is rightly considered the pioneer of an innovative microcredit program, introduced by Professor Yunus through Grameen Bank, which earned him and his organization a Nobel prize in 2006. Although Grameen model is recognized world-wide and replicated in many countries, microfinance has existed in Bangladesh in some form or other for a long time. At independence in 1971, Bangladesh had several organizations _ commercial banks, agriculture banks and cooperative societies _ which gave small loans to selected clients but not normally to the poor. A special model of cooperatives, Comilla model, pioneered loan and savings program for the poor. Its initial success was not sustained primarily because of escalating loan defaults. Comilla model provided a key lesson for late programs such as Grameen-that a cooperative system covering both poor and non-poor would be vulnerable to elite capture. Grameen targeted the poor people keeping out those who were not poor. Despite spectacular growth of microcredit in Bangladesh and its replication around the world, the program has faced criticism here and abroad because of the high interest charged which some people fear may have led to over-indebtedness of borrowers. Some critics have also cited coercive tactics used by some microfinance institutions. Impact studies on microfinance abound in findings of positive outcomes, including empowerment of women here and in other countries. However, some methodological controversies persist in assessing the impact of microfinance programs on the poor. Because of these concerns and controversies, it is the right time to examine the entire program in a historical perspective and assess where the program stands now and which way it can go in future. This review paper does that by describing its evolution, assessing current status including its performance and impact, as well as by reviewing the challenges that microfinance faces now. Finally, it suggests possible strategies for the Government policy makers and microfinance practitioners to follow in future. Occasional Paper iii Institute of Microfinance Table of Contents List of Tables vi List of Figures vi List of Acronyms vii Chapter 1: History of Microfinance Program in Bangladesh Introduction 01 Basic Concepts and Terms in Microfinance 01 History 04 History of Rural Finance and Cooperatives 04 Rural Finance in Pre-Grameen Period 07 The Comilla Model 08 Grameen Bank's Breakthrough 14 The Replication of Grameen Approach 15 Growth of Other Large MFIs 16 Other MFIs 18 Expanding Role of PKSF: An Apex Financing Agency 19 Recent Trends 25 Conclusion 26 Chapter 2: Current Microfinance Program and Its Impact Profile of Current Microfinance Programs 27 Competition among MFIs 31 Prevailing Lending Modalities 31 Operating Efficiency of MFIs 34 Portfolio Quality of MFIs 35 Effects of Proliferation of Financial Services 35 Poverty Impact of Microfinance 37 Recent Findings of InM 43 Impact on Hardcore Poor 44 InM Study on FSVGD & UP Project of PKSF 48 InM Study on Impact of PRIME (Special Program for Ultra-Poor) 52 Employment 53 Social Benefits 54 Seasonal Migration and Microcredit 54 Incidence of Poverty and Graduation Out of It 55 Conclusion 56 iv Occasional Paper MICROFINANCE IN BANGLADESH: Past, Present and Future Chapter 3: Current Concerns and Challenges Interest Rate 57 Multiple Borrowings (Overlapping) in Microcredit 59 Over-indebtedness 60 Sustainability and Financial Viability of MFIs 63 Microfinance Review by BRAC 70 Social versus Commercial Orientation of Microcredit 71 Appropriate Microfinance Regulation 72 Institutional and HR Development 73 Conclusion 74 Chapter 4: Future Direction Addressing the Key Concerns and Creating Favorable Political and Social Environment for Expansion of Microfinance 77 High Interest Rate 77 Overlapping 78 Indebtedness 78 Creating Favorable Political and Social Environment for Expansion of Microfinance 80 Easing Loan Repayment Process Using Information & Communication Technology 81 Easing Loan Recovery Method 81 Ensuring Sustainability of MFIs 82 Scaling up Microfinance and Catering to Needs of Poor Not Covered Yet 83 Extending Beneficiary Targets and Development of New Products and Services 84 Linking with Formal Financial System 87 Strengthening Microcredit Regulatory Authority (MRA): Facilitation Vs Regulations 89 Increasing Use of New Technologies 90 Conclusion 90 References 92 Occasional Paper v Institute of Microfinance List of Tables Table 1 Operating Efficiency and Portfolio Quality of MFIs 35 Table 2 Impact of Microfinance on Household Income/Expenditure 43 Table 3 Interim Impact of Microcredit in FSP Project 45 Table 4 Comparative Analysis of Performance of Different Programs on Hardcore Poor 49 List of Figures Figure 1 Number of Reported NGO-MFIs 19 Figure 2 PKSF to PO Loan Disbursement in Million BDT 20 Figure 3 Members of PKSF Programs (in Million) 23 Figure 4 Growth of MFI Members and Borrowers 25 Figure 5 Cumulative Loan Disbursement in Billion BDT 26 Figure 6 Gross Loan Portfolio and Number of Active Borrowers (2009) 28 Figure 7 Distribution of Revolving Microfinance Program by Sources (2009) 29 Figure 8 Utilization of Microcredit by Sector (2009) 29 Figure 9 Average MF Loan Balance Per Borrower (2009) 30 Figure 10 Comparison of MFI Performance in Bangladesh and Other Regions (2009) 30 Figure 11 Density of MFIs by Districts across the Country (2009) 32 Figure 12 Costs and Returns of 10 Largest MFIs in 2009 71 vi Occasional Paper MICROFINANCE IN BANGLADESH: Past, Present and Future List of Acronyms A AF Anukul Foundation ASA Association for Social Advancement ASAI ASA International ASM agriculture sector microcredit ASOD Assistance for Social Organization and Development B BDT Bangladeshi Taka BEES Bangladesh Extension Education Services BIDS Bangladesh Institute of Development Studies BIPOOL Big Partner Organizations Operating in Large Areas BKB Bangladesh Krishi Bank BMET Bureau of Manpower Employment and Training BOESL Bangladesh Overseas Employment and Services Limited BRAC Building Resources Across Communities BRAC-RDP BRAC Rural Development Program BRDB Bangladesh Rural Development Board BSBL Bangladesh Samabaya Bank Ltd BSCIC Bangladesh Small and Cottage Industries Corporation C CARB Centre for Action Research-Barind CARSA Centre for Advanced Research and Social Action CDF Credit & Development Forum CDM Centre for Development Management CESLI Community Empowerment & Strengthening Local Institutions CFPR Challenging the Frontiers of Poverty Reduction CGAP Consultative Group to Assist the Poor D DDJ Dak Diye Jai DMF Disaster Management Fund DSK Dustha Shyastha Kendra E EFRRAP Emergency 2007 Flood Restoration and Recovery Assistance Program Etc. Etcetera F FCR Financial Cost Ratio FSOEUP Financial Services for the Overseas Employment of the Ultra Poor FSP Financial Services for the Poorest FSS financial self-sufficiency FSVGD Microfinance Support Intervention for Food Security for Vulnerable Group Development FY Fiscal Year G GB Grameen Bank GDP Gross Domestic Product GK Grameen Kalyan H HRD Human Resource Development I ICG International Consulting Group ICT information and communication technology IDF Integrated Development Foundation IGA Income Genrating Activity IGVGD Income Generation for Vulnerable Groups Development IMEC Impact Monitoring & Evaluation Cell InM Institute of Microfinance IRDP Integrated Rural Development Program J JCF Jagoroni Chakra Foundation Occasional Paper vii Institute of Microfinance L LCG Local Consultative Group LIFT Learning and Innovation Fund to Test New Ideas LLR Loan Loss Reserve LRP Livelihood Restoration Program M ME microenterprise program MENA Middle East and North Africa MFIs micro-finance institutions MFMSF Microfinance for Marginal and Small Farmers MFTS Microfinance and Technical Support MIDAS Micro Industries Development and Assistance Society MIS Management Information System MIX Microfinance Information Exchange MRA Microcredit Regulatory Authority N N Number of observations NCBs Nationalized Commercial Banks NFPE Non Formal Primary Education Program NGO Non Government Organization O OER Operating Expense Ratio OOSA Organizations Operating in Small Areas OSS Operational Self-sufficiency P PAR Portfolio at Risk PARD Pakistan Academy for Rural Development PKSF Palli Karma Sahayak Foundation PLDP-II Second Participatory Livestock Development Project PMUK Padakhep Manobik Unnayan Kendra POs Partner Organizations PRIME Programmed Initiatives for Monga Eradication R RAKUB Rajshahi Krishi Unnayan Bank RDWF Rural Development and Welfare Foundation RESCUE Small Business & Livestock Enterprises RMC rural microcredit RNPPO Rehabilitation of
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