The First International Credit Union Conference on Social Microfinance and Community Development, BKCU Kalimantan - Gunadarma University Microfinance Industry in Bangladesh and India: International Perspectives Dr. M. Saeed Professor, Department of Business Administration, Minot State University, Minot, North Dakota 58707 United States of America E-mail: Official - [email protected] Abstract The study explores the microfinance industry in Bangladesh and India. Grameen Bank proved that financial inclusion of low-income households is the way out of poverty and that lending to poor can be profitable to both the borrower as well as the lender. Since then many microfinance institutions came up either following the same operating model as Grameen Bank or some form of its derivative. Many microfinance institutions (MFIs) in India started as non-profit NGOs and soon became for-profit non- banking financial companies (NBFCs) reflecting the financial viability of these institutions. With high returns, promising growth and portfolio diversification capabilities, microfinance industry in India has become a hotspot for foreign as well as local investors. Apart from widely known benefits, the study also highlights the criticism and challenges faced by the microfinance industry worldwide. Keywords: microcredit, remittance, collateral, securitization, private equity, IPO 1 Overview Microfinance refers to financial intermediation between microsavings and microcredit, and in- Microfinance is a tool which offers poor people cludes a broader range of services, such as loans, access to basic financial services such as loans, savings, insurance and transfer services (remit- savings, and money transfer services and micro- tances) targeted at low-income clients. A variety insurance who are generally not considered as prof- of institutions can provide these services, including itable by commercial banks and hence not catered. NGOs, credit unions, cooperatives, private commer- People living in poverty, like everyone else, need cial banks, non-bank financial institutions (some a diverse range of financial services to run their that have transformed from NGOs into regulated businesses, build assets, smooth consumption, and institutions) and parts of state-owned banks. Mi- manage risks. Poor people usually address their crocredit which is an integral part of microfinance need for financial services through a variety of fi- refers to very small loans given to low income peo- nancial relationships, mostly informal. Credit is ple with little or no collateral provided by legally available from informal moneylenders, but usually registered institutions. Over time, the microfinance at a very high cost to borrowers. Savings services industry recognized that the poor who lack access are available through a variety of informal relation- to traditional formal financial services required a ships like savings clubs, rotating savings and credit variety of financial products to meet their needs not associations, and other mutual savings societies. just microcredit prompting the evolution of micro- credit into microfinance. Poor people are not considered creditworthy by commercial banks because banks find it more prof- Though started as productive lending to help es- itable to lend big loans in small numbers as it tablish sustainable microenterprises, microfinance minimizes administrative costs, rather than lending loans serve the low-income population in multiple many small loans. Besides, they look for collateral ways by: (1) providing funds to buy assets to start with clear ownership title and sometimes a verifi- a business; (2) providing working capital to expand able credit history which most low-income house- businesses; (3) infusing credit to smooth cash flows holds do not have. Finally, the financial strength and mitigate irregularity in accessing food, cloth- and future earnings prospect of poor people are ing, shelter, or education; and (4) cushioning the not convincing enough and therefore are deemed economic impact of shocks such as illness, theft, or highly risky imposing high information monitor- natural disasters. Moreover, by providing an alter- ing cost. Therefore, low-income households cannot native to the loans offered by the local moneylen- meet even the most minimal qualifications to gain der priced at 60% to 100% annual interest, micro- access to traditional credit. finance prevents the borrower from remaining in a 30 The First International Credit Union Conference on Social Microfinance and Community Development, BKCU Kalimantan - Gunadarma University debt trap which exacerbates poverty. continues to lead in terms of portfolio outstanding Grameen Bank established in 1976 by Dr. Mo- with $16 billion or 36% of the total global portfolio; hammad Yunus in Bangladesh, microfinance insti- however, South Asia has the lead in terms of bor- tutions (MFIs), Community banks, Self help groups rowers with over 50% of the global borrower base. (SHGs), NGOs and grassroots savings and credit The disparity between these two trends is explained groups around the world have shown that there by the variance of average loan sizes in the two re- exists huge untapped potential at the base of the gions, which is a product of their economic well- socio-economic pyramid and these microfinance being and the business models followed by their re- services can be profitable for both the borrowers spective microfinance sectors. and the lenders. 3 Grameen Bank 2 Global microfinance industry Grameen Bank was started as an action research The microfinance industry traces its roots to the Project by Dr Muhammad Yunus in the village of mid-1970s, when the first microfinance institutions Jobra, Bangladesh, in 1976 to examine the possibil- (MFIs) were established in South Asia and Latin ity of designing a credit delivery system to provide America. During the same period, the success- banking services targeted at the rural poor. In 1983 ful model of Grameen Bank in Bangladesh was it was transformed into a formal bank under a spe- accepted and adopted by other MFIs around the cial law passed for its creation. With the mission to globe. The industry has since expanded through- help the poor help themselves it embraces the fol- out the developing world and has become one of lowing objectives; (1) to extend banking facilities the most significant areas targeted by the socially to poor families; (2) eliminate the exploitation of responsible and private and public equity investors. the poor by money lenders; (3) create opportuni- The United Nations declared 2005 the “Interna- ties for self-employment for large number of unem- tional Year of Micro-Credit”. One year later, Prof. ployed people in rural Bangladesh; (4) to empower Muhammad Yunus, the founder of Grameen Bank women who is more committed to family ties; (5) in Bangladesh, and Grameen Bank were awarded to end the vicious cycle of low income, low savings the 2006 Nobel Peace Prize. and low investment. Dr. Yunus received the Nobel The microfinance industry has experienced rapid Peace Prize in 2006 for his work. growth since mid 1990s and spans the developing Grameen bank is owned by the borrowers whom world of Latin America, Africa, Eastern and Central it serves. Borrowers of the Bank own 95% of its Europe, Arab countries, South Asia, East Asia and shares, while the remaining 5% is owned by the Pacific. MFIs have evolved from donor-depended government. Total number of branches, as of 2010, credit NGOs and credit cooperatives to licensed fi- stand at 2,565 branches with 8.36 million borrow- nancial institutions, non-bank financial institutions ers, of whom 97% are women. Its operations cover and niche banks. Driven by high return and portfo- 81,378 villages with a total staff of 22,277. Total lio diversification potential coupled with social in- amount of loan disbursed by Grameen Bank since clusion have attracted both local and global invest- its inception, is USD 10.38 billion out of which USD ments including private equity and capital markets. 9.20 billion has been repaid with a loan recovery MFIs in Middle East offer microfinance services that rate of 97.32%, higher than any commercial bank are shariah (Islamic law) compliant. To date, there in the country. Monthly average loan disbursement have been several successful initial public offer- over the past 12 month was USD 117.63 million. It ings by pure microfinance institutions, including: has an annual growth rate of 20% in terms of its Bank Rakyat Indonesia (Indonesia) in 2003, Equity borrowers. Besides, the bank has been profitable Bank Limited (Kenya) in 2006, Banco Comparta- ever since it came into existence except for years mos (Mexico) in 2007 and SKS microfinance (In- 1983, 1991 and 1992. A portion of the profit is dis- dia) in 2010. tributed as dividends among its shareholders who As of December 31, 2009, there were 1,395 MFIs are also its borrowers. In 2006, the dividend paid globally with an estimated borrower base of 86 mil- was 100% of the profit while in 2009 it was 30%. lion with a total outstanding portfolio of over $44 The Bank has four tiers, the lowest level be- billion as reported by the MFIs to the Microfinance ing branch office and the highest level being the Information Exchange or “MIX Market”, excluding head office. The branch office supervised all the MFIs that do not report to MIX Market. From 2003 ground activities of the bank such as organizing tar- to 2008, the global industry experienced a growth get groups, supervising the credit process and sanc- in borrowers at a CAGR of 12% and a portfolio tioning loans to members. For every 15-22 villages, outstanding CAGR of 34%. Inter-regionally, South a branch is set up with a manager and several cen- Asia, East Asia and the Pacific region had the high- tre managers. An area office supervises around 10- est growth rates in terms of borrowers, and Sub- 15 branch offices. Program officers assist the area Saharan Africa, Middle East and North Africa have office to supervise the utilization of loans and their experienced the slowest growth.