Analyzing the micro finance sector in: Bangladesh. Wouter Rijneveld

Transcription

1 Analyzing the micro finance ector in: Bangladeh Wouter Rijneveld 2006 Woord en Daad Thi document can be freely copied and ditributed under the following condition: The author name or name ha to be included in every copy of thi document Thi notice hould be included in every copy of thi document Thi document hould only be copied or ditributed a a whole Thi document hould not be ditributed for 1/10

2 General General data (per end of 2004) 1 GDP per capita (PPP) USD 2,115 GDP growth 5.4 % Conumer price inflation 7 % Population million Informal economy 35.6 % Exchange rate (Tk/USD) Micro/meo level Baed on CGAP information, microfinance in Bangladeh i defined a any loan le than BDT that i repayable within 12 month, regardle of the name given to the loan. Bangladeh i the country where in the late 70 the Jobra experiment wa carried out by Prof. Yunu from Chittagong univerity. Thi wa the tart of Grameen Bank. Uing micro credit to reach the poor rapidly pread within and beyond Bangladeh. The figure below how that the increae in MFI in Bangladeh tarted in the econd half of the 80 and accelerated in the The growth of the memberhip of MFI i parallel. 3 Today, there are over 1000 MFI and ngo that offer micro finance. Mixmarket lit 50 mfi, MicroCredit Summit lit 103 MFI that reach a total of 24 million client. The big four mfi are: client (million) loan portfolio (million USD) Grameen Bank BRAC ASA Prohika Apart from thee there are the (government program) Bangladeh Rural Development Board with 3.7 million client and the (government owned) Sonali Bank with 3.8 million client for micro credit. There are big difference between the MFI. Some offer a wide range of micro finance product with flexible amount and repayment period, while other (like Grameen and ASA) have more tandardized product See for a good ummary of the hitory of microcredit in Bangladeh. 3 2/10

3 The two map below how the ditribution of MFI and borrower over the country. Typical interet rate are around 15% for MFI, but lower at commercial bank: for example Sonali bank charge 8% for agricultural loan and 12% for microenterprie loan. In 2001, loan were dibured for the following activitie (in %): Agriculture Fiherie 4.91 Food Proceing 3.78 Small buine Cottage indutrie 3.03 Tranport 2.78 Houing 1.16 Health 0.45 Education 0.08 Livetock Other Mixmarket lit 15 ource of fund for micro credit, among which are the following Dutch organiation: CORDAID, Stichting DOEN, Oikocredit and Rabobank. About 30% of fund for micro credit come from member aving. Palli Karma-Sahayak Foundation (PKSF 4 ) i a public-private organiation that doe not directly lend to client but erve a an apex organiation, providing fund to MFI, building capacity, giving upport and networking with international organiation and government. Thi organiation alo developed everal policie and a quality ytem with a total of over 100 performance indicator (for viability of borrower and intitutional viability) and rating for each indicator. PKSF ha helped many MFI to move toward utainability. Lobby with the 4 3/10

4 government for a good regulatory framework i one of the activitie of PKSF. PKSF i an important member of the Microfinance Reearch and Reference Unit (MRRU) et up by the government for preparing a microfinance regulatory framework (ee below). A number of impact tudie were done to evaluate the impact of micro credit program in Bangladeh 5. Reult of uch tudie do how the poitive impact of micro credit program. However, reaching the hardcore poor turned out to be difficult. A a reult, ome MFI tarted implementing pecial program for thi target group: lower tart amount, horter cycle. An example i Grameen Bank program for truggling member (beggar), tarted in People who participate are not required to form group, no collateral i needed, loan are very low (USD 8), repayment period are determined by the client and no interet i charged people are reached by thi program. Many MFI are not elf ufficient. Mixmarket how that operational elf ufficiency for ome organiation (including Prohika) i a low a 60%. Other (like ASA) have an operational elf ufficiency of over 250%. Reaching elf ufficiency in urban area i only lightly eaier than in rural area, becaue of the high population denity. Micro credit i available both in rural and urban area. Self ufficiency i only lightly eaier in urban etting: becaue of the dene population and relatively good road network, even the rural area can be erved with reaonable cot. ROSCA are abent in Bangladeh but non-rotational aving ytem do exit both traditionally and et up by NGO. Traditionally the dadon: forward ale of agricultural crop i ued a a lending ytem 6. Thi ytem i alo applied to avoid the Ilamic prohibition of interet. Sale dicount replace interet in thi cae. However, the law of prohibition of interet i not trongly inited on and thi account for the high ucce rate of micro credit programme, eg a compared with a country like Nepal. World Bank rate Bangladeh 44 for getting credit which i jut above Belgium. The legal right index indicate to what extend law are deigned to expand acce to credit. Bangladeh core 7, which i far above the regional core of 3.8 and even above the core for OECD countrie of 6.3. Macro level Poverty Reduction Strategy Paper (2005) The government of Bangladeh actively recognize the role of micro credit in poverty reduction. The 2005 Poverty Reduction Strategy Paper of Bangladeh call micro credit the mot viible anti-poverty intrument, an effective and powerful tool for rural development, income generation, food ecurity, human reource development and ultimately poverty alleviation. The PRSP mention four challenge for the micro finance ector: 1. efficiency gain hould be tranlated into lower interet rate 2. downward extenion to pooret 3. combine with other product like micro inurance 4. development of appropriate regulatory framework The government i indeed actively developing a legally ound and effective regulatory framework for the micro-credit ector. Thi i done by a teering committee compoed of ectoral repreentative and chaired by the Governor, Bangladeh Bank and aited by a Microfinance Reearch and Reference Unit within the Bangladeh Bank. Completion of thi tak i called a key priority. Along with thi, the government i alo formulating a banking 5 See Zaman, 2004 for a good ummary of thee impact tudie 6 4/10

5 law which permit MFI to etablih themelve a micro-credit bank, which hould olve the current retriction for MFI. Upcaling of loan ize i another priority point for the government. Typical loan ize are now 5,000 Taka but there i demand for loan of 20-25,000 Tk. The limiting factor mentioned in the PRSP i conervatim of MFI and lack of product diverification. Government ha alo put emphai on expanding credit flow for the farmer and rural entrepreneur. The mot promiing area for invetment include mall buinee a well a high value agriculture, i.e. export quality rice, vegetable, fruit, rural aquaculture, poultry and dairy enterprie. See appendix 2 for an overview matrix of trategic goal for the micro credit ector from the 2005 PRSP. Regulation In 2000 a new regulatory body for the microfinance indutry ha been created with the Governor of the Bangladeh Bank a it Chairman: Steering Committee for Microfinance Reearch and Reference Unit 7, which facilitate the central bank overight in thi area. Thi unit developed format for information ytem, financial guideline and tandard, term of reference for internal and for external audit and twelve indicator for performance. PKSF i a main contributor in MRRU and policie and guideline developed by PKSF eem to be tricter than thoe developed by the MRRU. For an overview of regulation, ee the table of appendix 1. NGO-MFI cannot receive loan from invetor from abroad, but they can accept aving from member. There are no retriction on interet rate. SWOT analyi General SWOT i in the ector analyi and are not repeated here. Strength Well developed micro finance ector Adaptation made in order to reach the poor better (flexibility increaed, pecial program) Sometime high interet rate 8 PKSF trong apex organiation, providing quality Opportunitie Government recognize value of micro credit ee PRSP Regulatory / legal framework in the making Good communication and road network Recommendation for project and programme Weaknee Many MFI not yet elf upporting High rik member creened out by olidarity group ultra poor no acce Limited poibilitie for ucceful enterprie to obtain bigger loan (20,000+ Tk) Tranparency ometime quetionable, e.g. rationale for interet rate. Threath Lo of miion / viion to reach the poor Occaional emergencie lead to lo of income Linking up with commercial invetor from abroad may be problematic becaue of prohibition for ngo for receiving loan from abroad. Capacity building in line with PKSF policie / regulation. Diverification of product (e.g. micro inurance) to reduce vulnerability. Demand for SMED type of loan develop / timulate caling up of ucceful enterprie into SME ometime three time higher that MFI pay to commercial 5/10

6 Appendix 1: regulation Information from GCAP databae. For reference, ee Ownerhip tructure of There are currently four nationalized commercial bank, bank (and financial five government owned bank, 30 dometic private bank, intitution if available) 10 foreign bank and 28 non-bank financial intitution. The financial ytem alo include inurance companie, tock exchange and co-operative bank. The banking ytem i dominated by the four nationalized commercial bank, which together control more than 54% of depoit and operate 3396 branche (55% of the total) a of June 30, Regulated microfinance Commercial and pecialized bank; Grameen Bank intitution Non-regulated ource of microfinance Predominant informal finance mechanim (ROSCA, tontine, etc.) Wholeale Lender() Definition of microfinance or microcredit Ongoing microfinance policy development tatu NGO are the mot prevalent organizational form offering microfinance in Bangladeh, providing both credit and depoit ervice. Microfinance i alo provided by government-ponored microfinance project. No NGO offering microfinance in Bangladeh are regulated or upervied by the central bank, the Bangladeh Bank [ (BB). In April 2004, the teering committee of the BB Microfinance Reearch and Reference Unit wa appointed a interim regulator of NGO- MFI. Moreover, mot large and medium ize NGO-MFI receive funding from Palli-Karma Sahayak Foundation (PKSF), which provide regular monitoring of tandard financial and performance indicator. Some NGO-MFI have begun borrowing from commercial bank, which alo provide ome performance monitoring. Moneylender Palli-Karma Sahayak Foundation (PKSF) Any loan for le than US $171 (10,000 BDT) and repayable within le than 12 month, regardle of the name given to the loan. [See BRPD Circular No. 16 dated December 06, 1998 effective from January ] There i ongoing debate within the Bangladehi government, and with donor, takeholder, and conultant concerning the appropriate way to regulate Bangladeh large and unupervied microfinance market. A Microfinance Reearch and Reference Unit wa et up at the Bangladeh Bank [ in Recommendation have been made and no deciion have been taken for going forward. General Participation in the Financial Service Market No. of intitution No. of client Total Aet 6/10

7 Bank 49 US $25.18 billion [ billion BDT] (a of 2002) Cooperative 399 (2001) (WOCCU) 106,580 (2001) (WOCCU) US $12,120,615 (2001) (WOCCU) NGO-MFI 12.7 million (2002) US $3.257 billion [ billion BDT] dibured, and the total loan outtanding are US $509.4 million [ billion BDT] (2002) General Approach to Regulating Bank Cooperative Legal bai for regulating Bank Companie Act, 1991 Prudential Regulation for Bank Cooperative Societie Ordinance, 1984 (cited a Ordinance. ); Cooperative Societie Rule 1987 [cited a Rule ] Definition or decription of intitution Any buine conducting banking buine, meaning accepting depoit and making them withdrawable by check, draft, or otherwie Credit cooperative are etablihed to create fund to be on-lent to member [Rule 2(2) (vi)] Regulator() and role of regulator() Bangladeh Bank [ (BB) Regitrar of Cooperative Societie NGO None In April 2004, the teering committee of the BB Microfinance Reearch and Reference Unit wa appointed a interim regulator of NGO-MFI. Organizational Regitration Law and regulation governing regitration US $17.74 billion [ billion BDT] (a of 2002) net aving wa US $ million [ billion BDT] (2002) Activity that determine required regulatory tatu Accepting depoit for the purpoe of lending or invetment Memberhip-baed ocietie offering depoit and lending ervice Agency adminitering Required legal form of regitration organization Bank Companie Act 1994 Unknown Company Unknown Cooperative Unknown Regitrar of Cooperative Societie [Ordinance 6] Retriction on ownerhip Unknown Mut have at leat 10 member NGO NGO-MFI may regiter under the Societie Regitration Act of 1960, the Voluntary Social Welfare Agencie Ordinance of 1961, or the Companie Act of 1994 Depend on legal form of organization Varie Unknown Licening Requirement and Standard Standard for ownerhip officer Feaibility tudy/buine plan Auditing Requirement Operating Manual Bank Unknown Unknown Bangladeh Bank will Unknown examine financial poition of the company and it ability to pay claim of preent and future depoitor (at initial and renewal licene application) Cooperative Shall be et forth in the Unknown Unknown Unknown cooperative' by-law. NGO Unknown Unknown Unknown Unknown Rik Management Guideline Guideline & retriction on financial ervice Guideline & retriction on interet rate Concentration of rik Connected/inider 7/10

8 Cooperative NGO Permitted: loan and depoit to member; depoit-taking from nonmember allowed if outlined in cooperative bylaw. None pecified by law, however, mot NGO- MFI both accept depoit and make loan Reporting and Superviion Bank Cooperative Superviion Method Bangladeh Bank can carry out on-ite inpection at anytime Surprie on-ite inpection a deemed appropriate by the regitrar Interet rate mut be publihed in cooperative bylaw None currently exit, although fear of interet rate retriction being impoed may be preventing the furtherance of legal and regulatory reform. Dicloure and reporting requirement Monthly report mut include detail on all loan Semi-annual aet and liability report Annual: Balance heet, profit and lo account, and full, audited financial report Annually mut provide a report detailing cah account, balance heet, profit and lo account, and a profit and lo appropriation account. Quarterly return mut be ubmitted by central and national level ocietie Maximum loan to one member to be precribed by the rule of the cooperative Depoitor protection mechanim (e.g., depoit inurance or lender of lat reort) Depoit of all cheduled bank are inured up to US $1,684 (100,000 BDT) per depoitor. (See The Bank Depoit Inurance Act, 2000) 8/10

9 Appendix 2: Strategic goal for micro credit in PRSP 9/10

10 Literature: General ource: mixmarket, microfinance gateway, CGAP Povert Reduction Strategy Paper Bangladeh, webite of apex organiation PKSF Year of MicroCredit, country report Bangladeh Haan Zaman, The caling-up of microfinance in Bangladeh: determinant, impact, and leon. World Bank Policy Reearch working Paper /10