More Transparent Microfinance Institutes Suggested – Bangladesh
Speakers at a dialogue on microfinance Tuesday suggested greater transparency in terms of charges, terms and conditions in Microfinance Institutions (MFIs) to help the benefits of credit penetrate target groups.
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Prof David Hulme, Head of the Institute for Development Policy and Management (IDPM), University of Manchester, UK and Thankom Arun made a presentation titled ‘What’s Wrong and Right with Microfinance: Missing an Angle on Responsible Finance’ during the dialogue.
Speaking as chief guest, central bank governor Dr Atiur Rahman said the relatively higher interest rates and charges/fees remain a persistent, biting criticism of microfinance, albeit more from populist political authorities rather than from actual borrowers.
He said regulators and government authorities can however encourage and support MFIs in minimizing supervision costs, to the extent possible adopting remote loan delivery and recovery mechanisms in partnership with mobile phone companies and IT platforms offering card-based financial service delivery.
“The central bank is actively encouraging such partnerships,” the BB chief said.
The governor informed that total disbursement by the large MFIs (Grameen Bank, BRAC, ASA, TMSS, and BURO Tangail) in fiscal 2010 was Tk 252.94 billion, with recovery standing at Tk 229.68 billion.
The total outstanding loans stood at Tk 150.05 billion (US$ 2.1 billion) to more than 20 million poor borrowers whereas the overdue as percentage of outstanding improved to 3.73 percent in fiscal 2010 from 3.79 percent in fiscal 2009, he said.
Poverty (upper poverty line, 2122 kcal food intake) in Bangladesh declined from 57 percent to 49 percent of population during the 1990s and twice as fast in the next 5 years to 40 percent in 2005.
He also said the present government has published the “Microcredit Regulatory Authority Guidelines, 2010” as the gazette to augment the pace of regulation and supervision of the MFIs.
There are also some recent moves by Microcredit Regulatory Authority, including rationalization of lending interest rates and interest charging practices of microfinance institutions, limiting the lending rate to an upper limit of 27 percent per annum, at median level of the wide range of declared lending rates of these institutions, and which is a declining rate as well.
On the observations of the paper he said the impact of microcredit is substantial in Bangladesh in offering greater choice of financial services to the poor and reducing poverty.
“Microfinance institutions in Bangladesh have a tool that Indian MFIs are not allowed. Bangladeshi MFIs hold ‘compulsory savings’ from clients and if a client gets into difficulties with repayments these savings provide a buffer to manage a potential default,” Atiur said.
He also said the MFIs should examine the ways of assessing field staff performance and should try to reform them quickly with the aim of ensuring higher quality relationship between field staff and borrowers.
Prof David Hulme identified some wrongs in his paper, that included critics of microfinance often arguing that microcredit hardly reaches the ‘poorest of the poor’ and generally reaches a combination of poor and non-poor people.
Loans are used for diversified purposes such as microenterprise, education and health expenses, repaying debt, on-lending, wedding celebrations and even dowry, he said.
He noted the rate of interest on microcredit is claimed to be too high by many critics. However, the cost includes the cost of borrowing from banks, travel expenses of field staffs, and debt write-offs which call for interest rates higher than the lending rates in the banking system.
The ‘rights’ identified in the paper are, microcredit offers increased choice to the near-poor and poor population segment of the society in accessing basic financial services like loans, savings and insurance, adds to the vibrancy of local economic life by facilitating production, exchange and consumption, and improves access to microsaving services.
David said microcredit contributes to enhance social benefits with greater emphasis on female borrowers leading to active participation of women in the economic activities and decision making process.
He made a number of recommendations. The recommendations are: Regulators should be cautious about setting interest rate ceilings on microcredit, since setting the lending rate too low without considering high administrative costs associated with microfinance would reduce the range of financial services offered to the poor people.
Microfinance, the lending of small sums for income generating self-employment pursuits to people of small means with little or nothing to offer as collateral, has over the years grown globally into a major financial tool for combating poverty.
Bangladesh, with her leading role in the launching of this poverty combating instrument, established Microcredit Regulatory Authority (MRA) in 2006 with a view to licensing and supervising the microfinance institutions within a regulatory framework.