MFIs in Bangladesh should be transparent in fixing lending rates

MFIs in Bangladesh should be transparent in fixing lending rates

Micro finance institutions (MFIs) should maintain transparency in determining their interest rates and there should be a guideline in this respect, said finance minister Abul Maal Abdul Muhith on Tuesday.

“Operating expenses and risks are the determinant factors of calculating risks and bigger the operation, lower the interest rates will be,” he said at the inaugural session of the two-day seminar on microfinance interest rate and transparency organised by Institute of Microfinance (InM) and Microcredit Regulatory Authority (MRA). There are many instances where borrowers take loan from one MFI to repay the loan of another MFI, he explained.

“There should be a mechanism to stop such cross-financing,” he said. Mr Muhith urged the MFIs to get rid of low grade technology and adopt time-befitting technology that would help increase productivity and efficiency, he added. The micro credit is an important tool but ‘not the only tool’ to reduce poverty, he said.

Human development index is gradually increasing in the country but poverty is not reducing at the same rate, he pointed out. “There must be some problems in the government strategy and it should be taken care of,” he added. Chairman of InM professor Wahiduddin Mahmud said interest rate of micro credit depends on the frequency of development.

“If installment is weekly, the effective interest rate will be 25 per cent when nominal interest rate is 12.5 per cent,” he said. The rate will come down if the installment is paid monthly or quarterly, he explained. “Smaller the loan amount, higher the interest rate will be as administrative costs for reaching the credit at the doorsteps of poor people is higher,” Mr Mahmud said.

He, however, said there should be transparency in calculating interest rate by the MFIs, he said. The Dhaka University professor said there is controversy on the calculation of micro credit interest rate but no controversy about field level transaction. “But in scheduled banks there is no controversy about interest rate but many controversy about transaction,” he said.

There should be transparency when loans of big defaulters are rescheduled, he added. Bangladesh Bank governor Dr Atiur Rahman said micro credit significantly contributes in reducing poverty. “It will be a challenge for the central bank to incorporate MFIs into the monetary policy,” he said. The governor said transparency is important in the market-based economy as it will increase efficiency, he added.

“Whether interest rate is high or not can be calculated after analysing how much profit the MFIs are generating,” Dr Atiur said. Executive vice chairman of MRA Khandakar Muzharul Haque said it is costly to lend in rural areas according to MFIs, but how much more does it cost should be explained. Managing director of Palli Karma Sahayak Foundation managing director Quazi Mesbahuddin Ahmed said the MFIs are not transparent in their calculation of interest rate. “It should be transparent for the betterment of the sector,” he added.