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Evolving microfinance

Towards a new business model

Mustafa K. Mujeri | Monday, 12 November 2018


Microfinance started in Bangladesh in the mid-1970s to provide credit to the poor, who were mostly excluded from the formal financial services. Over time, non- government organisations (NGOs) and other financial service providers have developed a better understanding of the wide range of financial needs of the low-income people in both urban and rural areas. These needs include asset building and income generation, managing irregular income flows, and coping with crises such as sickness, death, natural disasters, and other adverse events. Many microfinance institutions (MFIs) now offer a wide range of products beyond credit, such as savings, microinsurance, and money transfers, to help the poor people manage their financial lives.
Further, new technologies including the digital revolution continue to create opportunities to broaden the reach and lower the cost of delivering financial services to the poor people. For example, financial services can now be made available to anyone with a mobile phone, with innovations driving both improved product design and delivery. Microfinance is now increasingly seen as one component of the broader financial inclusion system, comprising of various players with the common objective of delivering high-quality financial services to the low-income people.
The evolution of microfinance in Bangladesh and its journey towards maturity are characterised by both competition and innovations (financial and non-financial). Moreover, there have emerged important challenges such as expansion of multiple borrowing, high interest rates as well as commercialisation and potential 'mission drift' involving issues of sustainability of the microfinance sector.
Recent microfinance dynamics: Since Independence, NGO-MFIs in Bangladesh have been evolving over time and, in the process, these institutions have touched off some of the most powerful changes in the economy and society. Microcredit originally started as a humanitarian and philanthropic concept, but over the years it has matured as a 'business'.
In the process, it has also raised many social, political, and economic issues, including questions about its purpose. In this context, one important debate is: what is the value of microfinance? Is it its ability to alleviate poverty, promote financial inclusion or some combination of the two? If the answer is poverty reduction, is profit earning appropriate? While some argue that in many cases microcredit is used to sustain rather than increase the wealth and well-being of the poor, the fact remains: microcredit puts money in the hands of the poor (including poor women) providing a sense of dignity and self-worth.
What once started off as microcredit, a simple service offering micro-loans to the poor unbanked populations, has now evolved into financial inclusion offering broader services, such as savings, microinsurance and payment products. The NGO-MFIs have traditionally used a number of methods developed over the last few decades to deliver very small loans to poor borrowers, taking little or no collateral. These methods include, for example, group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly.
The recent past has witnessed phenomenal growth of MFIs in Bangladesh. In 2016-17, a total of 510 major reporting NGOs had a total membership of 39.2 million and 33.4 million total loan receivers. The annual loan disbursement during the year was Tk. 1,207.5 billion and members' net savings were Tk. 349.1 billion. Along with great attention and wide popularity, microfinance has also received serious criticism, including the allegation that it gives less-than-expected benefits to the poor. It is true that microfinance has its limitations. Yet, the premise of improving access to financial services for consumption smoothing by the poor has never been a subject of controversy.
The controversy surrounds mostly around whether microfinance can alleviate poverty. That the poor lack an effective and affordable alternative financing mechanism to support income generation does not necessarily mean microfinance is the answer since income generation, for example, needs entrepreneurial and many other skills, which many of the poor do not have. Therefore, microfinance can generate positive outcomes in conducive environment and may not perform well in unfavourable situations.
Further, microfinance is different from other anti-poverty programmes (e.g. conditional cash transfers) since benefits from microfinance-supported activities need entrepreneurial skills and ability as well as time to generate. Thus, microfinance, if effectively applied, remains as a cost-effective and useful tool for inclusive growth and development in Bangladesh. Further, various virtues of microfinance cannot be ignored in the current process of economic transformation in Bangladesh.
In the beginning, the promise of microcredit was to provide small loans to poor borrowers (especially women) to invest in their businesses (mostly self-employment activities), reinvest the returns and allow them to move out of poverty. Several recent studies indicate that while microcredit has been a useful financial tool for some borrowers, it has not typically generated dramatic increases in income. Although microfinance is certainly not a panacea for poverty reduction, it has proven itself as a useful tool in the fight against poverty.
Microsavings products aim to provide accessible and safe avenues to save, either for future investments or as a precaution against economic shocks. Microsavings products include simple, no-frills bank accounts as well as commitment-based products that encourage deposits or limit withdrawal in order to help savers reach their savings goals. Recent research shows promising effects of access to savings products both in terms of ability to smoothen consumption by self-protecting against economic shocks and to invest more in microenterprises. However, a big challenge is to make such products cost-effective for NGO-MFIs.
Microinsurance products are designed to mitigate different types of risks, such as agricultural, livestock or health risks. In the presence of very limited formal institutional mechanism of risk mitigation for the poor and low income populations, poor households facing disasters or other unexpected events resort to coping mechanisms which, in most cases, create negative impacts on their survival strategies. These include, for example, borrowing from informal sources at very high interest rates, and selling remaining assets often at unfavourable terms. Moreover, availability of even these unfavourable coping mechanisms is inadequate and unreliable, especially during times of emergency and natural disasters. Thus, a major constraining factor of the current efforts of sustainable poverty reduction and grassroots development is the absence of adequate formal institutional mechanisms of risk mitigation for the poor and low-income households.
In developing markets as in Bangladesh, the provision of microinsurance is faced with two challenges of asymmetric information. First, as in established markets, the challenge for any insurance provider is to monitor that claims are justified, and to avoid selection of particularly risky customers into their customer base. Second, in new markets, there is an additional challenge to establish trust
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among potential customers that insurance will indeed pay out in the event of a future negative shock. Innovative microinsurance models are being explored on how to overcome these challenges. In order to overcome these problems, one way for the microinsurance providers is to evolve different techniques e.g. sale of insurance policies as add-ons to products and brands that people already use and trust. Such partnerships with mobile phone companies, where telecommunications service providers discourage their clients to use multiple simcards and stay loyal to one provider, through offering life or health and disaster insurance as an incentive, like people who buy credit for one month may receive a month's worth of microinsurance at no extra cost, and so on.
In short, over the last few years, with rapid changes in technology, microfinance has been evolving, and NGO-MFIs are expanding their services in innovative ways. A case in point is the delivery of microfinance products using mobile phones. In many ways, NGO-MFIs are leveraging the dramatic penetration of mobile technology and mobile payments to improve delivery of microfinance services and products to their clients.
Still, several challenges for the microfinance sector remain important such as how the access to microfinance can better contribute to poverty reduction; what credit product design and screening mechanisms could increase their effectiveness, especially in addressing the problems of the extreme poor; and how to ensure institutional sustainability and financial viability of the NGO-MFIs.
Although microfinance has existed in many forms for decades, it has only recently garnered attention as a commercially viable-activity, which can offer real opportunities for micro-entrepreneurs. The new microfinance business models are becoming more and more technology enabled. At present, the generally accepted principle is that credit alone cannot eradicate financial exclusion, which has led NGO-MFIs to rely on integrated product and service propositions.
The wide mobile phone reach in Bangladesh has also created opportunities for NGO-MFIs and their partners (mobile operators, retail stores, credit card companies, etc.) to develop integrated mobile banking platforms for the delivery of a broad range of products and services. These changes have significant implications for the regulators (e.g. Bangladesh Bank and Microcredit Regulatory Authority, MRA) and industry players that operate in such new environments, including the need to address several open issues, such as e-money issuance by non-banking players (e.g. mobile operators), risk-based approaches to know-your-customer (KYC) controls, feasible requirements for nonbank retail agents, and adequate customer protection.
In Bangladesh, leading NGO-MFIs are driving the evolution in the microfinance business models. The microfinance product and services design is benefiting from greater business awareness and the application of rigorous impact measurement methodologies. For instance, the offering of individual microfinance products is increasingly replacing the traditional group-lending model. Bundle product packages and commitment devices are tools that are contributing to tackling the transaction costs and behavioural obstacles that otherwise make micro-saving unsustainable. The NGO-MFIs are designing tailored microinsurance products (e.g. index insurance) and establishing partnerships with retailers, utilities and mobile operators. This reduces the cost of providing microinsurance and increases customer loyalty.
New business models and microenterprises: In effect, a process is rapidly unfolding in Bangladesh where regulated and self-sustainable large NGO-MFIs are driving a once development-inspired movement of NGO-MFIs towards more business-oriented perspectives to ensure both institutional and financial sustainability. Direct and indirect access to financial markets, along with deposit-taking, represents innovative alternatives to commercial banking credit and donor funding on which NGO-MFIs increasingly relied in the past to scale up their operations.
It is more likely that a responsibly-executed commercial strategy can contribute to the achievement of an organisation's goals. For instance, transforming entities into regulated financial institutions allows for the expansion of financing sources through deposits, improved commercial credit and equity investments, thus enhancing resources to expand the customer value offering and increasing the financial inclusion reach of NGO-MFIs.
The role of NGO-MFI business is also changing. It is now getting more acceptance that NGO-MFI business has also to do with making a reasonable return along with achieving poverty and social development goals. It is argued that NGO-MFIs must drive social and environmental changes, but to do so effectively they must also ensure sustainability.
A combination of factors, e.g. evolving perceptions about the role of NGO-MFIs and public and private sectors has brought about a greater understanding of the connection and interdependency between NGO-MFI business and society. A higher expectation has emerged that NGO-MFI business should also address social and environmental issues more widely and effectively through their operations, products and services and their unique and innovative expertise.
Along with such expectations, the microfinance industry is now increasingly being regarded as an investment opportunity and target by social entrepreneurs and institutional investors. Innovation through technology and improved business operating models are widening financial inclusion reach, especially among the poor and in the rural areas. New opportunities are also emerging for providing financial sustainability to NGO-MFIs as well as stable and attractive investments for the formal financial market.
For exploiting the new opportunities and creating the capacity to perform the newly-emerging roles in development, the development-inspired NGO-MFIs need a more strategic approach, execution capability and the right set of specialised skills, which are necessary to identify opportunities in the evolving financial sector as well as to manage related threats. Through adopting the right, innovative and adaptable approaches, the NGO-MFIs should try to achieve the best combination of social and financial returns.
Probably, now is the time for NGO-MFIs in Bangladesh to recognise the importance of a proper degree of 'commercialisation', not as an end in itself but as a means to expand the outreach of microfinance services to the poor, low-income households and microenterprises on a sustainable basis. The aim should be to create an integrated financial sector in which low-income households and micro, small and medium enterprises (MSMEs) have permanent accesses to a range of high quality and affordable financial services offered by a range of retail providers to finance income-generating activities, build assets, stabilise consumption, and protect against risks.
One area where the NGO-MFIs have significant potential to contribute towards bringing about desirable socio-economic transformation is the expansion of microenterprises (MEs). According to BBS Economic Census 2013, out of a total of 7.8 million enterprises in Bangladesh, 89 per cent are micro (including cottage) enterprises. These enterprises together account for 56 per cent of total engaged persons of 24.5 million in all enterprises. An InM study on diagnostics of microenterprise (ME) lending in Bangladesh in 2016 shows that the MEs face both demand and supply side constraints, of which finance is a critical element. The study compares the demand for ME loan (based on demand side survey) with the supply of ME funds (based on existing supply of credit by NGO-MFIs and banks) in 2015. The analysis shows that an excess demand of Tk. 437 billion (which is one and a half times higher than disbursement) existed in 2015 and which is growing over time.
With varied experience of successful financing of relatively small enterprises, the study suggests that NGO-MFIs can emerge as the major source of ME lending in Bangladesh for which appropriate action in four key areas are critical: (i) creating a favourable policy and regulatory environment; (ii) building strong, sustainable institutions providing financial and nonfinancial services to meet the demands of MEs; (iii) creating improved access to low-income and disadvantaged (including women) micro-entrepreneurs to financial and business development services; and (iv) ensuring continuous and permanent flows of required financial resources to the NGO-MFIs for meeting the needs of MEs. The adoption of appropriate credit technologies and the development of needed financial products on the part of NGO-MFIs can significantly reduce transaction costs and improve the capacity of NGO-MFIs to serve the ME sector and contribute towards developing themselves as effective intermediary institutions for ME development in the country.
Challenging issues: multiple borrowing and lending rates: Leading MFIs, as well as some promising start-ups, are driving the evolution in the microfinance business model. The microfinance product and services design has been benefitting from greater business awareness and the application of rigorous impact measurement methodologies. Further, the new microfinance business models are more and more technology enabled. However, regulators, as well as the industry players that operate in such a new environment, should address the associated risk and customer protection issues.
It is well known that microfinance provides access to financial services that can help to reduce poverty by both promoting opportunities and facilitating empowerment. In general, formal financial services are not available to the poor people because of the high interest rates, collateral requirements, complicated application procedures, and long admissions processing. The high interest rates caused by high transaction costs are ascribed to the lack of collateral and the small loan amounts desired.
Challenges of paradigm shifts: There have been two paradigm shifts in microfinance. During the 1960s to 1980s, microfinance focused on agri-credit or microcredit subsidised by the government and/or donors to small farmers; after the 1980s the target shifted to the poor. The first paradigm shift began to emerge in the second half of the 1980s. The new paradigm recognised the problem of high transaction costs and risks because of information asymmetries, and the focus became the building of cost-efficient MFIs.
The second paradigm shift emerged in the middle of the 2000s. This shift was from microfinance to inclusive finance, from supporting discrete MFIs and initiatives to building inclusive financial sectors. In 2004, the Consultative Group to Assist the Poor (CGAP) endorsed the 'key principles of microfinance'. These principles are explained within a framework for an inclusive financial system. The framework recognises that the massive number of excluded people would gain access only if financial services for the poor are integrated into all three levels of the financial system: micro, meso, and macro.
Within this framework, poor and low-income people are the clients at the centre of the financial system. The micro level of inclusive financial systems consists of financial service providers that offer services to poor and low-income clients. The meso level includes the financial system's basic financial infrastructure and its range of services. The macro level consists of an appropriate government legislative and policy framework. Traditional microfinance focuses on the micro level of financial providers, but current microfinance focuses on a more comprehensive financial system.
The second paradigm shift can be described as a shift from a product-centred to a client-centred approach.
The product-centred approach is one where microcredit organisations offer a standardised product targeted to the 'average client' during 'normal times.' In contrast, a client-centred approach focuses on identifying and meeting the effective demand from both current and future clients. A client-centred MFI may offer a variety of financial products and services aimed at a variety of customers. The microfinance agenda is now increasingly client or market-driven. Therefore, new attention is being paid to client products: focusing on how to attract and keep clients. Under increasingly competitive conditions, obtaining information on clients becomes crucial for MFIs: Who are the clients? How do the clients use the products? What new product would better serve current clients? What new products would attract new clients and expand outreach?
Outreach and mission drift: Although microfinance continues to expand, many poor people still remain in poverty. The fact that outreach to the extreme poor is not being achieved has provoked criticism that microfinance has drifted from its mission. As the microfinance industry has grown, financial sustainability has been increasingly emphasised. The concern about financial sustainability has led to MFIs commercialising or scaling-up, which is suspected of interfering with further outreach and bringing on mission drift. The process of scaling-up leads to an increase in the size of loans and the inclination to lend to non-poor people. Some researchers, however, argue that a larger average loan size is not driven by transaction cost minimisation alone. Instead, anti-poverty MFIs could potentially deviate from their mission by extending larger loans, not because of 'progressive lending' or 'cross-subsidisation', but because of the interplay between their own missions: cost differentials between poor and unbanked better-off clients and region-specific characteristics pertaining to the heterogeneity of their clientele.
Issues in multiple borrowing: One of the big challenges facing the microfinance sector is multiple borrowing -- getting people into too much debt; transforming micro-enterprise lending into consumer finance; and rewriting the traditional relationship between MFIs and their clients. The inherent dynamics of microfinance indicates that: the most sustainable answer to the issue is not to avoid multiple borrowing, but to recognise it, understand it, and ultimately, manage it better.
One may consider a number of scenarios, which may encourage a client to take out loans from multiple institutions:
* The client's business needs exceed the loan offered by a single microfinance provider,
* Interest rates may vary across the sector, encouraging clients to go to a second microfinance provider,
* The client's credit needs are not fulfilled by one MFI's product ranges (one MFIs may only specialise in micro-enterprise loans, while other one may excel in micro-insurance),
* The client may want to use additional microloans for consumption purposes or for an emergency, and
* In case of default, the client can take out a second loan to repay an earlier loan or simply start over after the first microfinance provider refuses to advance another loan due to a tarnished credit history. This only occurs in the presence of information asymmetry about client indebtedness.
Multiple borrowing affects the smooth functioning of the microfinance industry. A multitude of microfinance operations, aggressive expansion, high penetration rate, and institutional leakages are the main supply -- side factors for multiple borrowing. The consumption demand of the poor, new or expanding microenterprises and household characteristics are the leading demand -- side factors.
The first and most common response to multiple borrowing in the sector is: credit bureau, since this can be one of the key tools in assessing a client's existing debt burden. The introduction of credit bureau improves MFIs' ability to target clients with existing repayment histories, that is to say, with existing loans. Another force is regulation, especifically client protection regulation that requires lenders to demonstrate that they have taken reasonable steps to verify that the client is able to repay the debt within accepted norms.
In India, there is a regulation by Reserve Bank of India (RBI) that all MFIs put together cannot give a loan of over Rs. 50,000 (about $1,100) to one borrower. The MFIs association (MFIN) has a code of conduct which limits a maximum of three MFIs who can extend loan to one client. Combining these two, the regulatory framework lays down that not more than three MFIs can extend loan to one borrower and all three of them put together cannot exceed Rs. 50,000 to one borrower. And given the income profile of these clients and their income generating capabilities, it is generally believed that this cap would ensure that almost all borrowers would be able to meet their debt obligations. Bangladesh may consider similar steps and the caps may be reviewed over time.
MFI lending rates: There exists a strong criticism of high interest rates charged by MFIs. In recent years, the criticism that MFIs charge its poor borrowers unreasonably high interest rate has further intensified. Some critics point out a combination of profit-seeking MFIs, absence of competition, and the presence of vulnerable borrowers as reasons for creating the potential for exploiting the poor.
Several factors determine the effective interest rate (EIR) of microfinance, which is the actual price of the loan that the borrower pays: (i) stated interest rate; (ii) method used to calculate the interest rate -- simple versus compound interest rate; (iii) method in which the principal of the loan is treated in calculating the interest rate -- the declining balance method or flat method.
The EIR for the borrower depends on:
* Payment schedule: As the number of instalment increases, the EIR also increases. If the flat rate of interest for a principal of Tk 1,000 is 12.5 per cent, the effective interest rate, if paid by weekly instalments would be nearly 31.3 per cent and it will go down to about 25.1 per cent if the loan is paid back by monthly instalments.
* Grace Period: As the grace period increases, EIR decreases. For a loan of Tk 1,000 at 10 per cent flat rate with no grace period, the effective rate would be 25.1 per cent. This would go down to 22.3 per cent if four weeks of grace period is allowed and the amount is paid in 48 weeks and not in 44 weeks.
* Other charges: Insurance or forced savings, application fee, loan processing fee, security money, pass book fee etc.
In fixing the interest rate, MFIs in Bangladesh usually take the following factors into account:
* Cost of Funds
* Administrative expenses: According to CGAP, administrative costs of MFIs tend to vary between 10 per cent and 25 per cent. The MFIs in Bangladesh have an average operating cost of around 18 per cent.
* Contingency reserves (Provision for bad debt): Globally, good MFIs maintain provision of 1-2 per cent. In Bangladesh, the rate varies between 2-3 per cent.
* Tax expenses
* Credit rating of client
* Capitalisation rate: This refers to the net profit of MFIs once inflation is accounted for. According to CGAP, an average of 5-15 per cent capitalisation rate is used.
In practice, the MFI funds are used in enterprises which vary a great deal in nature and activity, and some of the funds are also used for meeting consumption needs during hard times or for meeting unforeseen expenditures whose economic value may be indeterminate or unlimited. So this alone cannot be good criterion to judge whether interest rate is high. An assessment of whether the price of a product is high or not is reflected in the demand for the product. Surveys on demand for microcredit and access to finance of the poor or near poor (who cannot provide any acceptable collateral for borrowing from commercial or specialised banks) shows that:
* The formal sector does not provide flexible products and services to meet the varied credit needs of small borrowers.
* The transactions costs of dealing with the formal sector are high resulting not only from the significant travel time to bank branches but also from cumbersome procedures and the need to incur expenses on bribes (e.g. 10 to 20 per cent of the loan amount) in most cases.
* Formal sector institutions demand collateral, predominantly land, which the poor rural borrowers do not have.
In comparing microfinance interest rates with other rates paid by low income borrowers, the following may also be considered:
* MFI rates are significantly lower than consumer and credit card rates in most countries.
* MFI rates are almost always vastly lower than rates charged by informal lenders.
The MRA guidelines for MFIs to follow are:
* Maximum interest chargeable set at 27 per cent per annum.
* Calculation of interest on loans on a declining balance method.
* Minimum number of instalments on general loans must be 46.
* There will be a grace period of a minimum of 15 days (for loan given for one year) between the date of loan disbursement and the repayment of the first instalment.
Obviously, interest rates charged by MFIs must legitimately cover fully its operating costs, but those costs should correspond to the costs of efficient MFIs.
Setting interest rate caps on microcredit is advisable only when there are signs of market failure (such as lack of information flow to borrowers and absence of competition among MFIs).
Transparency and some degree of uniformity in interest rates charged for similar type of loan and use of declining balance method in calculating interest rate are desirable. Industry infrastructure (e.g., credit bureaus, auditor training) should be developed and supported.
An important issue is: Should lending rates of MFIs be capped? Some argue in favour while others hold the view that banning MFI activities for charging high rates would only drive poor people into more expensive loans from moneylenders. The experience of microfinance brings out that most of the poor are sophisticated money managers, simultaneously handling multiple assets and liabilities. Indeed, their annual financial turnover, as they juggle assets and liabilities, can be much more than their net assets.
MFI lending rates in Bangladesh are lower than say in Mexico or South Africa. Compartamos in Mexico lends at up to 100 per cent, yet borrowers repay. How this can happen? The big reason is that an annual rate of interest is meaningless for businesses with a daily activity. For example, a vegetable vendor may borrow Tk. 300 to buy vegetables wholesale, selling these for Tk. 450 at retail level. Even if she/he pays 100 per cent per year interest on his loan of Tk 300, it amounts to just Tk. 0.90/day, a negligible portion of his profits. Many poor use MFI loans to pay off moneylenders. An MFI loan at 25 per cent to pay off a moneylender's loan at 100 per cent is a blessing! The need is for MFIs to become more efficient and bring diversity in their activities targeting to the poor so that they can afford to cut the lending rates to the poor. And many MFIs have already started doing so!
Sustainability issues: In practice, microfinance is already in the process of transforming itself from a sector dominated by a mission-driven ethos to one responding to the needs and interests of the poor in Bangladesh. The sector, however, must make this transition quickly and effectively if it is to access sufficient resources to be able to expand and provide access to financial services to its clients.
To achieve the expected level of outreach, the NGO-MFIs need to overcome two critical challenges: first, access to finance far beyond the one which is currently available from traditional sources of financing; and second, developing institutional capacity with required human capital and skills to effectively perform the newly expected roles and emerge as an integral part of the country's formal financial sector. It is probably time to recognise that without consistent access to multiple sources of financing, it is unlikely that the microfinance industry will grow significantly or achieve its goal and broad-based sustainability.
For making the required transformations, NGO-MFIs will have to adopt a new set of rules -- those consistent with new responsibilities and new approaches to operations. The MRA also needs to apply a more supportive regulatory framework consistent with the changing realities of the microfinance sector. Achieving funding goals also require structured, professional, and clearly defined funding strategies. Although large NGO-MFIs are working towards developing such strategies, most NGO-MFIs still rely on rather informal and ad hoc approaches to funding. As NGO-MFIs grow, adopting professional strategies becomes more important, because growth is heavily contingent upon access to reliable and sustainable sources of funding, which has to depend increasingly more on alternative sources in the financial sector including banks and borrowings from the capital market.
A responsibly executed commercial strategy can contribute to the achievement of NGO-MFI goals. For instance, transforming selected NGO-MFIs into regulated financial institutions allows for the expansion of financing sources through deposits, improved commercial credit and equity investments, thus enhancing resources to expand the customer value offering and increasing the financial inclusion reach.
In the sector, NGO-MFIs will have to balance their financial inclusion mission with self-sustainability requirements, for which multiple issues should be addressed. One may note several challenges in this respect:
* External reporting as well as social impact transparency to investors and other stakeholders implies dealing with ever changing and modern reporting standards.
* Specialised skills are necessary to address tax and financial accounting issues.
* When considering microfinance investments, extensive knowledge of valuation methodologies and access to reliable market information are essential.
* In cases of major organisational transformations, such as recapitalisation or listing of a microfinance entity, planning and execution capabilities are key enablers of long-term success.
* Likewise, day-to-day operations require sound risk management.
However, in case of relevant business failures, a structured approach to remediation should be applied.
For the microlending sector, exploring the impact of microfinance on the poor still remains an important challenge; as it is difficult to modify the designs of microfinance business models without knowing how they affect the poor's welfare and profits. We are still in the process of learning; and one must carefully learn from each and every study that is consistent to produce externally applicable knowledge. It is important to determine the mechanisms for making microfinance 'successful' in the eyes of the policy makers and others, and how such mechanisms change with changing exogenous conditions.
Concluding remarks: In future, microfinance will continue to expand its scope and coverage in many directions in Bangladesh. The expected trend is for financial services to the poor to become more comprehensive. This trend might help to reduce the risks that the poor face and should protect them more effectively than when each service is provided separately. Accordingly, the role of MFIs will become increasingly important. This reliance on MFIs is necessary for expanding the scope of services.
However, caution is warranted because MFIs may face different types of problems than the MFIs at present. For example, one important question will be: whether the MFIs can develop innovations that will enable them to reach the poorer households at costs lower than they incur at present without compromising on quality. At the same time, MFIs will have to justify that their social and economic impacts are large enough to ensure receiving social support. In addition to wider scope, quality of service is also essential. A client-centred approach requires financial products with conditions flexible enough to suit the demands of the diverse groups of the poor, because their incomes are small and can be insecure. This will put an additional burden on much-needed cost reduction, which is already an issue for MFIs as it requires them to prepare flexible payment schedules, to accept broader purposes for loan use, and to allow longer repayment periods.
Progress in technology may be the key to reducing transaction costs in microfinance. We have already witnessed the rapid expansion of the market for mobile financial services. The expansion of mobile phone networks affords various opportunities to the poor, and it has benefited the microfinance industry in particular.
Microfinance will continue to change, but its original purpose is to provide comprehensive financial services to the poor and low-income people in a sustainable manner. To achieve these objectives, continued evaluation of microfinance model from the standpoint of sustainability, outreach, and impact is essential to facilitate further development of the microfinance industry.
Further, microfinance must find new resources to finance training and capacity building in MFIs, addressing such issues as governance, new products, management of social performance, management information systems, legal transformation. Funding "Microfinance Plus" programmes, which incorporate into microfinance a development component such as education, health or the environment, is also a priority. These programmes, pursued as part of an integrated approach, can have greater impact on success rates by increasing value addition at the local level through enhancing micro-entrepreneurs' ability to negotiate with intermediaries, by putting know-how to work on environmental protection policies, for instance.
Broadening the scope of microfinance institutions depends on technological innovation, which helps lower the transaction costs of MFIs, particularly in rural areas where microfinance is still not developed enough to meet the demand of potential entrepreneurs. Mobile banking, which is a relatively developed activity in Bangladesh, shows that it is possible to reach out to large numbers of customers. In Bangladesh, mobile phone subscriptions have exceeded 152.5 million in July 2018, making the potential for growth in mobile banking enormous.
These challenges call for new forms of action on the part of the microfinance sector, the government, and relevant institutions in order to support high growth in the sector and foster synergies between public and private development actors.
The role of the government is important to establish a prudential regulatory framework that will promote the sector's development. The government must also explore new, simplified and adapted legal frameworks for microenterprises, which are not destined to remain in the informal sector forever. Finally, the government can support the sector through incentive mechanisms designed to promote access to banking services; for example, by opening bank accounts. Indeed, the role of banks and other financial institutions should not be underestimated as it complements that of microfinance.
Today, microfinance is recognised as an effective tool with which to fight poverty in Bangladesh. The sector still does not quite have enough resources to ensure its professionalisation and regulation. It will have to meet many challenges in order to secure its survival and enhance its impact. Its key challenge will be to constantly find new resources to ensure continued progress in innovation in both product designing and delivery to both households and microentrepreneurs.

Dr Mustafa K. Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM). [email protected]