Charge rational interest rate on loans

Government's finance division wants fixing rational interest on loans from microfinance banks as it finds the rates irrationally high in case of microcredit, taken by small borrowers, sources have said.

It specifically wants that the microfinance banks charge simple interest from borrowers instead of compound interest that includes interest on interest and makes the repayment liability go ballooning.

The finance division's direction-meant for helping small enterprises grow--insists that such a provision should be incorporated into the Microfinance Bank Ordinance which was already issued Wednesday by the law ministry.

However, the ordinance did not contain any such provision.

Contacted, a senior official at the Financial Institutions Division (FID) told The Financial Express that since the central bank would regulate the microfinance banks, "we let it decide how much the banks can charge as interest on loans."

A senior finance division official says they had suggested that the interest on loans of these banks should be "rationally compatible" with the same of traditional banking system.

He says the interest on microcredit is "unbearable" for the poor borrowers but the authorities concerned have no control on it. "We want the government puts a limit on interest rate to make loans viable for the borrowers."

Presently, the microcredit institutions charge around 24-percent interest on loans, almost double the interest on traditional bank loans.

Once they reportedly charged 30-40-percent interest on borrowers, which the Microcredit Regulatory Authority (MRA) in 2010 capped up to 27 per cent. Later in 2019, the MRA further lowered it to 24 per cent which too economists and analysts consider "excessive" for the borrowers.

Dr Zahid Hussain, a former lead economist at the World Bank Dhaka Office, however, opines differently.

"The microfinance banks should be given chance to compete with other banks on the market," he says.

Mr Hossain thinks it is the borrowers who decide from where they will take loans. "The banks have the responsibility to make their products competitive to attract customers."

In his view, neither the government nor the central bank should put a cap or fix a rate on loan interest of any bank.

syful-islam@outlook.com