After the Covid-induced disruptions, micro-lending in Bangladesh is experiencing a severe slump in funding, resembling an El Niño-like dry spell.
Small and medium-scale microfinance institutions (MFIs), which rely on bigger institutions for funding, are bearing the brunt, according to microfinance regulatory documents.
The small lenders accuse larger MFIs of withholding adequate funding, while the larger institutions counter that the smaller ones have not repaid previous loans.
Several big names, including ASA, have even taken legal action against some smaller institutions over loan defaults stretching back 12-13 years.
At a recent Microcredit Regulatory Authority (MRA) meeting, the smaller MFIs urged larger institutions to provide the necessary credit to keep their microcredit operations afloat.
They also submitted proposals, including increasing the loan service charge to 11 per cent, to address the sector's liquidity crunch.
According to the Financing of Microcredit Institutions-2022 policy, larger MFIs are to facilitate funding for smaller and medium-sized ones. However, industry insiders allege that this policy has not been implemented effectively, leading to a capital shortage for smaller lenders.
The meeting minutes show reluctance from some large-scale MFIs, including ASA, BURO, Padakhep Manabik Unnayan Kendra and Jagorani Chakra Foundation, to finance smaller institutions due to persistent loan defaults.
The meeting also talked about the alarming rise in loan defaults within the MFI sector since the pandemic. The average cost of funds for MFIs sits at around 10-11 per cent, significantly impacting their wholesale lending capacity.
At the meeting, big MFIs expressed their willingness to loan to smaller and medium-sized institutions if the MRA relaxes the existing requirement for cumulative surplus funds. They also cited their own capital pressures.
Contacted, MRA Executive Vice Chairman Md Fashiullah acknowledged that the microcredit policy was yet to be fully implemented. "But the policy has not been implemented properly as large-scale MFIs are also facing capital problems."
While MFIs of all sizes can access capital from various sources, including banks, PKSF, SDF and foreign sources, the meeting note mentioned that medium and small institutions struggle to secure loans from banks due to recent interest rate hikes.
To contain the spread of Covid-19, the government imposed restrictions for 18 months, severely impacting NGO microcredit distribution and collection activities. Local authorities discouraged loan pressure in areas with high Covid prevalence, while lockdowns further hindered borrowers' ability to repay.
MRA Executive Vice Chairman Md Fashiullah noted that, in response to these challenges, the MRA has requested additional funds from authorities and is exploring a central bank refinance scheme.
He also mentioned prioritising medium and small MFIs for PKSF and SDF loans.
Currently, MFIs must set aside 10-20 per cent of bank loans as a lien, driving up their cost of funds, according to an MFI executive.
As of November 2023, some 727 MFIs, dedicated to poverty reduction and sustainable development, are certified by the Microcredit Regulatory Authority (MRA). Besides, 358 hold temporary licences.
Registered MFIs disbursed significantly more loans, with the figure rising from Tk 1,512.09 billion in June 2021 to Tk 1,918.83 billion by June 2022.
The number of loan recipients and MFI members also saw increases, reaching 29.74 million and 38.26 million, respectively, compared to 27.80 million and 35.19 million a year prior.
The MFI branch network also expanded, growing from 20,955 to 23,543 in the same period, while employee numbers jumped from 0.176 million to 0.207 million.
For the rise in micro-credit beneficiaries, a senior MRA executive credited the government's supportive policies for the sector.
High officials of different MFIs including Buro could not be contacted despite several attempts over the phone.
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