MFI regulations: Poverty reduction friendly or not?
Wednesday, 8 December 2010
M. Mizanur Rahman and Md. Maher
ALLEVIATION of poverty with the help of micro-credit is now a well-known process all over the world. Not only the advocates of micro-credit but also the governments, donors, development organisations and others have keen interest in it. The practice of micro-credit to combat poverty in Bangladesh is wide-spread. Microfinance offers small loans to people who do not normally qualify for traditional banking credit, to encourage entrepreneurship.
According to Micro-finance Transparency, a US-based agency, currently famous non-government organisations (NGOs) and Microfinance Institutions (MFIs) including Grameen Bank, Bangladesh Rural Advancement Committee (BRAC), Association for Social Advancement (ASA), Thengamara Mohila Sabuj Sangha (TMSS), BURO Bangladesh and some other 800 NGO-MFI's are serving in over 45000 villages. The operation of micro-financing in the country has started from the early 70's. After the achievement of the UN award, the current poverty status of Bangladesh is 58.5 per cent which is up from the 48 per cent, the status of the base year.
The advocacy of micro-credit for poverty alleviation has been in vogue from a long time ago. In this perspective, in the early 1970s, some Non-government Organisations (NGOs) and Microfinance Institutions (MFIs) introduced microcredit programme (MCP). They targeted the poor people to help in becoming self-employed and thus alleviate poverty with microcredit. Many of these organisations provide credit by following some processes of social mechanisms, such as lending money to specific groups. It is done to reach the poor and other certain group of people, including women, who are short of access to formal financial institutions.
According to Micro-Finance Information Exchange (MIE), in 2009, there were about 20.5 million active micro-credit borrowers where per head borrowing is Tk. 8094. But the recent regulation framed by the Micro-credit Regulatory Authority (MRA), which is required by the MFIs to launch within June 2011, has a mixed impact on both MFIs and micro-credit borrowers. So the question is whether this regulation is positive or negative?
The MFIs' usually works in remote areas where people are facing poverty and has no financial solvency to create income generating activities. Regarding the concept, the disbursed amount of loan per head is smaller compared to the amount disbursed by banks. So definitely the operational cost of the MFIs is higher than the traditional banks. And thus, to maintain the operational costs, many MFIs charge higher interest rate from the borrowers. The interest rate ceiling of 27 per cent ascribed by the Micro-credit Regulatory Authority (MRA) on the MFIs is not favourable to maintain or gain the operational costs.
The findings of Micro-finance Transparency in 2009, a US-based organisation, show that the effective interest rate amongst the existing MFIs varies from about 18 per cent to 51 per cent. Around 75 per cent MFIs charge an effective interest rate between 30 to 40 per cent, while around 5.0 per cent MFIs charge more than 40 per cent. According to MRA, this rate varies from 30 to 60 per cent. So the attributed interest rate, if made effective, will not leave anything for the MFIs in the face of profit as long as the MFIs are not charity organizations. Even there will be no margins left. So the ceiled interest rate is not viable. This may tend to a possibility that the MFI branches operating in the remote areas may be closed for good if they fail to gain the maintenance cost. This closing will spill over on the poor people as they will be deprived from the scope of livelihood improvement through receiving micro-credit. So the target to reduce poverty will be questioned.
Next is the abolishment of plan of deducting money from the issued loan against the borrowers in the name of savings. The 5.0 per cent deduction of money from the issued loan by the MFIs is done mainly to favor the borrowers. A 6.0 per cent interest rate is also paid by the MFIs to the borrowers for this savings. Moreover, the MFIs' can give this money to the borrowers when there is need of money. They can also use this money for further loan process to other borrowers. As this plan is abrogated by the MRA, this will not be favorable for the borrowers as well as for the MFIs.
The expansion of interim period between the loan issuance date and the first installment repayment date is encouraging and beneficial for the borrowers. 15 days of time is quite satisfactory to be ready and start repaying the debts. At present, the MFIs require the borrowers to start repaying the installments in the following week of loan issuance. Also the restraint to Tk. 15 on charging the borrowers for loan process and passbooks is a positive choice.
Number of installments restricting to 50 is not feasible. It is seen that if the amount of loan is Tk.15000 to Tk. 20000, the number of installments is only 46 which is sometimes seen more than enough. If the size of the loan is huge, the number goes more than 50. So the regulated restriction on 50 numbers of installments may put a pressure on the borrowers in the time of repayment if they are not able to make any high income generating activity by track of time.
But the critical aspect of these provisions is that these will benefit only to those MFIs who are the fund recipients' from Palli Karma-Sahayak Foundation (PKSF). It is not an impressive stride as it is discriminating between PKSF-funded and non-PKSF funded MFIs. The PKSF funded MFIs receive loans at 4.5-7.0 per cent of interest while many non-PKSF-funded MFIs are to borrow at 13 per cent interest rate from commercial banks. So definitely the non-PKSF-funded MFIs will charge a higher interest rate on the borrowers in order to repay the borrowings from the commercial banks and meet the operational expenses. This will tend the borrowers not to take credit from non-PKSF-funded MFIs as they are charging higher interest rate. So ultimately the borrowers will treat the opposite. This diverting tendency of the borrowers will lead the non-PKSF-funded MFIs to face loss and even at one stage they will have no way but to wind up their organisations. This will also push the micro-financing process to go to the back foot and the disbursement of micro-credit will not be as available as before. So there also can be a slow progress in case of poverty alleviation process.
Eventually, the regulation attribution is having a mixed impact but at first creating a speed-breaker to the progress of poverty alleviation. The MDG deadline to poverty reduction within 2015 is ticking down but this reduction task reduction will be demoralising if the provisions are made effective. Secondly, the existence of the MFIs will be threatening. As all MFIs are operating to help reduce poverty and as the micro-credit progression has helped many poor to improve their living standard, these provisions must be reviewed so that both lenders and borrowers get the spill-over benefit upon each other.
M. Mizanur Rahman is an Assistant Director at D.Net and can be reached at
mithunmds07@gmail.com. Md. Maher is a Project Research Officer at the Institute of
Micro-Finance (InM) and can be reached at maher_j784@yahoo.com
ALLEVIATION of poverty with the help of micro-credit is now a well-known process all over the world. Not only the advocates of micro-credit but also the governments, donors, development organisations and others have keen interest in it. The practice of micro-credit to combat poverty in Bangladesh is wide-spread. Microfinance offers small loans to people who do not normally qualify for traditional banking credit, to encourage entrepreneurship.
According to Micro-finance Transparency, a US-based agency, currently famous non-government organisations (NGOs) and Microfinance Institutions (MFIs) including Grameen Bank, Bangladesh Rural Advancement Committee (BRAC), Association for Social Advancement (ASA), Thengamara Mohila Sabuj Sangha (TMSS), BURO Bangladesh and some other 800 NGO-MFI's are serving in over 45000 villages. The operation of micro-financing in the country has started from the early 70's. After the achievement of the UN award, the current poverty status of Bangladesh is 58.5 per cent which is up from the 48 per cent, the status of the base year.
The advocacy of micro-credit for poverty alleviation has been in vogue from a long time ago. In this perspective, in the early 1970s, some Non-government Organisations (NGOs) and Microfinance Institutions (MFIs) introduced microcredit programme (MCP). They targeted the poor people to help in becoming self-employed and thus alleviate poverty with microcredit. Many of these organisations provide credit by following some processes of social mechanisms, such as lending money to specific groups. It is done to reach the poor and other certain group of people, including women, who are short of access to formal financial institutions.
According to Micro-Finance Information Exchange (MIE), in 2009, there were about 20.5 million active micro-credit borrowers where per head borrowing is Tk. 8094. But the recent regulation framed by the Micro-credit Regulatory Authority (MRA), which is required by the MFIs to launch within June 2011, has a mixed impact on both MFIs and micro-credit borrowers. So the question is whether this regulation is positive or negative?
The MFIs' usually works in remote areas where people are facing poverty and has no financial solvency to create income generating activities. Regarding the concept, the disbursed amount of loan per head is smaller compared to the amount disbursed by banks. So definitely the operational cost of the MFIs is higher than the traditional banks. And thus, to maintain the operational costs, many MFIs charge higher interest rate from the borrowers. The interest rate ceiling of 27 per cent ascribed by the Micro-credit Regulatory Authority (MRA) on the MFIs is not favourable to maintain or gain the operational costs.
The findings of Micro-finance Transparency in 2009, a US-based organisation, show that the effective interest rate amongst the existing MFIs varies from about 18 per cent to 51 per cent. Around 75 per cent MFIs charge an effective interest rate between 30 to 40 per cent, while around 5.0 per cent MFIs charge more than 40 per cent. According to MRA, this rate varies from 30 to 60 per cent. So the attributed interest rate, if made effective, will not leave anything for the MFIs in the face of profit as long as the MFIs are not charity organizations. Even there will be no margins left. So the ceiled interest rate is not viable. This may tend to a possibility that the MFI branches operating in the remote areas may be closed for good if they fail to gain the maintenance cost. This closing will spill over on the poor people as they will be deprived from the scope of livelihood improvement through receiving micro-credit. So the target to reduce poverty will be questioned.
Next is the abolishment of plan of deducting money from the issued loan against the borrowers in the name of savings. The 5.0 per cent deduction of money from the issued loan by the MFIs is done mainly to favor the borrowers. A 6.0 per cent interest rate is also paid by the MFIs to the borrowers for this savings. Moreover, the MFIs' can give this money to the borrowers when there is need of money. They can also use this money for further loan process to other borrowers. As this plan is abrogated by the MRA, this will not be favorable for the borrowers as well as for the MFIs.
The expansion of interim period between the loan issuance date and the first installment repayment date is encouraging and beneficial for the borrowers. 15 days of time is quite satisfactory to be ready and start repaying the debts. At present, the MFIs require the borrowers to start repaying the installments in the following week of loan issuance. Also the restraint to Tk. 15 on charging the borrowers for loan process and passbooks is a positive choice.
Number of installments restricting to 50 is not feasible. It is seen that if the amount of loan is Tk.15000 to Tk. 20000, the number of installments is only 46 which is sometimes seen more than enough. If the size of the loan is huge, the number goes more than 50. So the regulated restriction on 50 numbers of installments may put a pressure on the borrowers in the time of repayment if they are not able to make any high income generating activity by track of time.
But the critical aspect of these provisions is that these will benefit only to those MFIs who are the fund recipients' from Palli Karma-Sahayak Foundation (PKSF). It is not an impressive stride as it is discriminating between PKSF-funded and non-PKSF funded MFIs. The PKSF funded MFIs receive loans at 4.5-7.0 per cent of interest while many non-PKSF-funded MFIs are to borrow at 13 per cent interest rate from commercial banks. So definitely the non-PKSF-funded MFIs will charge a higher interest rate on the borrowers in order to repay the borrowings from the commercial banks and meet the operational expenses. This will tend the borrowers not to take credit from non-PKSF-funded MFIs as they are charging higher interest rate. So ultimately the borrowers will treat the opposite. This diverting tendency of the borrowers will lead the non-PKSF-funded MFIs to face loss and even at one stage they will have no way but to wind up their organisations. This will also push the micro-financing process to go to the back foot and the disbursement of micro-credit will not be as available as before. So there also can be a slow progress in case of poverty alleviation process.
Eventually, the regulation attribution is having a mixed impact but at first creating a speed-breaker to the progress of poverty alleviation. The MDG deadline to poverty reduction within 2015 is ticking down but this reduction task reduction will be demoralising if the provisions are made effective. Secondly, the existence of the MFIs will be threatening. As all MFIs are operating to help reduce poverty and as the micro-credit progression has helped many poor to improve their living standard, these provisions must be reviewed so that both lenders and borrowers get the spill-over benefit upon each other.
M. Mizanur Rahman is an Assistant Director at D.Net and can be reached at
mithunmds07@gmail.com. Md. Maher is a Project Research Officer at the Institute of
Micro-Finance (InM) and can be reached at maher_j784@yahoo.com