MFIs - Saviours or Shylocks at the grassroots?
Wednesday, 15 December 2010
Shamsul Huq Zahid
The microfinance institutions (MFIs) in Bangladesh have been receiving both bouquets and brickbats in recent years.
On one hand, a section of people and institutions of national and international repute regard them as saviours of millions of poor whom the formal institutional lenders consider 'un-bankable' and, on the other, some others accuse them of being 'institutional shylocks' at the grassroots.
But the fact remains that MFIs, of late, have been at the receiving end of lots of criticisms for their alleged charging of exorbitant rates of interest on the money they lend to the poor and application of coercive methods to get back loan money along with interests.
The recent allegation about transfer of Norwegian funds by the Grameen Bank, rightly or wrongly, has only heightened the criticism about micro-lenders. The allegation though originated from the source of fund, Norway, has got instant supports from the critics of MFIs. Grameen Bank chief and Nobel Laureate Dr. Muhammad Yunus on his return home from abroad dismissed the allegation terming it to be false and fabricated. However, the dust has not settled fully, it seems. The issue might again crop up anytime.
Allegations are galore that MFIs charge interest rates between 24 to 30 per cent on the poor borrowers and apply coercion if the poor borrowers fail to repay the loan money in time.
The issue of unregulated operations of the MFIs prompted the government to create the Micro-credit Regulatory Authority (MRA) in 2006. The MRA has been authorized by law to monitor and supervise the MFIs to ensure transparency and accountability in the microfinance sector.
The MRA has, perhaps, gone beyond its mandate recently to fix the maximum rate of interest at 27 per cent on lending by the MFIs. The interest rate fixation has not gone well with the MFIs on the plea that the cost of supervision of the credit is high.
It is not Bangladesh alone the $ 7.0 billion microfinance industry in India is also under attack. In fact they are in a deeper crisis. Andhra Pradesh, one of the hubs of the Indian microfinance industry is now working on a piece of legislation with the aim to launch crackdown on aggressive lending and recovery practices by the micro-lenders.
However, the MFIs in Bangladesh are different from those of India where MFIs are for-profit entities and some of them are even listed on the bourses. The lavish lifestyles of the Indian MFI executives caused many to raise their eyebrows. In contrast, Bangladeshi MFIs are non-profit ones. Yet the lifestyle issue has surfaced here also from time to time. But not many people have paid attention to it.
There is no denying that MFIs do need to be regulated and their operations streamlined keeping in view the interests of the poor borrowers. But the MFI-bashers should also take into consideration the important role these institutions have been playing at the grassroots since long. The MFIs now disburse loans worth around Tk. 250 billion a year among more than 30 million poor and the Grameen Bank and 10 other large institutions disburse more than 87 per cent of the aggregate micro-credits. The share of the overdue in the total outstanding micro-credit is only 5.2 per cent compared to the existence of a very high level of non-performing loans in the country's formal banking sector.
What if the MFIs are banned or they on their own decide to close down operations? Who would provide the poor with loans, soft or hard? Government or banks? The former does not have the resources and manpower at the grassroots to carry out such a large financial operation and the latter would not ever dare enter the micro-credit operations that involve both risk and intensive supervision. They can at best participate in the programme as a lender to the MFIs, not to the poor. A few mainstream financial institutions have already made available loans to a number of MFIs.
Since there is none to replace the MFIs, why should there be obstructions to their normal operations? Maybe, some people are living a cosy life out of their operation in the micro-lending operations. The government or the MRA, instead of discouraging MFIs, should introduce appropriate measures so that an MFI executive cannot misuse funds meant for helping the poor.
The microfinance institutions (MFIs) in Bangladesh have been receiving both bouquets and brickbats in recent years.
On one hand, a section of people and institutions of national and international repute regard them as saviours of millions of poor whom the formal institutional lenders consider 'un-bankable' and, on the other, some others accuse them of being 'institutional shylocks' at the grassroots.
But the fact remains that MFIs, of late, have been at the receiving end of lots of criticisms for their alleged charging of exorbitant rates of interest on the money they lend to the poor and application of coercive methods to get back loan money along with interests.
The recent allegation about transfer of Norwegian funds by the Grameen Bank, rightly or wrongly, has only heightened the criticism about micro-lenders. The allegation though originated from the source of fund, Norway, has got instant supports from the critics of MFIs. Grameen Bank chief and Nobel Laureate Dr. Muhammad Yunus on his return home from abroad dismissed the allegation terming it to be false and fabricated. However, the dust has not settled fully, it seems. The issue might again crop up anytime.
Allegations are galore that MFIs charge interest rates between 24 to 30 per cent on the poor borrowers and apply coercion if the poor borrowers fail to repay the loan money in time.
The issue of unregulated operations of the MFIs prompted the government to create the Micro-credit Regulatory Authority (MRA) in 2006. The MRA has been authorized by law to monitor and supervise the MFIs to ensure transparency and accountability in the microfinance sector.
The MRA has, perhaps, gone beyond its mandate recently to fix the maximum rate of interest at 27 per cent on lending by the MFIs. The interest rate fixation has not gone well with the MFIs on the plea that the cost of supervision of the credit is high.
It is not Bangladesh alone the $ 7.0 billion microfinance industry in India is also under attack. In fact they are in a deeper crisis. Andhra Pradesh, one of the hubs of the Indian microfinance industry is now working on a piece of legislation with the aim to launch crackdown on aggressive lending and recovery practices by the micro-lenders.
However, the MFIs in Bangladesh are different from those of India where MFIs are for-profit entities and some of them are even listed on the bourses. The lavish lifestyles of the Indian MFI executives caused many to raise their eyebrows. In contrast, Bangladeshi MFIs are non-profit ones. Yet the lifestyle issue has surfaced here also from time to time. But not many people have paid attention to it.
There is no denying that MFIs do need to be regulated and their operations streamlined keeping in view the interests of the poor borrowers. But the MFI-bashers should also take into consideration the important role these institutions have been playing at the grassroots since long. The MFIs now disburse loans worth around Tk. 250 billion a year among more than 30 million poor and the Grameen Bank and 10 other large institutions disburse more than 87 per cent of the aggregate micro-credits. The share of the overdue in the total outstanding micro-credit is only 5.2 per cent compared to the existence of a very high level of non-performing loans in the country's formal banking sector.
What if the MFIs are banned or they on their own decide to close down operations? Who would provide the poor with loans, soft or hard? Government or banks? The former does not have the resources and manpower at the grassroots to carry out such a large financial operation and the latter would not ever dare enter the micro-credit operations that involve both risk and intensive supervision. They can at best participate in the programme as a lender to the MFIs, not to the poor. A few mainstream financial institutions have already made available loans to a number of MFIs.
Since there is none to replace the MFIs, why should there be obstructions to their normal operations? Maybe, some people are living a cosy life out of their operation in the micro-lending operations. The government or the MRA, instead of discouraging MFIs, should introduce appropriate measures so that an MFI executive cannot misuse funds meant for helping the poor.