WELCOME TO THE PRESENTATION

State of Microfinance in Bangladesh

Micro Finance

Microfinance provides financial services for poor and low income people by offering smaller loans and flexible savings services where permitted, while accepting a wider variety of assets as collateral.

Micro finance belongs to the group of financial service innovations under the term of microfinance, other services according to microfinance is micro savings, money transfer vehicles and micro insurance.

Importance of Microfinance
Fostering economic growth Improving living standard Poverty alleviation Eliminating income inequality Reducing Unemployment Women empowerment Facilitate mobilization of savings Facilitating financial intermediation Encourage savings of rural people Making credit available specially to rural people

Boosting socio-economic development Making insurance available to rural people Overall development of rural finance

Microfinance Sector in Bangladesh

Bangladesh has been known as the birthplace of microfinance, and competition has markedly increased during the last decade. The development of the microfinance sector in Bangladesh can be divided into four phases, these are:

1) Action research phase in the 1970s 2) Microfinance development phase in the 1980s 3) Expansion phase in the 1990s 4) Increased competition and formalization from 2000 onwards.

Traditional Diversification of Microfinance

Poverty Outreach of Microfinance in Bangladesh

Compared to the global records, microfinance in Bangladesh is probably the most poverty focussed in its operations and discourses. Due to high population density, relatively easily accessible terrain, and solid institution builders, the trade-off between financial sustainability and serving poor people is less polarized and more consensual. Increasing depth of poverty outreach and enhancing poverty impact are the two fundamental challenges that dominate the microfinance discourses in Bangladesh.

The Key Actors in the Microfinance Sector with Coverage and Involvement
Microfinance has emerged as small-scale financial services offered to the poor in order to reduce their vulnerabilities and not only the NGOs and Grameen Bank, the public sector agencies have also been giving priority to microfinance program as an effective tool to combat poverty. In fact, the magnitude of growth of the microfinance program undertaken by various agencies has brought Bangladesh at global focal point.

Over time, the microfinance sector has grown to an industry and is unofficially treated as the third sector in the country.

Basically, the microfinance program in Bangladesh has turned into product diversification in terms of flexibility in savings and credit operations during the last couple of years.

The Key Actors in the Microfinance Sector with Coverage and Involvement

Grameen Bank
This is the pioneer of the microcredit concept.
It is one of the largest microfinance institutions in the world, which was primarily started as a project in 1976 and formally began functioning as a bank since 1983 in Bangladesh. Grameen has an outreach of 2.36 million members of which more than 2.3 million are women. These members mobilized savings amounting to BDT 8,142.7 million.

The Key Actors in the Microfinance Sector with Coverage and Involvement

The NGOs
Although the exact number of NGOs operating microfinance is not known accurately, reports from different sources reflect that more than 1000 NGOs are operating microfinance program in Bangladesh who can be called as microfinance NGOs (MFNGOs).

These include some of the largest NGOs in the world like BRAC, ASA, Proshika etc.

These NGOs mobilized a total savings of Taka 6,922 million and these NGOs also distributed a cumulative amount of Taka 92,436 million.

The Key Actors in the Microfinance Sector with Coverage and Involvement
Palli Karmo-Shahayak Foundation (PKSF)
This is another organization in the sector playing an important role since 1990. PKSF is widely known as a second tier organization that lends to the microfinance NGOs for on-lending to the borrowers.

It is mainly a government-initiated organization to promote and facilitate microfinance program in the country through the potential microfinance NGOs.
PKSF's contribution is 24% to the total amount of Revolving Loan Fund (RLF) of the microfinance NGOs in Bangladesh. It is now acknowledged as the most potential source of fund for the microfinance NGOs.

The Key Actors in the Microfinance Sector with Coverage and Involvement
Nationalized Commercial Banks (NCBs)
All the nationalized commercial and some specialized banks have microfinance program of their own. In general, these banks channel capital for microcredit through MFNGOs as well as other agencies. But, some like Islamic Bank Bangladesh Limited are participating in poverty alleviation program by directly providing microcredit to the landless and small farmers.

Funding of Microfinance Institutions

Financing strategy of the MFIs in Bangladesh has changed over the year. In the early 1980s it used to depend heavily on Grants, aids and foreign subsidies but in recent time MIs have emerged as more self dependent organizations. Again from another perspective it can be argued that Microfinance institutions (MFIs) have three main sources to fund their growth: donor fund, debt, equity, and deposits .

In Bangladesh Member savings has been the most crucial source of fund for the micro finance institutions along with interest income and commercial bank lending.

Funding of Microfinance Institutions

Funding strategy of MFIs 2008 onwards

Impact Assessment
Impact assessment is the systematic process of identifying the identifying the anticipated or actual impacts of a development intervention, on those social, economic and environmental factors which the intervention is designed to affect.

Possible stages for producing an impact assessment

Developme nt Review Option

Implement ation Final Proposal

Consultatio n

Common problems of impact assessment

Unobservable attributes Fungibility Selection Bias Program Placement Bias

Spillover Effect

Practice of Impact Assessment by Microfinance institutions

IMPACT ASSESSMENT: OBJECTIVES- Impact assessment studies have become increasingly popular with donor agencies and, in consequence, have become an increasingly significant activity for recipient agencies. In part this outputs.

Assessing impact: the choice of conceptual frameworks-

A model of the impact chain

The specification of the units or levels

The specification of the types of impact

Problems of Impact Analysis from the perspective of Microfinance

Fungibility- Fungibility of cash within households, whether from loans savings, insurance or pensions.

Program Placement- In implementing a group lending program it would be difficult to go into a rural village and randomly identify individuals to invite to join the group lending program and others who are not invited. Problems of attribution- The major methodological problems that confront the IA of microfinance relate to attribution. At the heart of impact assessment is the attribution of specific effects to specific causes.

Problems of Impact Analysis from the perspective of Microfinance

Leadership of the Organisations- Organisation leading by female CEO are creating more impact and more efficient. It is also globally approved. Selection Biasness- In particular problems of sample selection bias, mis-specification of underlying causal relationships and respondent motivation must be overcome.

Problems of Impact Analysis from the perspective of Microfinance

Selection bias may occur because ofDifficulties in finding a location at which the control groups economic, physical and social environment matches that of the treatment group. The treatment group systematically possessing an invisible attribute which the control group lacks. Receiving any form of intervention may result in a short-term positive response from the treatment group. The control group becoming contaminated by contact with the treatment group The fungibility of the treatment.

Solution to the problems of Impact Analysis

Quasi-experiments-

Multiple regression has rarely been used in microfinance IA because of its enormous demands for data on other possible causal factors and its assumptions.

control group method requires a before and after comparison of a population that received a specific treatment and an identical population that did not receive the treatment.

Solution to the problems of Impact Analysis

The Humanities Tradition- This tradition does not try to prove impact within statistically definable limits of probability. The validity of specific IAs adopting this approach has to be judged on the basis of

The logical consistency of the arguments and materials presented. The strength and quality of the evidence provided. The quality of the methodology. The reputation of the researchers.

Solution to the problems of Impact Analysis

Participatory Learning and Action (PLA)-

In the last five years participatory approaches to development planning and management have moved from being a fringe activity to centre stage.

Participatory approaches challenge the validity and utility of the scientific method as applied to developmental problems.

Global Debate on MFI (Same Game Different League)

The financial crisis has given rise to a heated debate about the corporate governance of large banks, and has emphasized its fundamental role in the management of change, the resolution of conflicts of interest and the prevention of crises.

Whether the micro finance institutions would be wise to focus on the corporate governance issue.

Global Debate on MFI (Same Game Different League)

The Board of Directors

Role and Responsibilities of the Board- Large banks main duties are setting strategy, risk profile and appetite. While MFI focusing on a transition to a deposit taking for profit entity. Board Size, Composition and Qualifications- Banks have always been aware of the trade-off between appropriate representation of all relevant stakeholders and a manageable size of the Board. Some commentators suggest that a size of 7 to 9 members is optimal for micro finance.

Global Debate on MFI (Same Game Different League)

The Role of Institutional Shareholders: Rights and Engagement
The debate has focused on institutional shareholders, for example pension funds, large asset managers, private equity funds and hedge funds. This analysis is highly relevant for MFIs. NGOs transforming into for-profit companies acquire owners for the first time.

The Governance of Risk An already vast literature exists on the shortcomings of risk management in the lead-up to the banking crisis. Microfinance institutions have been characterised by extremely tight risk management.

History of Regulatory Attempts

Creation of NGO Affairs Bureau

Microfinance Research and Reference Unit (MRRU)

Establishment of Microcredit Regulatory Authority (MRA)

Triggering factors of new regulations

Decline in foreign donation: Foreign donation for this NGO sector declined from almost 100% to 50% at the beginning of nineties. Emerging of huge microfinance institutions: A notable growth in terms of number of Institutions was observed after that period. Creation of wholesale funding agency: PKSF has been playing the role of a quasi regulator for the NGO-MFIs who have been receiving its funds. Requirement of sound legal basis: With the gradual difficulties to attract foreign donation many NGO-MFIs attempted to tap funds from local sources including commercial banks, PKSF, international investment

Establishment of Microcredit Regulatory Authority (MRA)

Microcredit Regulatory Authority Act, 2006 was passed by the Parliament in July 2006. Microcredit Regulatory Authority (MRA) has been established in August 2006. Grameen Bank as a bank remained out of the supervisory system of the MRA. Draft rules has been finalized after thorough consultation with the sector at different levels.

MRA Act 2006

Chapter One (Opening) Chapter Two (Establishment of the Authority) Chapter Three (Financial Matters of the Authority) Chapter Four (Certificate)

Chapter Five (Matter Related To Micro Credit Institutions)

Chapter Six (Offense, Punishment etc.) Chapter Seven (Miscellaneous)

MRA Act 2006

Chapter One (Opening)
The first chapter of the law describes various definitions of the numerous subjects from the perspective of micro finance. Micro credit means loan facilities offered by micro credit organisations certified under this act for poverty alleviation, employment generation and facilitate a small entrepreneur.

Chapter Two (Establishment of the Authority)

This authority shall be a statutory organisation which will have a permanent continuity.
The general management of the authority shall be selected by a board of directors. Which shall be comprises of Governor of Bangladesh Bank (Chairman), Six government officials and Executive Vice President (Member Secretary).

MRA Act 2006

Chapter Three (Financial Matters of the Authority)
The authority shall have a fund and it will be constituted through different types of financing sources. The auditor and controller general of Bangladesh shall examine every year the accounts of the authority and submit a copy of the report to the government and to the authority. The authority shall submit an annual budget to the government within a time frame to be fixed by the government ahead of the end of every fiscal year.

Chapter Four (Certificate)

Every micro credit organisation has to take the certificates from the authority to run the organisation in Bangladesh. Until the authority accept or reject the application the micro credit organisation can continue it activities. Scrapping and temporary suspension of the certificate, return of the certificate and adequacy of the capital of the micro credit organisation, income feasibility etc.

MRA Act 2006

Chapter Five (Matter Related To Micro Credit Institutions)
The authority shall form and maintain a fund in order to secure the depositors of Micro Credit institutions to be called Depositor security fund. No Micro Credit Institution can change, amend and scrap its constitutions without the approval of the authority. All micro credit institutions shall maintain their accounts in prescribed manner to be directed by the authority

Chapter Six (Offense, Punishment etc.)

If any person convicted any offense that person shall be punishable with imprisonment not more than one year, or penulty not exceeding Taka five lakh. Imposition of administrative fine for non-cooperation. Authority of imposing administrative fine.

MRA Act 2006

Chapter Seven (Miscellaneous)
The authority has to submit an annual report containing the descriptions of its activities within the year to the government within three months after the end of every year. The government shall take measures to the table at parliament as soon as possible. Microfinance institutions may unable to pay the liabilities it owe to the clients concerned institution shall appraise this to the authority in writing. The authority shall issue necessary directives to the concerned micro credit institution and it shall obliged to carry out the directives.

Experiences of the Microcredit Regulatory Authority

More than 4000 active NGO-MFIs have applied for license to the authority, over 60% of them are very small organizations.
503 licenses have been issued by February 2010, MRA is still processing applications. The market size of microfinance in Bangladesh is not at all comparable with the situation of other countries. There are lots of arguments regarding taking this huge responsibility by a new organization like MRA.

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