1.

Introduction
1.1 Microcredit
In recent years, microcredit, in its wider dimension known as microfinance, has become a much
favored intervention for poverty alleviation in the developing countries and least development
countries. There is scarcely a poor country and development oriented donor agency (multilateral,
bilateral and private) not involved in the promotion (in one form or other) of a microfinance
program. Many achievements are claimed about the impact of microfinance programs, and an
outside observer cannot but wonder at the range of diversity of the benefits claimed. Microcredit is
the extension of very small loans (microloans) to impoverished borrowers who typically lack
collateral, steady employment and a verifiable credit history. It is designed not only to support
entrepreneurship and alleviate poverty, but also in many cases to empower women and uplift entire
communities by extension. In many communities worldwide, in developed and developing nations
alike, women lack the highly stable employment histories that traditional lenders tend to require.
This reality might result from factors such as leaving the paid workforce to care for children and
elderly relatives. As of 2009 an estimated 74 million men and women held microloans that total
US$38 billion. Grameen Bank reports that repayment success rates are between 95 and 98 per cent.
Microcredit is a division of microfinance, which is the provision of a wider range of financial
services, especially savings accounts, to the poor. Modern microcredit is generally considered to
have originated with the Grameen Bank founded in Bangladesh in 1983. Many traditional banks
subsequently introduced microcredit despite initial misgivings. The United Nations declared 2005
the International Year of Microcredit. As of 2012, microcredit is widely used in developing countries
and is presented as having "enormous potential as a tool for poverty alleviation. Critics argue,
however, that microcredit has not had a positive impact on gender relationships, does not alleviate
poverty, has led many borrowers into a debt trap and constitutes a "privatization of welfare". The
first randomized evaluation of microcredit, conducted by Esther Duflo and others, showed mixed
results: there was no effect on household expenditure, gender equity, education or health, but the
number of new businesses increased by one third compared to a control group. Money begets
money. Adam Smith said Money, says the proverb, makes money. When you have got a little, it is
often easy to get more. The great difficulty is to get that little (The Wealth of Nations 1937, p.
93). It is very difficult for the poor to get small working capital from formal banking system for
various reasons. A collateral free working capital loan is the requirement at the door steps of the poor
at the right time to help them facilitate and start feasible intended income generating activities
(IGAs). It is with this background that, microfinance is seen as one of the significant approaches to
poverty alleviation.
Although Bangladesh has huge potential for development, it is, for various socio-economic reasons,
among the poorest countries in the world. About half of the country's population live below the
poverty line with 80% in the rural areas. The burden of poverty falls disproportionately on women,
who constitute half of the total population. Logically, therefore, poverty alleviation and creation of
rural employment are top priorities in the development agenda of the government of Bangladesh
(GOB) which has adopted a broad based approach to poverty alleviation, emphasizing
macroeconomic stability, economic liberalization, and support for a number of government agencies
and non-government organizations (NGOs). Substantial progress has been made in implementing the
1

microcredit program (MCP), and the scope for its efficient expansion is enormous. Microfinance is
entering into a new and more dynamic phase. The launching of initial public offerings (IPOs),
innovations in mobile microfinance services, remittance through microfinance institutions using
latest communications technology are the new dimension of microfinance that bring finance - and
hope - to the world's least developed countries. Microfinance is rapidly shifting from a niche product
to a globally recognized form of finance and becoming more sophisticated and diverse. Bangladesh
microfinance sector is mature now and its assets constitute around 3 percent of GDP in 2010. There
are four main types of institutions involved in microfinance activities in Bangladesh:

1.2

Grameen Bank
NGO-MFIs that have received licenses from MRA
Commercial and specialized banks
Government sponsored microfinance programs (e.g. through BRDB, cooperative societies and
programs under different ministries).

Evolution of Microfinance Institutions in Bangladesh

During the late 1970s, when the 'Jobra' experiment was underway under Professor M. Yunus, the Dheki
Rin Prokolpa was initiated by the Bangladesh Bank in collaboration with the Swanirvar Bangladesh, and
several other pilot schemes were initiated by a handful of the NGOs which were active then. At that
time, it was difficult to conceive that these initiatives would lead to a major microcredit movement,
which would make Bangladesh known to the rest of the world. Even during the 1980s, in spite of
Grameen Banks success, the main discourse amongst development practitioners in Bangladesh centered
around the desirability of microcredit program as opposed to conscientization. By 1990, unhindered
experimentation in the fields led to a quiet resolution of the debate and the country experienced a
massive expansion of microfinance activities during the 1990s. PKSF contributed significantly to the
expansion of microcredit programs in Bangladesh. This is borne out by the figures on the time path of
NGO-microfinance institutions (NGO-MFIs) expansion, as well as, by the expansion in membership in
these MFIs. This rapid expansion drew attention from all important quarterspolicymakers, academia
and development practitionerseach trying to grapple with the unfolding stream of issues and trying to
shape the course of the social and economic dynamics initiated due to introduction of microcredit. With
a view to meet the demand for fund for re-lending by the development partners (NGO -MFIs), and due
to an urge to coordinate the flow of such funds to appropriate use, the Palli Karma-Sahayak Foundation
(acronym PKSF and the full Bengali name can be translated in English as "Rural
Employment Support Foundation") came into being in late 1990. Over the years,
its share in the revolving loan fund of the MFIs increased from 9 percent in
1996 to 24 percent in 2002. In recent years MFIs have moved from the margins
of the financial system towards the mainstream. It is now more widely accepted
that populations traditionally excluded by the formal financial sector can, in fact, be a profitable market
niche for innovative banking services. The
1997 Microcredit Summit held in
Washington D.C., launched a global
movement to reach 100 million of the
world's poorest families with credit for
self-employment and other financial and
business services by the year 2005. Much
remains to be done, however, to integrate
microfinancial systems, and for orthodox
financial institutions, notably commercial
banks, to recognize its full potential.

1.3 Microcredit regulatory

authority of Bangladesh (MRA)
The Microcredit Regulatory Authority (MRA) has been established by the Government of the Peoples
Republic of Bangladesh under the "Microcredit Regulatory Authority Act 2006 to promote and foster
sustainable development of microfinance sector through creating an enabling environment for NGOMFIs in Bangladesh. MRA is the central body to monitor and supervise microfinance operations of
NGO-MFIs. License from the Authority is mandatory to operate microfinance operations in Bangladesh
as an NGO.
3

In December 1997 the Bangladesh Bank commissioned a study to examine "the Regulatory Aspects of
Microfinance Institutions (MFIs) and Linking it with the Formal Financial Sector". The study was
completed in 1998 and the major findings and recommendations were as follows;
1. The regulation available in the form of statutory requirement under the existing banking and
financial laws will not cater to the special needs of this sector,
2. Legal recognition of MFIs through enactment of law is required to access formal sources of funds,
so that they can operate under an agreed "Code of norms/ Conducts" under the form of a special
licensing arrangements,
3. Self-regulation based on agreed "Code of norms/ Conducts" can be an alternative or may supplement
the existing or new government regulation, which may be introduced
Subsequently in the light of the above recommendations Bangladesh Bank and other stakeholders also
raised the issue of regulation for this sector to the government. In this circumstance, the government
formed a Committee of seven members with the chairmanship of the Governor of Bangladesh Bank in
October 1999 to a) recommend an effective credit and savings policy for this sector, b) ensure
transparency and accountability into their activities and c) make some recommendations regarding a
regulatory framework and to propose a body to regulate and supervise these institutions. The Committee
submitted its report in March 2000, the major recommendations consist of formulating the following
policies and actions;
1. Policy to remove overlapping problem,
2. Policy regarding establishment of linkage between NGOs and formal financial sector to solve NGOs'
funding problem,
3. Policy for loan classification, provisioning, interest rate, reserve requirement against savings/
deposit, and investment of savings/ deposits,
4. Legal basis to recover default loan,
5. Proper definition of member and non-member,
6. Policy for uniform accounting standard, internal and external audit,
7. Fix up the upper limit of administrative expenses of NGOs,
8. Formulation of a prudential guideline for the microfinance sector,
9. Formulation of performance standard to monitor and rating NGO-MFIs,
10. Creation of a separate regulatory body or a subsidiary organization of
On the basis of the above recommendations there was a meeting in Ministry of Finance on May 28,
2000 under the chairmanship of the then Finance Minister. According to the decision of that meeting a
Unit namely "Microfinance Research and Reference Unit (MRRU)" was established in Bangladesh
Bank under the supervision of a National Steering Committee formed through a government order on
June 18, 2000. The Governor of the Bangladesh Bank headed this Committee and it consisted of 10
other members from, ministry of finance, social welfare ministry, NGO Affairs Bureau, PKSF, Grameen
Bank, ADAB, BRAC, and others. Members were selected from both government and private sectors.
However, the Committee could not prepare a legal framework of a regulatory body to act as the
regulatory authority for the micro-finance institutions (TOR (d) above) because of time constraint. A
separate office was established in Bangladesh Bank for the Unit to implement Committee's guidelines.
Initial technical and financial supports in establishing a separate office were given by the Bangladesh
Bank and the Palli Karma-Sahayak Foundation (PKSF). A public notice was published on daily
4

newspapers regarding prohibition of deposit collection from non-members without having formal
licenses to do so. Published an operational guideline on the basis of recommendations given the Steering
Committee for monitoring management and financial system of microfinance institutions. It contains
reporting formats, guideline for measuring performance and an accounting procedure as well as terms of
reference for internal and external audit. Based on that guideline MRRU requested NGO-MFIs to
provide quarterly information since January 2004 to the Unit. The Unit has published two analytical
reports on NGO-MFIs in Bangladesh based on the information provided by the NGOs. The Unit
provided training to NGO-MFIs on the operational guideline.
Board of directors of Microcredit regulatory authority:
1)
2)
3)
4)
5)
6)
7)
8)

Chairman: Dr. Atiur Rahman, Governor, Bangladesh Bank

Member: Secretary, Bank and Financial Institutions Division, Ministry of Finance
Member: Director General, NGO Affairs Bureau
Member: Managing Director, PKSF
Member: Mr. Masih Malik Chowdhury, FCA, Senior Partner, Masih Muhith Haque & Co.
Member: Dr. Taufiq Ahmed Chowdhury, General Secretary, Bangladesh Economic Association
Member: Professor M. M. Akash, Economics Department, University of Dhaka, Bangladesh
Member Secretary: Khandakar Muzharul Haque, Executive Vice Chairman, MRA

1.4 Grameen Bank

Grameen Bank (Bengali: ) is a Nobel Peace Prize winning microfinance organization and
community development bank started in Bangladesh that makes small loans (known as microcredit or
"grameencredit") to the impoverished without requiring collateral. The name Grameen is derived from
the word gram which means "rural" or "village" in the Bengali language. The system of this bank is
based on the idea that the poor have skills that are under-utilized. A group-based credit approach is
applied which utilizes the peer-pressure within the group to ensure the borrowers follow through and use
caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and
allowing the borrowers to develop good credit standing. The bank also accepts deposits, provides other
services, and runs several development-oriented businesses including fabric, telephone and energy
companies. Another distinctive feature of the bank's credit program is that the overwhelming majority
(98%) of its borrowers are women. The origin of Grameen Bank can be traced back to 1976 when
Professor Muhammad Yunus, a Fulbright scholar at Vanderbilt University and Professor at University of
Chittagong, launched a research project to examine the possibility of designing a credit delivery system
to provide banking services targeted to the rural poor. In October 1983, the Grameen Bank Project was
transformed into an independent bank by
government legislation. The organization and its
founder, Muhammad Yunus, were jointly
awarded the Nobel Peace Prize in 2006, the
organization's Low-cost Housing Program won a
World Habitat Award in 1998. In 2011, the
founder Muhammad Yunus was sacked from the
Grameen Bank by the Bangladesh Government.

2. History
2.1

Early Beginning

Ideas relating to microcredit can be found at various times in modern history. Jonathan Swift inspired
the Irish Loan Funds of the 18th and 19th centuries. In the mid-19th century, individualist anarchist
Lysander Spooner wrote about the benefits of numerous small loans for entrepreneurial activities to the
poor as a way to alleviate poverty. At about the same time, but independently to Spooner, Friedrich
6

Wilhelm Raiffeisen founded the first cooperative lending banks to support farmers in rural Germany. In
the 1950s, Akhtar Hameed Khan began distributing group-oriented credit in East Pakistan. Khan used
the Comilla Model, in which credit is distributed through community-based initiatives. The project
failed due to the over-involvement of the Pakistani government, and the hierarchies created within
communities as certain members began to exert more control over loans than others.

2.2

Modern microcredit

The origins of microcredit in its current practical incarnation can be linked to several organizations
founded in Bangladesh, especially the Grameen Bank. The Grameen Bank, which is generally
considered the first modern microcredit institution, was founded in 1976 by Muhammad Yunus. Yunus
began the project in a small town called Jobra, using his own money to deliver small loans at lowinterest rates to the rural poor. Grameen Bank was followed by organizations such as BRAC in 1972 and
ASA in 1978. Microcredit reached Latin America with the establishment of PRODEM in Bolivia in
1986; a bank that later transformed into the for-profit BancoSol. Microcredit quickly became a popular
tool for economic development, with hundreds of institutions emerging throughout the third world.
Though the Grameen Bank was formed initially as a non-profit organization dependent upon
government subsidies, it later became a corporate entity and was renamed Grameen II in 2002.
Muhammad Yunus was awarded the Nobel Peace Prize in 2006 for his work providing microcredit
services to the poor.

3. Microcredit in Bangladesh
3.1 Beginning of microcredit in Bangladesh
Microcredit programs in Bangladesh is implemented by NGOs, Grameen Bank, state-owned
commercial banks, private commercial banks, and specialized programs of some ministries of
Bangladesh government. In the microfinance sector total loan outstanding is around TK 248 billion
(including Grammen Bank TK 72 billion) and savings TK168 billion. The total clients of this sector
is 35 million (including 8.4 million clients from Grameen Bank) that accelerates overall economic
development process of the country. Credit services of this sector can be categorized into six broad
groups:
i)
general microcredit for small-scale self employment based activities,
ii)
microenterprise loans,
iii)
loans for ultra poor,
iv)
agricultural loans,
v)
seasonal loans,
vi)
loans for disaster management.
Loan amounts up to BDT 50,000 are generally considered as microcredit; loans above this amount
are considered as microenterprise loans. The main objectives of micocredit programs are to increase
employment opportunities and to enhance income adequate to lift the poor above the poverty line on
a sustainable basis.

3.2

State of microcredit in Bangladesh

7

In the backdrop of global double-dip recession and over-indebtedness crisis in microcredit sector in
several countries, Bangladeshs microfinance sector shows strong resilience and continues to
contribute towards enhancement of macroeconomic growth. Bangladesh microfinance sector is
mature now and its assets constitute around 3 percent of GDP in 2011. Total outstanding loan of this
sector (only licensed MFIs) has increased by 20.0 percent from BDT 145.0 billion in June 2010 to
BDT 173.8 billion in June, 2011 disbursed among 20.7 million poor people, helping them to be selfemployed and accelerating overall economic development process of the country. The total savings
has also increased by 23.25 percent to BDT 63.3 billion in June 2011 compared to previous year
from 26.1 million clients, over 93 percent of them are women.
TABLE-1: Basic Statistics of NGO-MFIs in Bangladesh (As of 30 June 2011)
Particulars

June, 2008

June , 2009

June, 2010

June, 2011

No. of Licensed NGO-MFIs

293

419

516

576

No of Branches

15,077

16,851

17,252

18,066

No. of Employees

98,896

107,175

109,597

111,828

No. of Clients (Million)

23.45

24.85

25.28

26.08

Total borrowers (Million)

17.79

18.89

19.21

20.65

Amount of Loan Outstanding (Tk.

Million )
134,680.96

143,134.03

145,022.66

1,73,797.60

Amount of Savings( Tk. Million)

50,610.04

51,362.93

63,304.44

47,386.19

Table 1 shows the overall trend of microfinance statistics in Bangladesh. This sector has created
direct job opportunities for over 111,800 people; 80 percent of them are male and 20 percent are
female. At the end of June 2011, the sector had outstanding loans of BDT 173.8 billion disbursed to
20.7 million borrowers, and had accumulated BDT 63.3 billion as savings from around 26.10 million
clients over 93 percent of them are women through more than 18,000 branches, by 576 NGOMFIs licensed by MRA.
TABLE-2: Size-Wise Loan Outstanding and Savings Compositions (As of 30 June 2011)
Categories

Very Small

Range of
Borrowers

Total
Total
Loan
No ofNo
of
% of Total
Savings
Outstanding
No of Savers
MFIs Borrower
Outstanding
(BDT
(BDT Million)
Million)

% of Total
Savings

Up to 1000

85

63973

492.48

0.28

87660

192.20

0.30

1001-2000

177

244974

1566.68

0.90

351054

741.81

1.17

2001-6000

120

422745

2914.21

1.68

566864

1282.30

2.03

6001-10000

46

364848

2987.90

1.72

469938

1128.09

1.78

Small

10001-50000 103

2218532

19946.10

11.48

2861318

6738.03

10.64

Medium

50001-100000 23

1571226

13805.22

7.94

1875363

4713.86

7.45

Large

1000011000000

19

4600621

39483.64

22.72

5527971

14652.13

23.15

Very Large

1000001Above

11162371

92601.36

53.58

14274780

33856.028

53.51

576

20649290

173797.60

100

26014948

63

Table 2 shows the market scenario of NGO-MFIs in Bangladesh. The top three MFIs contribute 54
percent of total loan outstanding as well as savings of the microfinance sector in Bangladesh. Two of
the largest MFIs, viz., BRAC & ASA, are each serving over five million borrowers. There are a few
more developing fast. On the other hand the smallest 428 NGO-MFIs have contributed only 4
percent of total loan outstanding and 5 percent of total savings. Institutional concentration ratio is
highly skewed in favor of large MFIs: just 22 institutions are in control of 76 percent of the market
share while three largest organizations have control of over 50 percent in terms of both clients and
total financial portfolios.
TABLE-3: Scenario of Micro Enterprise Loan

NGO-MFIs

Total Number
of Borrowers %

Total
Loan
Outstanding
(Tk
Million)
%

BRAC

249585

1.30

19128.64

11.27

ASA

140496

0.73

9194.57

5.42

Buro Bangladesh

4857

0.03

187.45

0.11

Jagoroni Chakra Foundation

15008

0.08

1067.96

0.63

Padakkhep Manobik Unnayan Kandra

8570

0.04

561.26

0.33

RDRS Bangladesh

3029

0.02

141.12

0.08

Shakti Foundation

3885

0.02

149.10

0.09

Society for Social Service

15552

0.08

1155.40

0.68

TMSS

8816

0.05

621.12

0.37

UDDIPAN

7310

0.04

663.40

0.39

Top 10 MFIs

457108

2.37

32870.01

19.37

Total 576 MFIs

617706

3.21

40059.84

23.60

Table 3 depicts the scenario of micro enterprise loan, i.e., loans above BDT 50,000, of different NGOMFIs in Bangladesh. It is observed that micro enterprise loan outstanding is BDT 40 billion which is
around 24 percent of total loan outstanding in which the top ten NGO-MFIs contributed around 19
percent. It also shows that BDT 40 billion is disbursed to around 6 lakh borrowers which are only 3
percent of total borrowers. The table expresses that only the top NGO-MFIs are capable to run micro
enterprise loan.

4. Microcredit institutions of Bangladesh

4.1 Licensing Status of the NGO- MFIs in Bangladesh
The Microcredit Regulatory Authority (MRA), established by the government in August 2006,
received applications from 4241 private institutions (NGO-MFIs). But, around 1000 applications of
them were found to be very small organizations that had fewer than 1000 borrowers or less than the
USD 58,000 in outstanding loans that is generally considered as the minimum initial operating
portfolio of a single branched MFI to be sustainable. However, till August 2012 the MRA had
approved licenses in favor of 651 NGOs. There are another 210 applications are under process for a
final decision although they are mostly small organizations but with some potentiality to become
9

viable in course of time. As of August 2012, 3380 applications have been rejected. Recently MRA
has invited new applications for obtaining license to conduct microcredit activities.redit institutions
of Bangladesh. Map 1 shows the geographical concentration of NGO-MFIs in Bangladesh in June
2010. Dhaka district has shown the highest concentration as usual where more than 60 licensed
NGO-MFIs have been operating while Gazipur has the second highest concentration. The lowest
concentrations are observed in the four districts i.e. Rajbari, Shariatpur, Bandarban and Rangamati
where less than 5 NGO-MFIs licensed from MRA have been operating.

4.2

Selected Indicators of NGO-MFIs in Bangladesh

It is observed from table 1 that savings per member has been increasing over the years. In 2006 savings
per member was Tk. 1,207 which stands at Tk.2495 in 2011 an increase to more than double within the
last five years. The loan outstanding per borrower also increased over the years and average growth rate
of loan outstanding per borrower is around 17 percent in 2011 compared to the previous year. The loan
outstanding per borrower has increased by more than 100 percent within the last five years. These two
indicators, savings per member (average saving size) and outstanding loan per borrower (average loan
size) increased over time perhaps due to the increase in the income level of the poor resulting in an
increase in their need for higher amount of loans from the MFIs. The ratio between borrowers to clients
(members) remained steady for the last few years, which is within 70 to 80 percent and the savings to
10

outstanding loan ratio has also been stable from 2006 to 2011. Since the total number of branches of
MFIs has increased at a much higher rate in 2011 compared to the previous year, the number of
members and borrowers per branch has decreased. Substantial rate of increase in the sizes of loans per
borrower and savings per member has resulted in a rise in the total loan outstanding and savings in the
sector. Consequently outstanding loan and saving per branch has also increased. The loan outstanding
amount per branch which was TK 8.42 million in 2010 has increased by 14.4 percent in 2011.
TABLE-1: Selected Indicators of NGO-MFIs in Bangladesh
Particulars

June '06

June '07

June '08

June '09

June '10

June '11

Savings per member (Tk.)

1,207.34

1,332.66

1,448.36

1,735.52

2,097.83

2494.49

Outstanding loan per borrower

(Tk.)
4,377.11

5,048.38

5,614.55

6,188.01

7,558.92

8807.69

Borrower to client (member) ratio 75.1%

81.6%

81.2%

78.9%

78.0%

78.8%

Savings to Outstanding loan ratio 36.7%

32.3%

31.78%

35.5%

35.6%

35.9%

Borrower per Branch

1,413

1,484

1,496

1,036

1,115

1093.33

Member per Branch

1,883

1,817

1,843

1,312

1,429

1387.87

6.19

7.49

8.4

6.41

8.42

9.63

Savings per Branch (Million Tk.) 2.27

2.42

2.67

2.28

2.99

3.46

Outstanding loan
(Million Tk.)

per

branch

While the fund composition of NGO-MFIs is changing, total fund has increased over time. In 2010, the
growth was 10.49 percent, which further increased to 20.6 percent in 2011. Total fund in this sector was
Tk. 152.3 billion in 2010 which rose to Tk.183.6 billion in 2011. Palli Karma Shahayak Foundation
(PKSF), the micro finance wholesale funding agency, provides a large portion of loan fund at a
subsidized rate which has increased from Tk. 24.48 billion in 2010 to Tk. 31.76 billion in 2011. Savings
from the clients and surplus income from microcredit operations appeared as two major sources of fund
for NGO-MFIsand are the main strength for their future growth. The clients savings has increased from
31.11 percent to 34.46 percent in 2011- an indicator suggesting that MRA Rules have a positive impact
on savings collections.

TABLE-2: Selected Indicators of NGO-MFIs in Bangladesh

Jun-08

Jun-09

Jun-10

Jun-11

Source of Fund
Clients' Savings

(Million Tk.)

(%)

(Million Tk.) (%)

(Million Tk.) (%)

(Million Tk.)(%)

36,397.32

29.66

40,526.91

29.73

47,436.35

31.15

63295.88

34.46

Loan from PKSF

22,708.58

18.50

22,666.20

16.63

24,484.12

16.08

31767.84

17.30

Loan from Commercial Banks

23,487.03

19.13

23,896.37

17.53

23,006.41

15.11

23577.85

12.84

Donors' Fund

4,549.07

3.71

4,110.29

3.02

4,109.29

2.70

7008.37

3.82

Cumulative Surplus

31,170.02

25.39

36,261.74

26.60

42,339.27

27.80

50298.66

27.38

Other Funds

4,435.49

3.61

8,847.97

6.49

10,907.40

7.16

7727.32

4.21

Total

122,747.51

100

136,309.48

100

152,282.84

100

183675.92

100.00

It is observed that although the commercial banks are recently considered a potential source of fund of
microfinance, their share of the total source of fund did not increase over the last three years. MRA has
been putting in efforts to increase loans from commercial banks to the sector by introducing the banks to
11

the NGO-MFIs. However, borrowing cost from commercial banks is very high due to high interest rate
charged and inflation which discourages NGO-MFIs to avail this as a source of fund. Previously donor
driven NGOs are now trying to rely more and more on local sources of fund with the decline in foreign
funding, which stood at only 3.82 percent in June 2011 which is around 70 percent higher compared to
previous year. Map 2 shows district-wise percentage of micro credit borrowers to number of poor people
in Bangladesh in June 2010. Number of borrowers is calculated based on the MRA-MIS data where only
MRA's licensed MFIs have been considered. The number of poor people is determined using lowest
head count rate of poverty mapping in 2005 data and updated in 2009 of Bangladesh Bureau of Statistics
(BBS). Lower ratio means smaller number of micro credit borrowers among the poor people taking
microfinance service from any particular district indicating lower MFI concentration within the region.
Higher ratio shows either that these districts have many borrowers or overlapped market and lower poor
people concentration as well. The lowest borrower to poor people ratio is seen in Khagrachari, Barisal,
Bhola and Jamalpur districts. The highest borrower to poor people ratio exists in Feni, Meherpur, Sylhet
and Narayanganj (more than 100 percent) which indicates that these districts have either lower rate of
poor people or higher rate of borrowers or overlapping borrowers for enterprise loan.

4.3 Growth of Top

NGO-MFIs
in
Bangladesh
According to the size of
institutions in terms of the
number
of
borrowers
served, MRA categorizes
MFIs into four major types:
very large, large, medium
and small. Two of the
largest MFIs, viz., BRAC &
ASA, are each serving over
four million borrowers.
There are a few more
developing
sharply.
Currently there are only 5
very large, 21 large, 115
medium and 341 small
MFIs
operating
in
Bangladesh.
Institutional
concentration ratio is highly
skewed in favour of large
12

MFIs: just 10 of the institutions are in control of 70 percent of the market share while two largest
organizations have control of over 55 percent in terms of both clients and total financial portfolios. The
number of borrowers, the total number of institutions, number of employees, loan outstanding and
savings under these four categories. Figure 1 shows the growth of cumulative disbursement of loans of
the top NGO-MFIs in Bangladesh over the last 5 years. The total disbursement of BRAC and ASA is
BDT 1000 billion as of June 2011. Although their total disbursement is overwhelmingly high but growth
rate has reduced over the last four years. The total disbursement of most of the MFIs has increased
during the last four years but yearly growth rate did not increase except for Shakti Foundation for
Disadvantaged Women (SFDW).
Fig.1. Cumulative Loan Disbursement of the Top NGO-MFIs

5. Impact of Microcredit in Bangladesh:

5.1
Social and Other Development Impacts

Health and Nutrition

There is positive program placement effect on nutrition status.
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Sanitation and Drinking Water

The BIDS study finds small positive influence of participation on waste disposal and use of sanitary
toilets among the land-poor households with no clear evidence of program impact on hand-washing.
The use of pure drinking water from hand tublewell was found universal.

Literacy and School Enrollment of Children

Adult literacy rate is significantly higher among the eligible participants. The BIDS study also found
that program participation increases the chance of both boys and girls to been rolled in schools.

Empowering Women
Microcredit programs' main target is women. There are strong evidences that, microcredit programs
contribute to women's empowerment. One consistent finding is the increased selfconfidence and
increased self-esteem. Another is women's increased in decision making in the areas of family
planning, children's marriage, buying and selling of properties and sending daughters to school.
There have been some evidences that members of microfinance institutions are able to stop domestic
violence due to personal empowerment and through group action. In Bangladesh, microcredit
programs have also increased women's participation in the activities of local government. Some
women microcredit clients have been elected as Chairpersons and Members of various Union
Parishads, the lowest and most vibrant tier of local government. Now women microcredit clients
take greater roles in community activities and organizing for social change.

5.2 Economic Impacts of Microfinance

Income
The 1998 survey found the average annual income of participant households to be higher than that of
the non-participants. Self-employment activities had more than 50% contribution to total income for
the participants as against 43 percent in case of non-participants. The second BIDS survey suggests
that nominal household income increased by 19 percent in program villages and by only 13.5 percent
in control villages. Compared to non-participants the participant households were better able to cope
with flood, sustain their income, achieve higher purchasing power and consumption level.

Food Security
The BIDS study finds the program participants, due to greater access to sharecropping, had better
food security and about 26 percent of rice consumption out of own production (after sale), which
was also marginally higher than the non-participants.
Wage
Wage earning contributed about 23 percent of total annual income for the land-poor households.
Microcredit helped participant households to earn about 8 percent higher income than that of the
non-participants.

Employment
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The participant households are better able to ensure more employment on own farms due to their
better access to the land rental market. Wage and self-employment in non-agricultural sector is also
higher for the participant households due to their access to microcredit program.

Assets
Land and non-land. Average size of land owned by participant households is lower than the nonparticipants; 91 decimals compared to 149 decimals. The BIDS study however suggests that the
eligible participants mortgage or rent-in more land than the non-participants, and therefore, have
larger operational holding. Higher percentage of program participants own poultry, goat/sheep and
cows compared to non-participants. A higher percentage of the participants own bicycles (12.5%
compared to 8%), boat (3.7% compared to 1.6%), irrigation equipment (1.23% compared to 0.23%),
radio (17.9% Microcredit in Bangladesh Achievements and Challenges compared to 12.6%) and
rickshaw/van (8% compared to 2%) thus showing higher asset ownership of the participants.

5.2
Activities of Borrowers Financed by Microcredit Institutions in
Bangladesh
Of the various employment activities (mainly self-employment), small-scale business/trade is the
most important, accounting for more than 40% of fund disbursed by the MFIs. On the other hand
agriculture, food processing, transport, housing and livestock sectors were getting relatively small
portions of fund. This is shown in Table. The table shows that a transformation is taking place in the
economic activities of the poor households in the rural areas. In the initial years of microcredit
operation during eighties, the traditional sector including fisheries and poultry accounted for a larger
segment of self-employment activities of the poor. BIDS surveys conducted during 1997 to 2000 on
PKSF funded MFIs, show the predominance of small-scale trade and lately medium and large-scale
trading has assumed prominence. There are, however, some weaknesses of the non-farm sector;
many of its activities are unable to accommodate a workforce round-the-year and also over a period
of two or more years (BIDS, 2001). This aspect combined with the market constraints to the
expansion of Microcredit in Bangladesh Achievements and Challenges. Self-employment has
prompted the efforts of MFIs to finance microenterprises for the borrowers graduating form income
generating activities (IGAs).

5.4 Major Issues

Targeting the Poorest Versus

Achieving
Financial
Sustainability:
Studies of microcredit programs
show that these have been
successful in improving the
economic
condition
of
the
members. Macro studies, however,
show that there has not been any
significant decline in the overall levels of poverty. This apparent contradiction may be partially due to
the fact that the microcredit programs have not been very successful in including the hard core poor,
who constitute about half of the poor in Bangladesh. The poorest may have been left out because quite
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often the destitute themselves feel they are not credit worthy and the microcredit programs also do not
judge them to have the entrepreneurial ability necessary to handle money properly. Perhaps microcredit,
especially in the form that is currently in practice, is not the answer for the hard core poor. Normally, the
MFIs have been successful in expanding their outreach by providing microcredit to increasing numbers
of borrowers who are near the poverty line, not well below that. The MFIs adopt this approach to reach
financial viability within a reasonable time frame. If the MFIs are to borrow (from PKSF and other
sources) at a rate close to market rate of interest, the effort to reach financial viability may become
difficult and delayed. The partner organizations (POs) of PKSF have achieved financial viability at the
present (subsidized) rate of service charge of PKSF. Therefore, in the context of Bangladesh there seems
to be a trade -off between outreach and sustainability of MFIs and they should strike a judicious balance
between the two which may enable them to achieve financial sustainability. Experiences suggest that the
financial needs of the poor are best served by encouraging a broad range of institutions to provide
efficient and responsive lending, savings, insurance, and other financial services that poor people need to
build their business, increase income and assets, and reduce risks. Poor people need sustained access to
an evolving set of financial products and services. These can only be provided by financially sustainable
institutions, dealing with diverse segments and products, each in the position to increase outreach and
grow with their clients.
Widening the Target Group: New Products and New financial Technologies
The MFIs have some scope to expand horizontally-devising ways to include more people from the target
group. More important is, as older borrowers graduate to higher income brackets, new products need to
be devised to meet their changing needs. These new products may also help the MFIs to expand
vertically by tapping borrowers outside the target group. A possible way to expand horizontally is to
include more men. Research in Bangladesh and elsewhere show that men usually borrow larger amount.
However, their repayment record is not as good as women. Including more men will allow MFIs to
attain sustainability quickly, but it will also mean that the repayment performance of an institution will
suffer as well. As the microcredit movement matures it faces the varied requirements of the borrowers
and the need to offer a larger package of products.

Accessing Non-Donor Source of Financing

It is fair to say that donor funding and enthusiasm for microcredit will diminish in the future. This means
that MFIs have to look for new avenues to fund their activities, potential source of fund will be to
mobilize saving deposits of members and non-members. Another alternative is to try to tap commercial
source of funding such as commercial banks, the local stock market and financial market. This option
might be open only to large and well established MFIs and may not be feasible for small MFIs.
Internal and External Governance Issues
Research in Bangladesh and other places show that a crucial element for the success of a credit granting
NGO-MFI is the quality of leadership and management. The governance of NGOs is increasingly being
discussed nowadays. Research findings indicate that governance and financial sustainability are closely
interrelated. Weak governance and management characterize many microfinance NGOs in Bangladesh.
It is commonplace to find friends, close relatives, retired bureaucrats, and such other persons in the
governing bodies. They are mere onlookers and remain uninvolved with the board's business. The chief
executives are said to overpower the boards. If this is the situation, good governance will not occur by
just inducting good people in the governing body. The essence of governance is to ensure an overall
system of structuring accountability and transparency in an organization. The problems of governance
are mostly due to the inadequacy of the existing laws and regulations and lack of reporting, supervision
and monitoring. The MFIs are not to blame fully for this.
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 Sustainability of Microcredit Borrowers

An individual member may be considered as sustainable when he/she is capable of meeting the basic
needs of his/her family without borrowing money/capital from the project or any other sources like
banks etc. for consumption purposes. However, loans can be taken for IGAs. Most people are of the
opinion that a member's sustainability should be judged by two separate but inter-dependent criteria, viz,
(i) social development and (ii) economic development. Controversies, however, exit as to which of the
two criteria should go first. Some people argue that economic development is a pre-condition for social
development while some others consider social development as a prerequisite for economic
development. Most people, however, are of the opinion that the two interactive and therefore be pursued
simultaneously. Sustainability of borrowers is also linked with some programme challenges of MFIs,
like devising appropriate microinsurance schemes and social protection schemes, providing other
financial services to the poor.
Service Charge of MFIs
The MFIs in Bangladesh usually charge flat rate of 12 to 15% per annum from the microcredit
borrowers. The effective rate becomes about 20 to 28% at the borrowers level. Recently, there has
debate whether this rate is too high or not. The critics of service charges of MFIs compare, somewhat
erroneously, with interest rates of the conventional formal banking system. Microcredit is banking at
the doorstep of the poor borrowers. The monitoring and supervision are quite intensive and costly.
Therefore, the comparison with formal banks is not proper. There are several other factors like risks
associated with collateral free loan, provisioning for doubtful and bad loans, compulsion to build up
MFIs equity and attaining financial sustainability also are determinants of service charge of microcredit
programs, Bangladesh microcredit sector has relatively lower rate of service charge compared to many
other countries. However, social obligations, political realities and credit at a competitive rate may
require consideration of reducing the rate by MFIs. But that should not be done by resorting to capping
the rate. The actions to increase efficiency in the credit operation of MFIs, information flow at
grassroots level regarding charges of various MFIs, increasing the loan size for the borrowers and
healthy competition among MFIs may lead to competitive rates acceptable to all concerned.
Regulatory Framework
This issues has come to the forefront because MFIs are providing financial services and products to the
poor, outside the formal banking system. In view of the history of MFIs (most of which are NGOs), it
can be argued that the conventional regulatory framework such as that of formal banks and financial
institutions is not appropriate and hence not required under the circumstances prevailing in many
countries. This is particularly in view of the fact that many MFIs are not accepting deposits with
checking facilities. The unique features of MFIs in the field of social and financial services with the core
objectives of poverty alleviation differentiate the industry from the formal financial sector and further
justify this proposition. However, that does not in any way downplay the importance of having some
strategic monitoring measures that are compatible and appropriate to MFIs objectives, institutional
operation and development culture. The measures should incorporate user-friendly prudential
norms/indicative guidelines in the form of a concrete Code of Norms/Conduct which would ensure
sound and organized growth of MFIs on a sustainable basis. A set of financial standards, reporting
formats and performance standards may be an effective way to keep the MFIs on the right track. There is
a broad range of experiences to draw from in establishing appropriate standards, including the work
being done by PKSF in Bangladesh. An independent autonomous apex body outside the governments
control is the best option to ensure that the code of conduct and the microcredit standards are complied
with by the MFIs. Non-compliance by the MFIs may ultimately result in canceling the
permission/registration of a defaulting MFI. The government has recently decided to give the
responsibility to devise a regulatory framework to a Committee headed by the Governor of the central
17

bank of Bangladesh. The Committee has already formulated a set of reporting formats to be followed by
MFIs and also drafting a law for microcredit programs in Bangladesh.

6. Conclusion
Microcredit, originated in Bangladesh has spread all over the globe. Today within the global coverage of
microcredit Bangladesh's achievement stands out prominently. According to the Microcredit Summit
Campaign Report, 67.6 million families have been reached by microcredit in 2002 around the world.
Out of that 59.6 million clients are in Asia and Bangladesh alone covered 13 million clients (22.6%).
The world community has appreciated the contributions of Bangladesh in the field of microcredit, which
was evident in the recently held Asia Pacific Region Microcredit Summit (APRMS) Meeting of
Councils in Dhaka, Bangladesh from 16-19th February, 2004 arranged by Palli Karma -Sahayak
Foundation (PKSF), in association with the Microcredit Summit Campaign based in Washington D.C.
More than 1200 participants from 47 countries from different parts of the globe pledged their firm
commitment to take forward the microcredit movement. Bangladesh government has also placed
adequate emphasis on microcredit programs. The Interim Poverty Reduction Strategy Paper (IPRSP) of
the government of Bangladesh has outlined some important roles for microcredit. The policy makers
have recognized the importance of microcredit in Bangladesh and the present government has pledged
its support to this program. Recognizing the importance of microcredit in poverty alleviation, the major
challenge now, the UN has declared 2005 as the UN International Year of Microcredit. With combined
efforts of the governments, MFIs, donor agencies and above all the peoples of the nations through a
multipronged approach poverty will be removed form the face of the earth and thus peace in its true
sense will be restored around the world.

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