Microfinance

ABSTRACT
The world is getting more matured in terms of level of sophistication. At the same time it
becomes a threat due to the difficulty of having areas where further sophistication is possible.
But, now, the most sensitive problem for all is the severe poverty. Micro-credit became a new
phenomenon in the present world due to its recognition of an efficient weapon to fight against
poverty. A current investigation proved that, more than 1.3 billion inhabitants are struggling to
earn a smaller amount one dollar ($1) a day where they are captivated by extreme shortage of
basic needs such as; food, cloth, shelter, treatment and education. However, reducing poverty is
more successful in rural areas than in urban areas because of its random access in remote places.
In every year half a billion US dollar are given to 7.5 million borrowers throughout the country
as a micro-loan to break the vicious cycle of poverty. Commercial banks are historically not
inclined to provide loan to the poor and grassroots people of the society. But commercial banks
involvement in microfinance is very important for fighting against vicious poverty in the
country. An earnest effort has been made to make the micro-credit programs and methodologies
comprehendible with the process of diffusion and usability from a commercial perspective. Such
perspective is important to give micro finance program an institutional modality that will
ultimately ensure long-term existence.
It is also important that commercial banks can change the scenario of microcredit sector because
of their high structural administration and economic power. So, this paper approaches to explore
selected Commercial Banks activities and the way it assists enormously to develop the living
standard of the poor and vulnerable people in Bangladesh and encourages to apply this model in
different countries.

1 Micro finance in the banking industry: A study on some selected banks of Bangladesh.

1.1 INTRODUCTION
Micro finance used as a key element in the development strategy of Bangladesh since the early-
subsidized rural credit Program was dominant state interventions to help with the development
process. In the mid-70s though, neoclassical economists identified these programs as failures.
They pointed out that subsidized interest rates led to an excess demand for credit, followed by
the rationing of credit, thus causing distortions of the market. Further access to subsidized credit
was skewed to the wealthier rural population thereby leading to less optimal allocation of scarce
investment funds. This resulted in a process of financial repression interest rates on savings
deposits were inhibiting mobilization of domestic resources, which was injurious to the countrys
overall economic development.
A number of non-governmental organizations and the GRAMEEN Bank pioneered alternative
credit delivery mechanisms for the rural poor; consisted of small amounts of collateral free,
affordable loans, popularly known as micro credit. These micro-credit programs, unlike previous
state efforts, have been successful in providing commendable access to credit by landless women
and men usually defined as those with a land holding of less than half an acre and in achieving
high repayment rates of up to 98 percent. Impact studies on micro credit programs have
substantiated the important role of credit in the development process of Bangladesh.

The activities of the banking sector in the microfinance activity are a very important concept for
the economy of the Bangladesh. Most of the people of our country are poor and helpless. The
traditional banking does not allow them to take loan because of the collateral based loan
mechanism. So traditional microfinance institutions are specialized in micro finance business
have come long way in this sector. These NGOs and MFIs is the main player in micro finance
industry and may be they will remain the same for their no collateral based loan system and
exotic loan recovery system. But the exorbitant interest charged by these institutions and their
unstructured nature paved the way for the traditional banks to involved in microfinance industry.
Now the commercial banks and government controlled banks and also other specialized banks
are playing an important role in this sector. These institutions are now involved in varied
microfinance activities in Bangladesh.


1.2 AIM AND OBJECTIVES OF THE STUDY
The aim of the paper is to bring out the present scenario of microfinance activity of banking
sector of Bangladesh. The study is based on overall banking sector performance of Bangladesh.
Other objectives are:
1. To reflect the evolution of microfinance in the banking sector.
2. An understanding about the microfinance product offered by the banking sector of the
country.
3. To discuss the microfinance activity of the banking sector.
4. To reflect the current condition of the micro finance activity in banking sector,
emerging issues and challenges.
5. To present the regulation and the policy implication of major constituents such as;
Bangladesh bank, private commercial bank, Government specialized banks and other
public banks.

1.3 METHODOLOGY OF THE STUDY
The review is primarily based on secondary and published information. The major sources of
information are published research reports and papers, unpublished reports from reputable
organizations, data from major institutions such as Microcredit Regulatory Authority (MRA),
Grameen Bank, BRAC, network agencies such as Credit and Development Forum (CDF),
commercial banks, Bangladesh Bank (Central Bank) etc.
1.4 SCOPE OF THE STUDY
The scope of the research is limited to the microfinance in the banking sector of Bangladesh. To
understand the present scenario eight banks have been selected consisting of two public banks,
three private banks and three Islamic banks. The list of the selected banks is:
1. Public banks
a. Agrani bank
b. Sonali bank
2. Private banks
a. Prime bank


b. Standard chartered bank
c. Eastern bank Ltd.
3. Islamic banks
a. RDS of IBBL
b. Social Islami Bank Ltd.
c. Al-arafah Islami Bank Ltd.
This selection of microfinance institutions and banks are based on the level of disclosure, quality
of disclosure, financial parameters etc. The study is based on the policies, products, objectives,
strategies and other qualitative and quantitative information to evaluate the present scenario of
the microfinance in banking sector.
1.5 LIMITATIONS OF THE STUDY
The emergence of Micro finance institutions is not now fully fledged in our country. So it is very
difficult to collect more and potential information about Micro finance institutions in our
country. There are some limitations which are:
1. It is very difficult to collect sufficient information about Micro finance institutions within a
very short time.
2. Lack of harmonious relation & close contact between officials of the Organization.
3. Most of the MFIs in Bangladesh do not provide data due to the accounting practices
followed by them.
4. This report may suffer from statistical error due to the fact that all data used was secondary
5. Lack of sufficient alternative sources prevented verification of information. The analysis
and future projections presented here may vary with opinions of experts in this field of
study, owing to limited economics knowledge on part of the authors of this report.


2 LITERATURE REVIEW
There is plethora of literature on performance of micro finance institution across the globe,
though only few studies have been carried out on the topic related with banking sector
involvement in microfinance. In a study (Shil, 2009) carried out a research about the
commercialization of microfinance and studied the prospects of commercial banks in the
microfinance sector. Both developed and developing countries still have a good market for the
development and advancement of microfinance industry. Because there is a huge market gap
that is required to be filled up to grasp the potential benefits from it. The market is growing, but
the pace is very slow. The main reason is lack of commercialization. Here, most of the NGOs
provide donated funds at a subsidized rate. Transformation rate (from NGO to MFI to
Commercial Bank) is very low. First thing that we need according to our proposed model is
conducive to regulatory environment to support the microfinance operation. Commercial Banks
should be kept free to engage themselves in such operations that are not authorized in many
countries. So, Central Bank may form a task force to conduct a feasibility study to evaluate
whether full-fledged commercial banks can be given the permission to go for microfinance
operation. Grameen Bank, BRAC Bank, Islami Bank Bangladesh Limited and some other
financial institutions are enjoying the facilities and they are making a good fortune, if we take
Bangladesh as a sample. If all banking and non-banking financial institutions avail the option,
the breadth and depth of outreach can be maximized. The need for microfinance is higher in
rural areas than in urban areas irrespective of the status of the country. Most of our unemployed
and unproductive men and women live in rural areas that need works and funds. Sometimes they
do not get work due to shortage of fund. Again, there are ample opportunities in rural areas to
operate successful venture at minimal fund involvement in various agro-based projects.
Indigenous people may also be a target group of microfinance industry who needs training and
funds to expose them off. Thus commercialization of microfinance may work as an effective
tonic here to bring our poor people out of the vicious circle of poverty. From NGOs, we cannot
expect the maximum result so long as they will run by donated fund or soft and grant loans. If
commercial banks come up with their expertise and commercial funds, the situation may be
better. They can use their long trained staff, fund management policies, scattered branches to
ensure outreach and last, but not the least, commercial funds with a commercial motive that leads
not only to alleviate poverty but also to develop wealth-base of the destitute group.


In his study (Shil 2009) tried to persuade the reader about the commercialization of microfinance
through banking sector. He postulated that the commercialization can increase the outreach and
the breadth of the microfinance and the rural and hard to reach people will be largely benefitted
from the microfinance lending mechanism. If the group (target market, loan receivers) is
identified rightly, if commercial principles can be applied equitably and if the poor are rightly
and timely focused, micro finance may work as a strong and timely intervention against poverty
that no laboratory can test and prove. It may work as a cause of smile for a vast majority poor
people who suffer from acute poverty level in terms of hunger, illiteracy, ignorance, slavery,
insecurity and such other in humanitarian condition.
The commercialization of the microfinance by established commercial banks is not a new idea.
The fact is that its a prominent idea and also a better one. Government of Bangladesh is trying
to enforce the commercial banks to open their branches in the rural and distant areas. It will
create a very congenial environment to eradicate poverty and unemployment in in rural and
distant areas. Also commercialization will improve the micro financing sector in Bangladesh.
But some important things which were necessary to fully understand the commercialization of
micro financing sector were not present in Shills findings. Some points are:
1. (Shil 2009) postulated commercialization as a new concept. This is historically not a new
idea. It is practiced in Bangladesh for many years, but in a limited basis.
2. Shil didnt provide a framework for the commercialization to modify or change the
present scenario. Further study is needed to establish a strong framework to strengthen
the commercialization of micro financing sector through banking sector.
3. No clear statistical or historical or factual data are given to understand the present
scenario of commercialization approach of Bangladesh.
4. No specific commercial bank or institutions have selected to replicate the
commercialization process.
(Pine, 2010; Awal, 2006) worked in the relationship and interlink between the banking sector
and the MFIs. Awal (2006) suggests that to facilitate growing partnership between financially
viable MFIs and the banks, the relevant financial authority could act as guarantor on behalf of
MFIs or establish Guarantee funds. He mentions one example of such a guarantor - the Swiss
Agency for Development and Cooperation (SDC), which guaranteed a loan from Sonali Bank,


the largest bank in Bangladesh. The repayment to the bank was excellent, and the guarantee
from the SDC was reduced annually until the next loan was approved by Sonali Bank without
any guarantee necessary. Another fact that should be considered is that according to the CDF
(Awal, 2006), the recovery rate from wholesaling is higher for commercial banks compared to
their recovery rates in direct microfinance involvement.
As Schicks (2007) points out, in recent times there have been commercial banks around the
world entering the microfinance business, which see serving the poor as an investment in access
to lucrative markets. In Bangladesh, this downscaling has taken place as well, but due to
obstacles for these banks in microfinance such as regulation and prudential norms, the mindset
and commitment level of staff or in general a lack of understanding for the microfinance
industry, these banks have not had much success so far in trying it out on their own (Awal,
2006). For example, the recovery rate for Sonali Bank was only 76% in 2006. At the same time
its wholesaling activities to reputable NGO-MFIs were by far more successful and resulted in an
overall recovery rate of 97%.
Awal (2006) sees the main reason for this in their respective comparative and competitive
advantages which lead to synergy in linkage between the banks and NGO-MFIs. By wholesaling
to a NGO-MFI, a commercial bank can rely on the MFIs experience, capacity and
understanding of the market while the NGO-MFI on its part is backed by the commercial banks
resources.
Pines (2010) study found that the achievements in sustainability MFIs are able to reach great
levels of outreach and accommodate demand through innovative product development. Financial
sustainability means turning away from donor grants and soft loans and making use of
commercial funding sources. These commercial funding sources will only be available to
properly regulated and supervised MFIs. Increasing competition as a result of market saturation
will then in turn lead to the development of innovative microfinance products.
Although Bangladesh is the birthplace of microfinance, it is only now taking measures that will
eventually lead to increased commercialization and therefore to competition, ultimately leading
to real innovation of microfinance products that suit the needs of the individual borrower. In
Latin American countries commercialization of the microfinance sector is far more advanced


thanks to regulatory frameworks which further fully commercial microfinance banks such as
Mibanco in Peru or Banco Compartamos in Mexico.
The traditionally hands-off policy of the government of Bangladesh in the microfinance sector
led to the rapid growth of the sector, and only now are the MFIs getting involved with regulation
and its related implications for commercialization, competition and innovation. For this new era
to be successful, all involved parties with their respective interests - the big MFIs as well as the
small ones, and the government -will have to cooperate with each other.
Both (pine, 2010) and (Awal, 2006) have suggested about the formal commercial micro
financing activity and defined that if the formal commercial banks come forward to the micro
financing activity situation would be most beneficial for both the clients and lending institutions.
They identified that commercial banks should help and provide loan to MFIs more and more as
the MFIs loan recovery is much higher than formal commercial banks. But important things to
remember that both researchers didnt provide some important basis of knowledge:
1. The basis of the study is based on micro financing institutions, but it is not based on from
the perspective of from the banking institutions.
2. The dataset doesnt provide enough details about the banking sector involvement in
microfinance activities.
3. The basis of the research was for the whole financial sector, no specific guideline was
provided for an individual institution.
Bell et al. (2002) indicate the need for the involvement of private commercial banks in
microfinance as essential in the fight against global poverty because of their domination of the
financial market. However, although commercial banks possess electronic payment
infrastructure and other necessary resources, the earlier discussions have identified several
factors that have reduced their willingness to enter the microfinance market. Meanwhile,
although MFIs are powerful in their outreach due to their numerous one-on-one relationships
with their customers, they are challenged by reduced accessibility to physical and other relevant
infrastructure present in commercial banking. Moll (2005) anticipates that the extension of MFI
services will include a larger proportion of the rural population, while commercial banks may
eventually compete with MFIs in their goal to reach a greater number of the poor.


In her study Groen (1998) stated that:
When assessed on the basis of achieving both high portfolio quality and significant scale
of outreach to the poor, most of the commercial bank microfinance programs that were
mandated by governments can only be considered as failures. The exceptions were those
programs that charged a commercial rate of interest. They had a higher portfolio quality
than other programs but they were still not profitable. This almost universal failure is not
explained by the different policy contexts across the region. Further, because
microfinance has not been a profitable business, government mandates have been
unsuccessful in encouraging commercial banks to become involved in microfinance. The
banks must have the incentive to design better products for micro entrepreneurs, which
can be profitable. (p. 4)
Groen (1998) argued about the microfinance success depends on regular rate of interest which is
charged by the commercial banks and privatized microfinance institutes. This refers that as we
experience- most of government supported lending institutes and government banks are not so
successful in our country. This is one of the most important findings from her study. She
argued that the private commercial sector can play an important role in the microfinance sector.
The large majority of commercial bankers interviewed had little positive experience of banking
with the poor. They experience non-payment by the poor, look at the high costs, and assume the
problem is with the poor rather than with the design or delivery of their banks products. They
also distrust NGOs that provide financial services to micro entrepreneurs, because they are not-
for-profit institutions and not subject to regulation. As a result, the majority of commercial
bankers perceive microfinance as risky, unprofitable and not fitting with their core business. By
contrast, commercial bankers with a positive perception of microfinance had seen successful
microfinance in practice, undertaken a comprehensive analysis of the size and performance of
the microfinance market, and designed lending and savings products that were profitable and
could reach significant scale. Groen stated that the mindset of the commercial bankers needs to
change. The present commercial banking system is not so happy to provide investment in micro
credit sector as its risk exposure is high and potential defaults rate is also high if the policies and
strategies are not taken accurately. But if the banking trust the micro financing activity and
maintain positive attitudes toward it, the situation and the microfinance sector will rapidly
change. A very conspicuous change in this sector is the information gap and limitation of


potential clients. Nowadays commercial banks are changing their attitudes toward this sector.
More and more banking institutions are trying to maintain positive attitudes and are merging
with microfinance institutions, they are providing loan towards the root level clients. This is a
positive change in this sector.
Groen (1998) provided some policy implications to change the banking institutions attitude. She
had emphasized on governmental influence and some other policy making to change the attitudes
of the banking sector.
The most effective way for governments to encourage commercial banks to become involved in
microfinance is to ensure an appropriate regulatory and prudential framework. The elements of
an optimal policy context are:
Sound macroeconomic policies and basic infrastructure to ensure a growing economy
(especially increasing complexity in the financial sector)
Minimal restrictions to profitable lending, particularly no interest rate caps enhanced
ability to establish a small commercial bank which can focus on this sector (such as a low
minimum capital requirement)
Appropriate prudential regulations for this market including capital adequacy ratios, asset
quality indicators and unsecured loan limits.
Create a small specialized bank or a separate microfinance unit within a large commercial
bank.
Treat savings as equally important to lending.
Charge interest rates to cover all the costs of the lending products.
Ensure excellent MIS and portfolio management.
Recruit staff from outside the bank and/or give staff specialist training.
Find a champion or visionary who will see the program through to success. (p. 6)
These suggestions are really important for Bangladesh context as the micro financing sector
needs much more support from the traditional banking sector. Banking sector of Bangladesh
needs to come forward to improve the unemployment situation, unequal distribution of wealth,
Inflationary situation. Governments and central banks in Bangladesh need to give official
recognition and support to NGOs and self-help groups engaged in credit for the poor, and to
encourage commercial banks to participate in meeting their loan capital requirements. They
should also establish a favorable policy and legislative environment for that purpose.


Obaidullahs (2008) study found that the entire banking and financial system comprising of
private commercial banks and semi-private-semipublic specialized banks and financial
institution leave a large chunk of population untouched by their activities. These are the poor,
poorest of the poor and marginalized people who do not enter into the market at all. Some non-
governmental noticed that there are two stumbling blocks which hinder the access of poor people
to the banking and financial system:
High cost of financing
High cost of processing
System of collaterals.
The urban concentration of modern commercial banks is another stumbling block. It is well
known, hence needless to point out that modern commercial banking developed hand to hand
with industrialization and urbanization. Hence, most banks are found in urban areas. The micro
financing institutions, on the other hand, aspire to take financial services to their clients in the
rural areas, where they come from. They also wish to keep the cost of processing as low as
possible, in many cases, eliminating the hugely costly paper work altogether. The system of
collateral has resulted into a situation where banking and financial system functions for the
benefit of rich only. There is credit for you if you can produce collateral only. Be it a house,
land, jewelry, factory, raw material, semi-finished products, or just claims to some ownership.
No collaterals and No credit. It is that simple. That means that the banking and financial system
makes a circuit of wealth amongst the rich only. Since poor people are known to have to access
to any kind of assets, they cannot get credit from the banks with the result that they are left out.
From the above studies we can refer that Banking sector play an important role in microfinance
activities. Without the proper banking sector intervention microfinance will not be fully fledged
in any economy. It is really an important concern for our countrys perspective. So government
interventions and commercial banks support are must to help this sector.
Some guidelines for future studies are given below:
1. The specific sector analysis is important for to understand the microfinance activities of
banking sector.
2. Specific bank analysis is not provided by any researchers which is so frustrating.


3. Every researcher tried to view this topic as a whole but individual analysis is very
important for to understand the need of microfinance activity by the bank.
4. Proper guideline is not provided by the government to regulate the microfinance activity
by banking sector which is very important.
5. Banking institutes must provide dataset for the researchers for much more detail activity
on this topic.


3.1 MEANING OF MICROFINACE
Microfinance refers to a variety of services provided by the various traditional microfinance
institutions and other bank and non-bank financial institution. This institution provides loan and
other services to the rural and poor people who are unable to take loan from the traditional
banking sector for various economic and non-economic factors. Microfinance products tend to
be for smaller monetary amounts than traditional financial services. These services include loans,
savings, insurance, and remittances. Microloans are given for a variety of purposes, frequently
for microenterprise development. The diversity of products and services offered reflects the fact
that the financial needs of individuals, households, and enterprises can change significantly over
time, especially for those who live in poverty. Because of these varied needs, and because of the
industry's focus on the poor, microfinance institutions often use non-traditional methodologies,
such as group lending or other forms of collateral not employed by the formal financial sector.
3.2 A BRIEF HISTORY OF MICROFINANCE
The origin of the current microcredit model can be traced back to action research in the late
1970s, carried out by academics as well as practitioners in organizations that were created to deal
with the relief and rehabilitation needs of post-independence Bangladesh. The 1980s witnessed a
growing number of non-governmental organizations (NGOs) experimenting with different
modalities of delivering credit to the poor. The predominant model become one of providing
individual loans to a target group of poor households, rather than providing loans for group
projects which suffered from a free-rider problem. The various models converged around the
beginning of the 1990s toward a fairly uniform Grameen-model of delivering micro credit. A
franchising approach whereby new branches copied the procedures and norms that prevailed in
existing branches fueled the Grameen-style growth. From the mid-1990s onward, it became clear
that the standardized model of providing micro credit with fixed repayment schedules and with
standard floors and ceiling on loan size were not sufficient to meet the needs of the extreme poor.
In recent years, the standard Grameen-model has undergone greater refinement in order to cater
to different niche markets as well as to different life-cycle circumstances.


The early 1990s was the period of rapid expansion of the Grameen-style microcredit approach.
The growth was fueled largely by franchising, whereby new branches replicated Case Studies
in Scaling up Poverty Reduction the procedures and norms that prevailed in existing branches. It
was clearly aided by the high population density and relative ethnic, social, and cultural
homogeneity in Bangladesh. A notable shift occurred during this expansion phase to placing a
greater emphasis on individual borrower accountability for loan repayment and less reliance on
peer monitoring. Staff follow- up of loans became more rigorous and professional with the use of
computerized management information systems. Donor funds helped in varying degrees to
expand the revolving loan funds for MFIs, particularly during expansion phases of the various
institutions.
Moreover, PKSF emerged during this period as a wholesale financing institution. Following this
expansion, a geographical mapping of microfinance suggests that all districts in Bangladesh now
have microcredit services, although there are many smaller pockets with little or no coverage
(e.g., Chittagong Hill Tracts). A closer look shows that there is somewhat greater coverage of
poor households in the central and western districts. The southeast and pockets of the northeast
still have room for expansion of coverage.
Feedback from the field, academic research, and international experience contributed to an
increasing emphasis on providing diversified financial services for different groups of
households from the mid-1990s onwards. The benefits of a narrow focus on microcredit during
the expansion phase was that it kept costs low, operations transparent, and management
oversight relatively straightforward. However, it became clear that the standard Grameen model
of providing microcredit with fixed repayment schedules, and standard floors and ceilings on
loans sizes, was not sufficient to meet the needs of the extreme poor or the vulnerable non-poor.
Moreover, existing microcredit borrowers also required complementary financial and
nonfinancial services. The standard practice for MFIs until the late 1990s was to collect
compulsory weekly savings from their clients, holding the money as a de facto lump sum
pension, which was returned when a client left the organization. Access to these deposits was
otherwise limited, which curtailed a potentially important source for smoothing consumption.
Recognizing these limitations, an increasing number of MFIs in Bangladesh have offered savings
accounts that clients can withdraw from more freely, in addition to the fixed deposit scheme.


Moreover, many MFIs have life insurance products, whereby outstanding microcredit debts are
written off and other benefits are paid following the death of a borrower. Noncredit services can
also take the form of input supply, skills training, and marketing support for micro-entrepreneurs.
A complementary package to microcredit can also take the form of providing education for the
children of borrowers. Grameen Bank, for instance, has a scholarship program for secondary
education for girls, and a student loan program for tertiary education.
Similarly many MFIs have community health programs, legal literacy training, and information
on how to access local resources.

3.3 TYPES OF MICROFINANCE ACTIVITIES IN BANGLADESH
In Bangladesh there are mainly four types of institutions involved in micro-finance activities.
These are
1) Grameen Bank (GB), a member owned specialized institution,
2)Around 1500 Non- Governmental Organizations (NGO) likes BRAC, Proshika, ASA, BURO-
Tangail, BEES, CODEC, SUS, TMSS, and Action- Aid etc.
3) Commercial and Specialized banks like Bangladesh Krishi Bank (BKB), Rajshahi Krishi
Unnayan Bank (RAKUB) and
4) Government sponsored micro finance projects/ Programs like BRDB, Swanirvar Bangladesh,
RD-12 and others which are run through several ministries viz., Ministry of Women & Children
Affairs, Ministry of Youth & Sports, and Ministry of Social Welfare etc. (Source, BB report
2012)
3.4 HISTORY OF MICROFINANCE IN BANKING SECTOR OF BANGLADESH
Having a bank account and credit card seems normal to many people, but for more than 2.5 billion
people in the developing world, it is almost unimaginable. Excluded from the formal financial sector,
they have no access to savings or current accounts, credit or other basic types of financial services.
Ending this exclusion has long been seen as a way of lifting the poorest people out of poverty.
Microfinance took off around 30 years ago with the launch of Grameen Bank in Bangladesh,
founded by the banker, economist and Nobel peace prize winner Muhammad Yunus, and was
based originally on the idea of providing small loans to poor people to enable them to invest in
their own livelihoods.


NGOs and large banks are not obvious stalemates but, as this alliance has shown, they can work
together successfully where they share a common interest. In fact they need to because no single
institution has all the skills and capacity required for a project as ambitious as expanding
financial services to several billion new people around the world.
Microfinance organizations don't only provide money, they also provide access to ideas,
technology and new business ventures for their members. One of the best examples is the
introduction of cell phones to rural villages in Bangladesh. Communication between families in
different villages and among suppliers and markets in different areas were very difficult. Days
were often wasted traveling back and forth to get information. To fill the need, Yunus's Grameen
Bank leased a cell phone to one woman in each village. The women made money by charging a
small fee for use of the phone. This allowed the women to make a living and made
communication easier among villages. Introducing cell phones is just one of many examples of
non-lending efforts made by microfinance institutions to improve the lives of their community's
impoverished citizens.


4.1 CURRENT SCENARIO OF MICRO FINANCE ACTIVITIES OF SELECTED
BANKS
Microfinance sector has a vital role in financial deepening. Increase in financial deepening is one
of the targets of the monetary policy pursued by the Bangladesh Bank as it helps poverty
reduction through availability of money in the informal sector, especially in the rural sector. It is
found that an expansionary monetary policy contributes to higher monetization in informal sector
through activities of MFIs. Faced with depleting donor funds, MFIs have to depend on their
retained earnings, clients savings and borrowings from the banking sector. Expansionary
monetary policy is represented by lower (weighted average) interest rates on credit and larger
advance of the scheduled (member) banks.
In general, government commercial bank and some specialized bank practice micro financing
activity in Bangladesh. Private commercial banks activity is very negligible in direct micro
financing intervention, but they have strong influence on the stream of financing towards micro
financing institution.
On the other hand, RDS of IBBL is showing its strong resilience and intervention in micro
finance activity all around the country. But other Islamic banks are lag behind from this sector
due to their lacking of strong financial position and administrative power.
4.1.1 Financial Products of commercial banks for microfinance in general

Various kinds of financial and non-financial products are arrived in microfinance sector.
Government and non-government banks provide this variety of financial products to their clients
depending on their own strength and microcredit policy. But usually most of the MFIs and
commercial banks follow these lines of products:
Loan Products


Most of the MFIs and commercial banks work in rural and urban areas with poor in general and
extreme poor in exception. So they have clients of these two categories both in the rural and
urban areas. This being the operational functions the loan products is equally available for all
intended poor and extreme poor members and there is no discrimination in the two sectoral areas.

The Loan Products of banks for microfinance are:

Rural Micro Credit for providing credit support to the rural poor members
Urban Micro Credit for providing loan assistance to the urban poor
Agricultural Credit Livestock, Poultry & Fishery, crops
Off Farm Activity Loan
Education Loan
Housing Loan
Food processing
Health Service Loan for supporting emergency health needs- accidents, delivery and
emergency treatment for any epidemic and/or chronic health disease
SME / SEL (Small Enterprise Loan)
Women Entrepreneurship Loan
Transport Loan for procuring Rickshaw and Rickshaw Van, Push Cart, Bullock Cart,
Indigenous Local Public Transport (Human Huller) etc.
Savings Products
The Savings Products are:

Weekly / Mandatory or Compulsory savings and varies from Taka 10 to 20 or more across
the MFIs and CDCs and the minimum amount is Taka 10 per week
Voluntary Savings is also practiced with the wisdom of building future capital for emergency
and unforeseen factors and there is no fixed rate where a member can deposit according to
her/his capacity
Emergency / Risk Covering Savings deduction @ 1% at source during loan disbursement
and payable at the time of leaving the group on bonafide ground should the emergency


savings remains unutilized. However, any adjustment against loan loss on genuine ground
from this savings fund will be deducted prior to refund of the risk fund

Insurance
The interface with the insurance companies in each town under the study reveals that there is no
insurance scheme or product for the poor and neither extreme poor nor they can avail any
existing insurance facility/products for technical reasons of ineligibility. The big and national
MFIs like BRAC and ASA have both Life and Loan Insurance for their clients. But their
insurance products do not have any legal entity in terms of the insurance law nor can they
practice `it without concurrence of the appropriate body of the government.
Remittances
In view of the extensive work force from Bangladesh working abroad, especially in the Middle
East the Remittance function has become an important financial service for the families whose
male member mostly works outside the country. While Banks, big and medium MFIs have
remittance services but the poor and extreme poor can not avail the remittance services for there
is no wage earner in their family.
Non Financial Products
The MFIs and MFNGOs in practice do have some non-financial services extended to the
beneficiaries. These are, Education and Training, Water and Sanitation, Advocacy and Policy
Lobbying, Campaign with Right Based issues for poor and extreme poor, Financial Literacy ,
Health (especially primary health, mother and child care) etc.
4.1.2 Current scenario of microfinance activity of selected banks:
Name of
Bank
Nature
of bank
Forms of
intervention
Interest
ceiling
Target people Name of
products
Repayment
period
Agrani bank public Direct and
indirect
8%-10% Net annual
income
(10000-50000)
Agricultural
loan, farming,
education.
Maximum
18 month or
12 month.


Sonali bank Public Direct and
indirect
8%-12% Farmer,
fisherman,
rural women.
Pond fisheries
scheme, off -
farming
project,
Swanirvar
credit scheme.
Maximum
18 month or
12 month.
Prime bank
LTD.
private Indirect 12-13% MFIS &
Other micro
lending
institution.
N/A Medium to
long term
Standard
chartered
bank
Foreign-
Private
Indirect Not
certain
ASA and other
MFIs
N/A Long term
financing
Eastern
Bank LTD.
Private Indirect 12%-
13%
MFIs N/A Medium to
long term
RDS of
IBBL
Private Direct Profit
margin
rate-
12.5%
Hardcore
poor,
poor,Farmer,
Sanitation
Bai-Muajjal,
Murabaha,
45
installments
within one
year.
SIBL Private Direct N/a MFIs,
Farmer,
fisherman,
rural women.
N/A Maximum
18 month or
12 month.

4.1.3 Overview of Public Banks in Microfinance
Public banks follow mostly the same policy for providing the microfinance. All the public banks
are working together to find a solution to eliminate poverty and unemployment from the country.
Sonali Banks performance overview has been taken as a sample to understand the public banks
activity in microfinance.


4.1.4 Sonali Bank Performance
Presently, 32 Micro Credit projects/programs are being run by the Bank. Amongst the
programs, Bank-NGO Linkage wholesale credit program, Goat rearing, Lamb rearing, Fruit,
Herbal, Medicinal and Nursery development credit scheme, Loan program for Disabled
persons, Swanirvar, different types of Credit through BRDB-UCCA ( Corp, Irrigation &
Poverty Alleviation), ADB financed Rural Livelihood project (RLP) in 152 Upazillas, Daridro
Bimochone Shahayta Rin Karmachuchi, Rural small business & Small Farming loan scheme ,
BARD Comilla - SB & RDA Bogra - SB Functional Research project etc. deserve special
mention in channelizing the financial resources for poverty alleviation and rural socio
economic development of the country. Credit for Urban Women Micro Enterprise
Development (CUMED) project without collateral up to Tk. 5.00 lacs operating in 9 selected
branches in Dhaka city, now CUMED has been extended in Dhaka city more 17 branches in
addition to existing 9 branches, Chittagong two branches, MoulaviBazar 3 branches and in
total 92 branches including all District branches of all over the country. Micro Entrepreneur
development credit program Unmesh operating in Moulvibazar district, now this credit
program has been extended all over the country. Daridro Bimochone Shahayta Rin
Karmachuchi now has been extended all over the country in the year 2010. In the year 2007 a
special credit program named ` SIDR ' has been introduced for SIDR affected areas in which
there are a provision of collateral free loan upto Tk. 20,000.00.
More over to make the self dependency especially for the women Micro credit Division has
been introduced a now Loan program in the year 2010 named; J ago Naree Grameen Rin"
through 250 Rural branches all over the country with a provision of collateral free upto Tk.
25,000.00.
Up to December, 2010 a total amount of Tk.422426 Lacs has been disbursed under various
projects/programs monitored by this Micro Credit Division, whereas it was Tk. 386529 Lacs
Up to Dec. 2009. On the other hand total recovery position stands at Tk. 482839 Lacs as on
December 2010, whereas it was Tk. 463854 Lacs up to Dec. 2009. The present outstanding
position of Micro Credit is Tk. 98263 Lacs.


Features :
SL. Project/Programs Target group Loan size in Tk. Rate of
Interest
A. Bank's own Program
1 Bank-NGO Linkage wholesale
Credit.
Poor people According to project size 13
2 Credit for Urban women Micro
Enterprise Development-
CUMED
Urban women
Entrepreneurs
Highest - 5,00,000 11
3 Goat Rearing Small & Medium
Entrepreneurs
According to project size 12
4 Swanirvar Poor Landless
people
Highest - 40,000 11
5 Unmesh Micro
Entrepreneurs
Highest - 50,000 11
6 Daridra Bimochane Sahayta Rin Hard core poor Highest - 50,000 10
7 Rural small Business Small
Entrepreneurs
Highest - 50,000 11
8 Small Farming Loan Small
Entrepreneurs
Highest - 50,000 11
9 Loans for SIDR affected Area SIDR affected
People
Highest - 20,000 08
10 Marginal and small Farms
SystemCrop Intensification
Pro.- MSFSCIP
Marginal, poor &
small farmer
Highest - 10,000 09
11 Crop Go down credit project Small & Medium
farmer
Highest - 10,000 09
12 Herbal, Forestry, Medicinal and
Nursery development Credit
Poor energetic
youth
Highest - 25,000 10
13 Loan to Salt Growers Actual Salt
producer
Highest - 44,000 per acre 4+6=10


14 Loan for disabled people Disabled people Highest - 50,000 08
15 Sonali Bank-BARD, Comilla
Priogik Gabesana Rin Prokalpa
Bittahin rural male
& female
Highest 10,000 09
16 Sonali Bank-RDA, Bogra
Priogik Gabesana Rin Prokalpa
Bittahin rural male
& female
Highest - 10,000 09
17 J ago Nari Grameen Rin
Karmachuchi
Bittahin rural
female
Highest - 25,000 09
B. BRDB-UCCA
1 BRDB Crop Lending Small & Medium
farmer
Highest 8,000-15,000 10
2 Shrimp Culture Small & Medium
farmer
Highest 2,333-28,000 10
3 Women Development Program Co-operative poor
female member
Highest 1,500-20,000 10
4 RLP (Rural Livelihood program) Small & Medium
farmer
Highest 5,000-20,000 6.25

Source: website of Sonali Bank
4.1.5 MICROFINANCE ACTIVITY OF ISLAMIC BANKS
Islamic banking has been thriving in the vibrantly growing Bangladesh economy, by now
comprising a fifth of total banking sector assets and liabilities. Islamic microfinance services in
the economy are also growing healthily; with avid participation of the Islamic banks in the
financial inclusion campaign. According to available data, Islamic microfinance amounting to
Taka 46.2 billion as of end December 2011 comprised 8.38 percent of total Islamic financing,
increasing sharply from a mere Taka 2.8 billion or 0.93 percent of total Islamic financing as of
end of December 2009. The number of microfinance clients has risen to 448734 as of end of
December 2011, from 211197 as of end of December 2009. In other words, the client base has
literally doubled over the last two years.


In order to reach a greater number of people, new models of microfinance are being studied and
developed by the IDB, Muslim Aid and a nonprofit think tank in the United States, the Institute
of Halal Investing (IHI). In the early days of Islamic microfinance, the loans were usually given
with no fee (qard hasan) and any costs incurred were covered with sadaqa and loan forgiveness
with zakat. While using qard hasan is an easy method to ensure Shariah compliance, it is not a
sustainable model. Even when repayment rates are between 97% and 99%, comparable to the
most successful microfinance institutions (MFIs), the reliance on voluntary contributions makes
the continuing operation of the organizations uncertain. As one of the early adopters of
microfinance, Bangladesh was also one of the first to introduce Islamic microfinance. A recent
study of three Islamic MFIs in Bangladesh, which have existed for between 10 and 12 years,
show disappointing results: the three MFIs disbursed only $530,000 in financing in 1999
(compared to $376 million disbursed by the Grameen Bank in the same year) and most of this
was based on murabaha. Another early experiment in Islamic microfinance occurred in
Hodeidah, Yemen starting in 1997 that also used murabaha starting in 1997. Murabaha is a
transaction where the bank buys a good for the customer and charges the client the cost of the
good plus a markup where the amount including the markup is repaid in a fixed number of
installments. Many organizations recently entering Islamic microfinance combine a Shariah-


based microfinance program with zakat to help those too poor to be able to use microfinance.
While the track record of halal microfinance institutions using profit-and-loss sharing products is
mixed, all the new microfinance programs include the use of mudaraba and musharaka to
provide financing to micro businesses and allow micro entrepreneurs to save. Some microfinance
providers use an individual methodology while others use the group methodology that has been
successful in conventional microfinance like the Grameen Bank.
4.1.6 ROLE OF COMMERCIAL BANKS IN MICROFINANCE
While a commercial bank is a financial institution that offers a broad range of deposit accounts,
including checking, savings, and time deposits, and extends loans to individuals and businesses.
The decision as to whether the commercial banks be involved in microfinance is a sensitive and
debatable issue which requires a deep analysis of many factors. Primarily, the microfinance
customers are large in number, scattered in far-flung areas with very minute transaction sizes.
Only government or state bank alone cannot reach out to millions of potential Microfinance
beneficiaries; a whole well knitted network with almost doorstep reach is required, which is only
possible when the commercial banks will be involved in microfinance. In Pakistan it is estimated
that as many as 5.6 million households need microfinance services but these services reach only
to less than 1 percent, most probably because of the absence of commercial banks from the
microfinance sector. (Source: Pakistan microfinance Network PMN)
These way poor person just needs to visit his local commercial bank to get access to
microfinance benefits, which will help reduce many economic problems. One criticism over
involving the commercial banks in microfinance is that commercial banks will charge higher
interest rates, further lower the standard of living and will exploit the public. The ground realities
are totally different; empirical evidence has demonstrated that participants in microfinance
programs have improved their living standards at both the individual and household level, and
that this has provided increased educational opportunities for children. For example, the clients
of the Bangladesh Rural Advancement Committee increased household expenditures by 28% and
assets by 112%. It was also demonstrated that Bangladeshi children were sent to school in larger
numbers and stayed for a longer time - almost all girls in Grameen Bank (A commercial bank!)
client households had some schooling, compared with the rate of 60% in non-client households.
(Source: World Bank group, 30 August 2005)


No doubt on the other hand the loans provided by the commercial banks to the microfinance
beneficiaries are a bit expensive, its not to discourage the poor but there is a sound reason
behind it; providing financial services to poor people is quite expensive, especially in relation to
the size of the transactions involved. A $100 dollar loan, for example, requires the same
personnel and resources as a $2,000 one thus increasing per unit transaction costs. Loan officers
must visit the client's home or place of work, evaluate creditworthiness on the basis of interviews
with the client's family and references, and in many cases, follow through with visits to reinforce
the repayment culture.
It can easily cost US$25 to make a micro loan. While that might not seem unreasonable in
absolute terms, it might represent 25% of the value of the loan amount, and force the institution
to charge a "high" rate of interest to cover its cost of loan administration. If commercial banks
are to be involved in the micro finance by no means it would be a wrong decision for them as
regard to their primary aim, profitability. Yes it can. Data from the Micro Banking Bulletin
reports that 63 of the world's top MFIs had an average rate of return, after adjusting for inflation
and after taking out subsidies programs might have received, of about 2.5% of total assets. This
compares favorably with returns in the commercial banking sector and gives credence to the
hope of many that microfinance can be sufficiently attractive to mainstream into the retail
banking sector. Many feel that once microfinance becomes mainstreamed, massive growth in the
numbers of clients can be achieved.
On the whole microfinance is not an area commercial banks want to overtake. The majority of
commercial banks that undertook microfinance lending were because it was required of them by
their governments. A great deal of microfinance undertaken by commercial banks was found,
but it was undertaken because of government mandates to lend to this sector rather than for
business reasons. So their involvement in microfinance is not as an active partner but somewhat
passive. Commercial banks in Bangladesh provide loan to the MFIs. They do not actively
participate in the marketplace of microfinance. Some example of banks passive financing is
given to understand the real scenario:
A syndicated term loan agreement for Taka 2 billion (Taka200 crore) favoring BRAC was signed
recently at a city hotel under the lead arrangement of Prime Bank Limited Presided over by
Prime Bank Managing Director M Shahjahan Bhuiyan. The syndicated term loan has been


sanctioned for the micro-credit lending program of BRAC, which one of the worlds largest non-
government organizations (NGOs) is operating in the country. By arranging this syndicated term
loan facility, Prime Bank Limited has created an opportunity for local and foreign commercial
banks to demonstrate their shared commitment to meet the challenge of the International Year of
Microcredit, 2005. (Source, The Financial Express, Bangladesh)
Standard Chartered Bank will provide Taka 100 crore loan to ASA, one of the leading
Microfinance Institutions (MFI) of Bangladesh. The bank will provide the money to the non-
governmental organization for micro-credit disbursement in the country. Recently, an agreement
was signed between Standard Chartered Bank and ASA regarding the big loan. According to the
agreement with Standard Chartered Bank, ASA will disburse the amount among 60,000 loan-
seekers and their families across the country.
This kind of loan from any foreign bank is first of its kind and also the biggest in amount.
Earlier, the Bangladesh Bank had initiated a Taka 500 crore project for implementation through
the BRAC Bank to disburse loan among the landless farmers of Bangladesh. But, this is for the
first time a microfinance institution is getting TK 100 crore loan from a foreign bank for micro-
credit operation and till now it is the biggest one.
On the agreement signing ceremony Chief Executive Officer of Standard Chartered Bank in
Bangladesh J im McCain said, It is the part of Standard Chartereds largest initiative to provide
micro-credit facility to the people of Asia and Africa. I hope poor people in this region will be
benefited from this program.
The involvement of commercial banks in micro finance is important because all those micro
finance programs, which were directly run or backed by the government, faced a total failure.
Sustainability and scale in microfinance by commercial banks were only found in the market-
based programs when assessed on the basis of achieving both high portfolio quality and
significant scale of outreach to the poor, most of the commercial bank microfinance programs
that were mandated by governments can only be considered as failures. The exceptions were
those programs that charged a commercial rate of interest. They had a higher portfolio quality
than other programs but they were still not profitable. This almost universal failure is not
explained by the different policy contexts across the Asia-pacific region. Further, because


microfinance has not been a profitable business, government mandates have been unsuccessful in
encouraging commercial banks to become involved in microfinance. The banks must have the
incentive to design better products for micro entrepreneurs, which can be profitable.
The types of commercial bank involvement in microfinance can be classified as; government-
subsidized lending programs channeled through the banks, government mandated lending targets
met by banks subsidizing interest rates, government-mandated lending targets with banks
charging commercial interest rates and microfinance as a profitable business. Only the last one
"micro finance as a profitable business" has seen success. Thus the involvement of commercial
banks in micro finance sector should not be based on any government mandate, subsidy or target.
The sole benefit of the society as well as commercial banks is the adoption of micro finance as a
business. (Source: The Role of Commercial Banks in Microfinance: Asia-Pacific Region Ruth
Goodwin-Groen, 1998)
Involving commercial banks in micro finance would be a step to take these services at the
doorstep of the potential customer, because if only some government agency or state bank is
involved the extensiveness as regard to area covered cannot be brought. On the other hand
commercial banks need not to make any special arrangements to cater for micro finance
operations. Only a new "micro finance" counter might be needed in the existing branches. Thus
there would be no high setup cost for the commercial banks to venture into this sector.
4.2 COMPARATIVE STUDY AND ANALYSIS OF MICROFINANCE SECTOR
Though world has suffered from a serious recession in recent years, 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 self-employed 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. (Source, MRA-MIS-2011)


TABLE: 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. Millions ) 134,680.96 143,134.03 145,022.66 1,73,797.60
Amount of Savings( Tk.
Millions) 47,386.19 50,610.04 51,362.93 63,304.44
Source: MRA-MIS Database-2011
Table 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 NGO-MFIs licensed by MRA.
TABLE: Size-Wise Loan Outstanding and Savings Compositions (As of 30 June 2011)
Categories
Range of
Borrowers
No of
MFIs
No of
Borrower
Total Loan
Outstanding
(BDT
Million)
% of Total
Outstanding
No of
Savers
Total
Savings
(BDT
Million)
% of
Total
Savings
Very
Small
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- 23 1571226 13805.22 7.94 1875363 4713.86 7.45


100000
Large
100001-
1000000 19 4600621 39483.64 22.72 5527971 14652.13 23.15
Very
Large
1000001-
Above 3 11162371 92601.36 53.58 14274780 33856.028 53.51
576 20649290 173797.60 100 26014948 63304.44 100
Source: MRA 2011
Table 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.
Fund Composition of the Microfinance Sector in Bangladesh
TABLE: Selected Indicators of NGO-MFIs in Bangladesh
Source of Fund
Jun-08 Jun-09 Jun-10 Jun-11

(Million
Tk.) (%)
(Million
Tk.) (%)
(Million
Tk.) (%)
(Million
Tk.)
(%)

Clients' Savings 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

Source: MRA-MIS-2011


It has been 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 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. (Source,
MRA-MIS-2011)
From the above dataset we can understand that the commercial banking sector has not evolved or
has not able to cope up with the need of the microfinance sector. In Bangladesh, private
commercial banks are providing loan to the microfinance institutions instead of participating in
the market place of microfinance sector directly. Government commercial banks are providing
loan and other services to the poor and root level people but were not so successful as the
microfinance institution because of some inherent constraints of governmental sector which
prevails in Bangladesh.
Comparison on the basis of interest taken by different organization in providing loan to the
MFIs
Borrowing from PKSF @ 7.0% and 4.5% subject to the organization classified
Return on Savings of small savers and groups @ 5 % to 6%
Borrowing from Central Bank @ 2% to 5% based on the program (SAL) and other
term loans at bank rate ( annually in particular and half yearly in general fixed by the
Central Bank)
Provision of Loan Fund / Seed Capital of a development project @ 5% to 6% for on
lending to the project beneficiaries as agreed upon in the project document
Borrowing from Commercial Banks by the MFIs @ 11% to 13% from private banks and
10% to 12% from government banks. (CDC, 2012)


4.2.1 Financial Service Providers catering the needs of Poor and Extreme Poor
Financial
Service
Providers
Availability Accessibility Acceptability Affordability Remarks
MFIs ++++ +++ +++ +++
MRA registered semi
formal organization
to serve the poor &
extreme poor, i.e.
Banking with the
Poor
Banks ++++ ++ ++ +
Formal financial
institution operating
on commercial
approach. Serves
micro credit under
government
directives
Cooperative ++ + + +
Registered with
concerned
government body but
do not serve poor and
extreme poor
Insurance
Company
+ + + +
No product for poor
and extreme poor
Moneylender +++ ++ + +
Meets the emergency
financial need of
people at any time
under stringent terms
and conditions. So
poor and extreme
poor seldom avails
under compulsion

Financial
Service
Providers
Availability Accessibility Acceptability Affordability Remarks
Friends and
Relatives
++++ +++ +++ ++++
Subject to relationship
based on trust and
faith fund needs are
supported for
repayment on an
agreed date but no cost


involved
Pawn Shop ++ ++ ++ ++
Operate in market
mostly for trade and
commerce
MF NGOs ++++ +++ +++ +++
Informal organization
working for and with
the poor and extreme
poor, i.e. Banking with
the Poor
Result
Financial
Service
Providers
are
available
for lending
in UPPRP
towns
MFIs and
NGOs cater
the needs of
the poor and
extreme poor
commensurate
to demand
upon
qualification
in terms of set
criteria
MFIs and
NGOs are
mostly
preferred by
the poor and
extreme poor
for banking
with them at
their door
step
Friends &
relatives
occupy the
first priority
but very
limited to
poor and
extreme poor
for classified
reasons
MFIs and NGOs
although are catering
the financial needs of
poor and extreme
poor, their terms and
conditions are not
always conducive
Scale: + = Poor, ++ = Modest, +++ = Good, ++++ = Excellent (source, CDF website)
The data analysis and review on supply of and demand for credit envisages that for the poor and extreme
poor access to financial services is available to the MFIs and NGOs only. It is difficult and hard for the
poor and extreme poor to approach other formal and informal sources for credit access due to technical
constraints of security of the loan amount and their weak status as a customer of formal and semi
formal credit organizations.
4.3 IMPACT OF MICROFINANCE ON ECONOMIC DEVELOPMENT
Micro finance can play vital for economic development in Bangladesh. It can improve the
economic condition day by day. During 1988, a number of non-governmental organizations and
Grameen bank pioneered alternative a credit delivery mechanisms for the rural that consisted of
small amount of collateral-free, affordable loans, popularly known as micro credit. These micro
credit programs have been successful in providing commendable access to credit by landless
women and men, and achieving high repayment rate of up to 98%. Impact studies of micro credit
programs have substantiated the important role of credit in the economic development process of
Bangladesh. The higher rate of growth in per capita income observed for micro credit recipient
when compared of that of non-recipients. An increase of self-employment, generated by the poor
with greater access to credit, has also increased rural wages due to a reduction in the rural labor
supply as reported by a World Bank study on the impact of Grameen Bank (1995).


Most of the MFIs in Bangladesh are not run on commercial or profit considerations.
Commercialization is partly a cost, revenue and profitability function and partly it is a function
of intention of the MFIs enabling legal, institutional, social and overall economic growth. It is a
gradual process and can be attained by the MFIs over a period of time under an enabling
economic environment. An individual MFI will have to undergo the process of sustainability
institutionalization for economic growth. Economic growth of micro finance sector will enable
the constituent MFIs to operate in an open market environment with access to money and capital
market. MFIs are interested to attain viability and recognized institutional status. The
government is keen to ensure an enabling legal environment. MFIs help of shifting from
traditional farm activities towards non-farm activities which are the main potential sources of
productivity and growth in rural economy such Bangladeshs. Prospect is emerging for economic
growth of micro finance in Bangladesh.
The impact of micro-credit has some impact at the level on the society both in terms of economy
and social value. There are a few studies on this impact assessment of micro-credit; findings of
those studies are as follows:
1) Women empowerment:
In the 1990s micro credit has become a key strategy for womens empowerment. Micro credit
programmed diverts resources and the attention of women themselves from other more effective
strategies for empowerment and poverty alleviation. Advocates for micro-credit place great
emphasis on lending to women. Micro credit provided by government departments /agencies
/NGOs /MFI institutions has given many benefits for village women, by increasing their
mobility, income generation, decision-making in the family and community. Woman use loans to
purchase:
Consumer goods, including food, radio-cassettes, televisions, etc.
Medical care,
Materials and labor for building tube-wells, toilets and house improvements
Education for sons and daughters
Supplies for their personal income-generating activities, including poultry or animals,
materials for jute work or other handcrafts


Materials for income generation activities for their men folk, including purchases of
land, animals, rickshaws or boats, or setting up tea-stalls or other small trading
enterprises, and
Capital to loan to other villagers at a profit.
As the main target group of micro-finance is women, they have gained a special financial power
over men. The women participation in micro credit programs helps to increase women
empowerment. Credit programs participate leads to women taking a greater role in household
decision making, heaving greater access to financial and economic resources, heaving greater
social network, heaving greater bargaining power vis--vis their husband and heaving greater
freedom of mobility. Though women are dominated by men culturally, their access to get credit
and do their own business has increased their confidence on their own ability. This is especially
true for the rural poor women of the country. Now more and more rural women move outside
their home after joining micro-finance program. They now go to office, banks, market and other
places without a male company. This is a positive indicator of women empowerment.
2) Shift in the occupational pattern:
There has been a shift in the occupational graph from agricultural waged labor considered
socially inferior to self- employed petty trader. Micro-credit has succeeded in graduating the
poor from poverty level to a self-sustained position.
3) Builds Trust among Poor:
Micro credit helps to build trust among poor. The working of the Grameen is largely through
trust. It believes in the enormous potential of each and every human being given enabling
environment, even the poorest of the poor can peel off doubts and start exploring their abilities to
find a life with full human dignity.
4) Spurs social change:
Micro credit helps solve a host of intractable, long-term social ills related to poverty. In
Bangladesh the use of contraception is one of the first behaviors to change. In fact formation of
groups of women to meet regularly helps in discussing new ideas and sharing information, this
serves as a potent factor in bringing about broad based social change, otherwise women are


isolated. In Bangladesh micro-credit has led to an increase in participation of people in the
mainstream economic and political process of society, and overall human development.
5) Very low default rate:
The default rate is astonishingly low compared to what Bangladesh commercial banks suffer.
It is about 2% as compared to about 70% for agricultural loans and 90% for industrial loans.
Yunus Says The difference lies in the psychology of the borrowers. The rich can evade the
consequences of non- payment, the poor cannot. They value loan sharks so much; that they are
only too grateful for once aims a lifetime opportunity to improve them. Micro credit has
graduated the rural poor from the informal capital market controlled by the moneylender and
local elite to institutionalized banking.
6) Positive impact of female participation:
Independent studies show that micro credit has a host of positive impacts on the families that
receive it. Micro credit not only affects the welfare of participants and non-participants, but also
the aggregate welfare at the village level. In fact even in disaster situations and post conflict
areas, it has helped rebuild economic activities and livelihoods. This was successfully
demonstrated during the floods in Bangladesh in 1998.
7) Reduce dependency on money lender:
The dependency of poor people on the moneylender or richer people has been reduced
substantially in the society and people are getting access to institutional sources for credit. Even
the formal sectors have been keeping confidence on the poor for lending money, which is a
qualitative change in the rural society due to micro-credit intervention.
8) Create new employer:
Employment opportunities of the poor have increased to a great extent in terms of both longer
working hours and new employment. The targeted households that are eligible for participation
in micro-credit programs have a higher probability of being self-employed than their
counterparts in non-program villages.


9) Increase labor participation:
The labor force participation rate (LFPR) for more employment opportunity of the participants
was found higher than the non-participants. Before nineties the wage rate for women labor force
did not get importance because of social backwardness, women labor was sold at a very low non-
bargaining rate. This was equally true in case of male labor force before the eighties. But with
time passing situations have changed noticeably; it is recognized that there is nowadays a serious
scarcity of labor in rural areas, especially in the peak season and this shortage even hampers
agricultural production. The intervention of micro-credit in the rural market is one of the main
reasons for this change. Therefore, the labor force of rural areas now has the ability to influence
rural wage rate.
4.4 IMPACT OF MICROFINANCE ON EMPLOYMENT
Lack of income security is one of the fundamental challenges for the poor in both urban and rural
areas. While there are greater opportunities for employment in the urban areas than in the rural
areas, the high cost of living makes it difficult for families to save. Wage differentials between
the formal and informal sectors are significant with a majority of the poor engaged in the
informal sector in both rural and urban areas. A relatively small percentage of the educated elite
have access to salaried jobs and income security by gaining employment in the government and
the private sector; however, income security and fair wages is a dream for the vast majority of
the Bangladeshi population who rely primarily on daily or seasonal income from various types of
economic activities in both rural and urban areas. In the rural areas, the poor who own
agricultural land or are able to rent land for cultivation eke out a living with limited access to
capital for purchasing essential agricultural inputs. The landless poor have to sell their labor and
skills as agricultural workers in different types of farm and off-farm activities. The poor in urban
areas are engaged in daily labor in the construction, transport, manufacturing, service and trading
sub-sectors.Poor rural women either work as agricultural labor or do home-based income
generation activities, including paddy husking, small livestock rearing, pond-fish farming or
handicrafts depending on the income to invest in these activities. In urban areas, the vast
majority of poor women are engaged as domestics in the homes of the upper middle class and the
wealthy. The emergence of garment factories in cities such as Dhaka have provided employment
opportunities for many women who face grueling working conditions but are able to earn a


living and save a small amount to send to their families. Lack of employment opportunities and
the inability to initiate economic activities in the rural hinterland force large numbers to migrate
to the big cities, especially Dhaka. Seasonal migration is witnessed during low seasons when
there is limited work available in the agricultural sector. After each flood or typhoon, families
who have lost their meager assets move permanently in search of employment to urban areas.
Such migration puts tremendous stress on the scarce resources and infrastructure in the urban
areas. Lack of adequate clean water, sanitation, electricity, police protection, and other essential
support systems have led to unsafe conditions for the population in these slums.
In these circumstances, self-employment in ones own business activity or in a family business is
an alternative for a poor household. These income generation activities may be initiated either as
the primary or a supplemental source of income for the individual and household. The main
constraint to self-employment in income generating activities that can be developed into
microenterprises is the lack of capital for investment. The poor do not have adequate savings or
productive assets that can be invested, nor do they have access to loans from the formal financial
sector. While some borrow from moneylenders at high rates of interest, these borrowings are
limited to essential needs and emergencies. Few are able to take the risk of borrowing from
moneylenders for investment purposes.
Microfinance is therefore an essential instrument or tool for enabling the poor who have the
confidence and risk to transform their skills and existing resources into sustainable income
generating activities. They can either be developed as the primary source of household income,
or contribute as supplemental or seasonal income.
The success of microcredit Bangladesh has led to using it as a major tool in national poverty
reduction strategy by both the government and non-governmental organizations. The popularity
of microfinance has made it the core activities of hundreds of microfinance institutions in
Bangladesh. As we will see later in the report that due to support from the government and
acceptance by people, microcredit has become the main form of rural finance. The case of
microfinance in Bangladesh is a good example of non-government organization led operations
where the government directly and indirectly provided major policy and material support to
make it probably the largest microfinance sector in the world. We have also discussed the
possibility of rising poverty in Bangladesh due to external factors and no fault of the poor.
Microfinance may need to bear more responsibilities in this environment. Income inequality


persists in the rural household process. The impact of the MF program in reducing the inequality
of income distribution can be assessed by its influence on womens access to and control over
household income and expenditure. It is found that women have relatively lesser control on
income and expenditure decisions, particularly with regard to income generated by male outside
the households. However, women tend to have greater say on income generated by them through
say, poultry rearing, kitchen gardening and sale of livestock products. Women have least control
over income from crop sale. This pattern of control over income is common. Impact studies find
that women are gaining greater say in income and expenditure decisions to the extent of 25%-
30% of households. Program womens participation has increased in expenditure decisions
relating to poultry rearing, schooling of children and health care. Non-program women have
lesser say in all the income and expenditure decisions.
Employment generation in microfinance is of two types: (i) direct, which refers to the staff
recruitment for rendering services to the target people, and (ii) indirect, referring to the self-
employment generation of the borrowing household members through utilizing microcredit.
However, here, only the direct employment creation would be considered as outcome of the
program intervention, although total employment generation by lenders and borrowers would be
higher than the employment being created directly. Up to December 2010, the total number of
staff was 260,516 and it was 361,764 in 2009 and 225,766 in 2008. The annual decrease in direct
employment in 2010 was 101,230 compared to annual increase of 135,998 employees in 2009
over 2008. The negative growth of direct employment creation showed at around 28 percent in
2010 by the sector for first time after significant growth of 60.24 percent in 2009 than
2008.(Source, CDF publication)
4.5 PROBLEMS IN RELATION TO RECOVERY OF FINANCE
The primary objective of micronance institutions (MFIs) is to prov ide nancial services (credit
and saving) to the poor in order to release nancial constraints and help alleviate poverty. Each
MFI tries to maximize its repayment performance, whether or not it is pro t oriented. High
repayment rates are indeed largely associated with benets both for the MFI and the borrower.
They enable the MFI to cut the interest rate it charges to the borrowers, thus reducing the
nancial cost of credit and allowing more borrowers to have access to it. Improving repayment
rates might also help reduce the dependence on subsidies of the MFI which would improve
sustainability. It is also argued that high repayment rates reect the adequacy of MFIs services to


clients needs. They limit the incidence of cross subvention across the borrowers. Last but not
least, repayment performance is a key variable for donors and international funding agencies on
which many MFIs still depend for their access to funds.
The main factors inuencing repayment is either related to information asymmetries, to ad verse
shocks aecting the borrower, or to the low performance of institutions such as justice or
education. Information asymmetries arise when gaining information on the characteristics or on
the behavior of the borrower are costly for the MFI. Information asymmetries generate problems
of adverse selectionallocation of loans to borrowers with undesirable characteristics such as a
high level of risk or inability to take advantage of the loan- as well as moral hazardthe
borrower may behave in an undesirable way (make little or insucient eort to take advantage
of his loan or used it for unproductive purposes). Adverse selection and moral hazard increase
the proportion of borrowers who cannot repay their loans on time. Borrowers that have enough
money to reimburse their loan might also default strategically. The cost of strategic default might
indeed be low if the lending institution has low collateral requirements and if the legal system
gives little power to the MFI to enforce contracts. MFIs try to restrict the occurrence of those
three types of situations in designing appropriate credit schemes.
4.6 PROBLEMS IN RELATION TO FINANCING
Banks lack, however, some key ingredients most of all, the financial methodologies to reach a
low income population. Our study of banks in micro-finance identified at least six key related
issues banks need to resolve to enter the micro-finance market successfully:
Commitment: The commitment of commercial banks (particularly the larger banks) to
micro-enterprise lending is often fragile, and generally dependent on one or two visionary
board members rather than based solidly in its institutional mission.
Organizational structure: Micro-finance programs need to be inserted into the larger bank
structure in such a way that they have relative independence and, at the same time, have
the scale to handle thousands of small transactions efficiently.
Financial methodology: Banks need to acquire an appropriate financial methodology to
service the micro-enterprise sector financial innovations that permit a cost-effective


analysis of creditworthiness, the monitoring of a large number of relatively poor clients,
and the adoption of effective collateral substitutes.
Human resources: Given that micro-finance programs differ so radically from traditional
banking, banks must recruit and retain specialized staff to manage these programs. Issues
of recruitment, training, and performance related incentives require special consideration.
Cost-effectiveness: Micro-finance programs are costly because of the small size of their
loans and because banks cannot operate them with their traditional mechanisms and
overhead structures.
Regulation and supervision: Banks must communicate with banking authorities to ensure
that reporting and regulatory requirements take into account the specialised nature of
micro-finance programs.


5.1 RECOMMENDATION FOR FUTURE STUDIES
Some guidelines for future studies are given below:

1. The specific sector analysis is important for to understand the microfinance activities of
banking sector.
2. Specific bank analysis is not provided by any researchers which is so frustrating.
3. Every researcher tried to view this topic as a whole but individual analysis is very
important for to understand the need of microfinance activity by the bank.
4. Proper guideline is not provided by the government to regulate the microfinance activity
by banking sector which is very important.
5. Banking institutes must provide dataset for the researchers for much more detail activity
on this topic.
6. Institutional studies and survey procedure should be conducted to understand the scenario
of microfinance activities of banks.
7. More and more studies are needed to establish a framework for study of this sector.
8. Commercialization may also increase the loan sizes by reducing the number of clients to
ensure more control and reduce transaction and recovery costs. The rate of interest may
rise due to the fact that the invested funds will have costs that will be recovered by
charging the loan receiver only. These are the negative perceptions of potential users
against commercialization though most of the problems can easily be solved by a proper
system.
9. Commercialization has a lot of positive and negative implications. Most of its negative
implications generates from human psychology, controversial explanation and flaws of
application that can easily be solved if the authority has sufficient commitment. Critics of
commercialization believe that it leads to mission drift by giving less focus on the
poorest of the poor. Thus many poor households would remain unnerved who are
presently under the net of micro credit.


5.2 CONCLUTION
Bangladesh still has a good market for the development and advancement of microfinance
industry. Because there is a huge market gap that is required to be filled up to grasp the potential
benefits from it. The market is growing but the pace is very slow. Transformation rate (from
NGO to MFI to commercial Bank) is very low. If all banking and non-banking financial
institutions avail the option, the breadth and depth of outreach can be maximized. The need for
microfinance is higher in rural areas than in urban areas irrespective of the status of the country.
Most of our unemployed and unproductive men and women live in rural areas that need works
and funds. Sometimes they do not get work due to shortage of fund. Again, there are ample
opportunities in rural areas to operate successful venture at minimal fund involvement in various
agro-based projects. Indigenous people may also be a target group of microfinance industry who
needs training and funds to expose them off. Thus commercialization of microfinance may work
as an effective tonic here to bring our poor people out of the vicious circle of poverty. From
NGOs, we cannot expect the maximum result so long as they will run by donated fund or soft
and grant loans. If commercial banks come up with their expertise and commercial funds, the
situation may be better. They can use their long trained staff, fund management policies,
scattered branches to ensure outreach and last, but not the least, commercial funds with a
commercial motive that leads not only to alleviate poverty but also to develop wealth-base of the
destitute group
Micro credit programs have a strongly positive relationship with poverty alleviation; this is the
proven fact. But, the only requirement is that the loan giving authorities really mean it. It is not a
simple task to help the poor, as they are poor in every respect. The geographical location of the
poorest and the broader environment in which they operate also make it more difficult to serve
them. For example, while the poorest can be found in urban areas, most of the poorest in Asia are
concentrated in rural areas where basic physical infrastructure is highly inadequate.
The poor are scattered throughout the remote geographical area where the outreach is so difficult
and due to the rapidly increasing number of borrowers, a matured institutional set up is required.
So, micro finance is required to be commercialized. Application of commercial principles in
micro finance becomes a time demanding issue now a day with the increase in failure rate also.
Micro-businesses (defined as those employing less than five people) have a high failure rate and


are considered high-risk investments. Micro-business borrowers seek to borrow sums that,
because of their small, often non-standard, character, incur disproportionately high transaction
costs. Micro finance facility may suit them in such a situation.
Finally, if the group (target market, loan receivers) is identified rightly, if commercial principles
can be applied equitably and if the poor are rightly and timely focused, micro finance may work
as a strong and timely intervention against poverty that no laboratory can test and prove. It may
work as a cause of smile for a vast majority poor people who suffer from acute poverty level in
terms of hunger, illiteracy, ignorance, slavery, insecurity and such other in humanitarian
condition. And if commercialized properly, small business entrepreneurs may find the program
worthy for them also.
5.3 REFERENCES
Shil, Nikhil Chandra: Micro Finance for Poverty Alleviation: A Commercialized View,
International Journal for Economics and Finance,
www.ccsenet.org/journal/index.php/ijef/article/download/.../3079
Pine, David: The microfinance sector in Bangladesh: Innovation or Stagnation.
BA Thesis in Banking and Finance, CMF Thesis Series no. 6 (2010), Center for
Microfinance Thesis Series, University of Zurich,
http://www.cmf.uzh.ch/publications/david_pine.pdf
Awal, A.: Case Study Bangladesh: Financial Linkages in Bangladesh,
Banking with the Poor Network,
2003,http://www.microfinancegateway.org/gm/document-
1.9.27834/37596_file_2Case_study_Bangladesh.pdf, 08/10/2009
Schicks, J.: Developmental Impact and Coexistence of Sustainable and Charitable Microfinance
Institutions:
Analyzing BancoSol and Grameen Bank, in: European Journal of Development Research,
Vol. 19, No. 4, 2007
Bell, R., Harper, A. and Mandivenga, D. 2002: Can commercial banks do microfinance?
Lessons from the Commercial Bank of Zimbabwe and the Co-operative Bank of Kenya.
Small Enterprise Development 13(4), 3546.


Groen, Ruth Goodwin: The Role of Commercial Banks in Microfinance, 1998,
http://www.microfinance-
pasifika.org/assets/newsitefiles/books/The%20Role%20of%20Commercial%20Banks%2
0in%20Microfinance.pdf
Obaidullah, Mohammed: Introduction to Islamic Microfinance,
The Islamic banking and finance network.http://www.imad.in/mf-obaidullah.pdf
CDF (Credit and Development Forum) (2011),
Microfinance Statistics, Vol.17, December 2004.http://www.cdfbd.org
Microcredit Regulatory Authority (MRA) (2011a)
MRA, About us, Website of the Microcredit Regulatory Authority, accessed on
09/11/2009
http://www.mra.gov.bd/index.php?option=com_content&view=article&id=40:history-of-
microcredit-regulatory-authority-mra&catid=23:about-us&Itemid=76
Sonali Bank website:

www.sonalibank.com.bd/

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