Micro-Finance Passes Through A Phase Of Transition

by S M Rahman


MICRO-CREDIT programme is being implemented throughout Bangladesh following the Grameen Bank approach. It was started as a credit and savings programme with mandatory weekly savings and a basic loan product called general loan. The NGOs afterwards followed this model with some modifications. During the last 2-3 years or so, a trend is being discerned among the NGOs in launching new savings and loan products. They introduced some innovative features in their design and implementation. More than 1000 NGOs are carrying out micro-finance operations now. Curiously enough, each and every NGO eventually has taken up micro-finance as a common activity. In the NGO sector alone, there are now more than 9 million active members (more than 90 per cent are women) that include more than 6 million borrowers. These members have net savings of Tk. 6 billion. The total loan outstanding against the borrowers is Tk. 16 billion. The size of the total revolving loan fund is Tk. 20 billion. The average loan recovery rate in the sector is about 93 per cent. Ironically, the NGO led micro-finance sector is very much lopsided in that only a handful of organisations (not more than 2 per cent) have very strong presence resulting in highly monopolistic competition. They now offer differentiated savings and credit products and provide lucrative interest rates to overwhelm the smaller ones. On the other hand, the Grameen Bank has 2.37 million members who have saved about Tk 9 billion and have loan outstanding of Tk 15 billion. The Bangladesh Rural Development Board (BRDB), which is one of the largest public sector programme, has about 1.65 million borrowers with loan outstanding of Tk 2 billion. The total outreach in the country is now approximately 13 million that indicates that the sector is already somewhat saturated in terms of outreach.

New Turn of Micro-credit: The terminology of micro-credit itself has undergone a change recently. Most practitioners in many countries including Bangladesh call it micro-finance for its wider dimension. Micro-credit was initially member-based, who are, of course, poor. Now many NGOs are collecting deposits from non-members. The non-members are not necessarily poor. Micro-finance is thus marking a gradual shift from poor to non-poor. So clearly, it is no longer a service for the poor only, as the non-poor are also becoming part of micro-finance programme. Repayment system is by and large weekly. But now fortnightly and monthly repayments are noticed. Many NGOs are going to the very doorsteps of the clients to collect savings. So a change in the group methodology is also appearing. Efforts are seen stronger than in the past in mobilising local resources by bringing in various savings instruments. The savings products of NGOs now include daily savings, mandatory savings, forced savings, contractual savings, and time deposits. Some are introducing flexible rules for typical loan products. The cases of ASA and BURO, Tangail, can be cited as glaring examples. About 75per cent NGOs provide interest on savings @ 5-7per cent. There are, however, a few who provide more. There are also some, who commit to provide interest on normal savings, if the clients do not withdraw money before a specified period of time. But if they do they are denied any interest. In these cases, the rate simply works as a carrot and the poor are deceived. In most cases, the savings cannot be withdrawn. The progressive organisations, however, are allowing savings withdrawal. ASA and BURO, Tangail, are spearheading in savings product innovations and have generated much enthusiasm among the micro-finance practitioners around the globe. The NGOs are also trying to become more responsive to the demand for credit facilities. Over time, the credit products have been diversified. Today there exists more than 15 credit products including daily credit, leasing loans, housing loans, credit for old aged people and community-based credit (e.g. for fisherman).

Credit is given mostly for undertaking income generating activities. Practical experience indicates that of the total credit supply, minimum 30per cent goes for consumption purposes. The clients significantly tend to perceive credit, as a pure financial service. The credit providers will have to formally admit this reality and recognise this as a service. At present, there is perhaps no credit product called consumption credit. So, obviously, a product may be designed to cater to this need. Normally, the loan ranges from Tk 1,000 - 10,000 for one year. The average loan size is Tk 2,500 ($50). The loans carry average interest @ 11-15per cent in flat method. About 80per cent NGOs apply this method. The number of organisations providing loans above Tk 3,000 is very rare. Only a few organisations can adequately support the needs of their clients. Field experience suggests that the money that is given as credit is far away from the actual need. Many NGOs, however, gradually enhance the amount over time. At any rate, the amount of money that is being given falls short of their veritable need. This points to the fact that the market can absorb more, presumably 3-4 times the current debt portfolio. One can, therefore, easily imagine the scope of demand-supply gap from this scenario. In addition to savings and credit, insurance service is also being provided by NGOs. Insurance product appears in various names and has different mode of applications. It covers mostly the risk factor due to death of the client. In some cases, livestock is insured and claims are partly met for the death of the animals. According to a sample of 200 NGOs surveyed by CDF, 16 per cent NGOs were found to have some kind of insurance practices. The NGOs mostly regard insurance as a source of fund that can be had at no cost and is collected hardly looking at the benefit of the clients. Fees or premiums are collected at various modes that make the effective rate of interest quite higher. This is undoubtedly a big cost burden for the poor people. It has been gathered from field visits that many clients understand the benefits of insurance but do not support any outright credit slash or charging extra fees. They treat it as coercion and do not like it at all. This is a fact, which is seldom looked into by the insurer. On the other hand, some organisations see insurance from welfare point of view, as for instance BRAC. It does not charge anything from the clients. The claims, if any, are met from reserves. Such provision evidently pulls down the sustainability of the organisation. Insurance, in fact, is suitable for those people or organisations that can really afford. In micro-finance, insurance should be looked into from service perspective as well as commercial point of view. Suitable products, therefore, need to be researched and designed, if at all viable. Many NGOs have started thinking that they have to give huge time and efforts for micro-finance operations. Given the huge number of clients, they maintain that, it is indeed difficult, if not nearly impossible for a field worker or a supervisor to see who is doing what. The realisation is that adequate money should be given to the clients and that their number should be few. Micro-enterprise concept is eventually emerging among the NGOs. They think that it is an effective tool for faster employment generation. Some NGOs including the top three in the country are providing micro-enterprise loans to the graduated clients and other individuals. Loan is provided to the extent of Tk 400,000 in the sector to an individual and the performance in general is reportedly well. For financing the micro-finance programmes, the NGOs need more money. In a survey conducted by CDF, 80 per cent respondents out of 380 NGOs said, their main problem is shortage of funds.

Access of the NGOs to the banks is also very limited. The banks in our country have been traditionally shy in lending to the NGOs. Banks insist on collateral, which the NGOs find it difficult to comply. Nevertheless, some changes in the policies of banks are being noticed. A few nationalised commercial banks have come forward a little to assist the NGOs. To expand the banking services to the NGOs, the banks, however, will have to take more proactive role and should open separate windows for the NGOs. A good example of NGOs' access to banks can be found in South Africa with a strong banking sector, where two kinds of programmes are implemented; one through guarantee financing and the other through collaboration between NGOs and commercial banks.

The developments in the foregoing indicate that micro-credit in Bangladesh is really in a speedy transition.The micro-finance sector has burgeoned over time in size, developed innovations and various product designs. Nevertheless, it is confronted with internal and external challenges that are hampering the growth of the industry and creating hindrances to serve the clients effectively. The challenges are formidable and tend to undo the achievements. Ten such challenges have been identified that include: (i) governance and ownership structure (ii) capacity building (iii) small and marginal farmers' accessibility to rural finance (iv) hard-core poor (v) migration of poor people to urban areas (vi) overlapping (vii) disaster management (viii)sustainability & growth (ix)funding sources and (x) regulatory framework.

The governance of NGOs is increasingly discussed nowadays. Research findings indicate that governance and financial sustainability are closely interrelated. Ironically, weak governance and management characterise most micro-finance NGOs in Bangladesh. NGOs' boards are no less than rubber stamp boards in most cases. It is commonplace to find friends, close relatives, retired bureaucrats, and such other persons on the boards. They are mere onlookers and remain reticent on board's business. The chief executives are said to overpower the boards. Activities of the organisations are conducted mostly on their whims and decisions. If this is the situation, good governance will not occur just inducting good people in the governing body. Essence of governance is to ensure an overall system of structuring accountability and transparency in an organisation. Practice of good governance in the NGO sector seems to be totally forlorn. This has been so mostly due to the inadequacy of the existing laws and regulations and lack of reporting, supervision and monitoring. The NGOs are not to blame fully for this. Operationally, micro-finance NGOs are quasi-banks dealing with deposits and loans. While it is difficult for the NGOs to think of themselves as banks, they should at any rate conduct their business professionally. Accountability and transparency must be ensured in the built-in systems, practices of these organisations. Ownership in micro-finance is also a much-talked-about issue. NGOs have truly no owners. Profit, if any, made out of operations does not go to anybody's pocket. They are not liable for any loss. Without significant resources at risk, investors generally lack incentives to monitor the institutions adequately. Here the investors are socially-motivated institutions and they tend to place a priority on the institution achieving social objectives. Some private individuals investing their resources may also place their investment to accomplish social goals. As a result, they may not hold this investment to the same standards that they apply to the commercial ventures. Micro-finance has emerged as a distinct discipline. The micro-finance NGOs hugely lack capacity and are yet to perform up to the mark despite some interventions in the area. This is a common concern of the donors, government and other fund providers. In fact, only strong institutions can provide quality services on a sustainable basis to the poor. The capacity of micro-finance institutions will virtually depend on the quality of human resources, operation systems, procedures and practices and the availability of support services. On the contrary, the quality of human resources in the NGO sector in general is abysmally low. The thing, which is most importantly required in the sector, is to enhance competence of NGOs to run the micro-finance programmes efficiently. They scarcely think about the minimum number of clients that is necessary. Most of the NGOs follow the going rates of interest, what others are indeed doing and do not properly calculate product costing in setting their prices. There is no structured MIS for quick decision-making and corrective measures, if any deviation occurs. Nobody forecasts any time-frame when to achieve break-even, attain sustainability and go beyond. With the exceptions of a few, most NGOs barely prepare any standard income and balance sheet, portfolio reports, etc and get them audited duly. Despite having a mature micro-finance industry, unfortunately we are yet to have performance standards and necessary indicators. Performance standards in micro-finance refer to common industry norms or practices that should be adhered to, by the micro-finance implementing agencies. Compliance may, however, vary depending on the size or scale of operations of an NGO. Both qualitative and quantitative indicators are required. The objective of introducing standards is to equip the micro-finance NGOs with necessary competence to reach the poor and conduct sustainable micro-finance programmes. Successful adoption of performance standards will also assist the government agencies, donors, banks and other financial institutions in identifying the effective micro-finance NGOs. The small and marginal farmers are still less focused in Bangladesh. A research conducted by CDF indicates that a large portion of them live below the poverty line, who have remained outside the comprehensive interventions of micro-finance institutions. Not only that, their access to nationalised and specialised banks is also very limited. Some are gradually sliding towards the poverty line. It is estimated that the share of institutional sources of credit ranges between 8-24 per cent of the credit needs of the rural population and the portion of agricultural credit never exceeded 15 per cent in any year. Considering the dominance of better-off farmers in institutional sources credit, the share of small and marginal farmers has been very low and this is posing a challenge to a considerable population.

Sustainability is a recent realisation of the NGOs. So far, their concept had been just limited to taking savings, giving out credit, achieving a good recovery rate and nothing more. It is to be borne in mind that micro-finance institutions must operate on two pillars. Firstly, to serve well and reach out to more clients. Secondly, to attain financial viability to achieve financial sustainability and growth. In fact, there should be a trade-off between these two concepts. The NGOs have been carrying out micro-finance programmes practically without looking into their sustainability and beyond. It is ironic to mention that more than 1,000 NGOs are operating micro-finance in Bangladesh. Even after nearly two decades of experience in the sector, only ASA and BURO, Tangail, are known to have achieved financial sustainability and that is also marginally. Examples of organisations are also few, who have become operationally sustainable. This is really a very sombre picture in the industry. The dreadful consequence is that the institution's and the clients' assets will be eventually eroded. It is time for giving more intensive thoughts to the current micro-finance technology to make it more cost-efficient so that the interest burden on the poor is also less. The sector was once highly dependent on grants. Now 80 per cent funding comes from Bangladesh sources, while 20 per cent from direct donors. The NGOs also preferred grants from the donors. There is no denying that grants have limited supply and it is also decreasing over time. Meanwhile, NGOs have become accustomed to loan culture. This is a positive sign for the sector. PKSF has so far funded 186 NGOs at concessionary rate of interest @ 3-5 per cent. The banks normally charge 16 per cent for the general clients but for the NGOs they charge about 10 per cent, which is below the market rate. In view of the fact that grant is limited in supply, which is not to be returned, the donors can redraw their funding strategy to provide soft loans and equity support. It has two-fold benefits. In the first case, a donor can work as investor and assist more NGOs than in the past. This will leverage the overall fund flow to alleviate poverty faster. Secondly, the NGOs can get rid of some kind of psychological dependence on the donors. It is right time that the donors reviewed their policies for a grant cut in their aid flows, particularly to the mature micro-finance NGOs and instead channel the funds to the smaller and medium ones to ensure a balanced sector. The donors can use the existing effective micro-finance networks for selection, monitoring and supervision. This will reduce their business risk as well as administrative cost and help build a lasting institutional infrastructure for the NGOs. The major source of RLF now comes from clients' savings and various interest income or service charges. But what can be said with certainty is that overall donors' contribution in the revolving loan fund (RLF) is plummeting as the size of the RLF is expanding. As said earlier, currently 20 per cent (in 1999) contributions come from donors as grants, which was 26 per cent in 1998 and 34 per cent in 1997. As a single institution, PKSF is the major supplier of credit. It is providing fund to the extent of 25 per cent to the RLF of the NGOs. Donors tend to prefer the bigger NGOs as these organisations have better management and leadership. Besides, it is administratively easier for the donors to manage with less monitoring. A shift is, therefore, necessary in the donors' policy. PKSF also seems to have policy bias towards the bigger ones like the donors. About 60 per cent of its loans go to a few large NGOs, which they love to call Bipul' meaning very big. PKSF should play an important role in ensuring a balanced growth in the micro-finance sector. Regulation is a very hot issue now in Bangladesh and also elsewhere in the world. So far the sector has remained unregulated. The process of regulation that was stalled so long seems to be under progress. A committee has been formed lately with seven members with the Governor of Bangladesh Bank as the chairman. They are reviewing all matters with regard to regulation. A new development has taken place meanwhile and that is also very quickly, so to speak. The Asian Development Bank (ADB) consultants in Bangladesh as part of their assignment in the Ministry of Local Government and Cooperatives have drafted an omnibus legislation Act for Micro-finance Institutions (MFIs) that includes NGOs, cooperatives and others. The first draft has been shared with important stakeholders. An updated version is supposed to be ready meanwhile. NGOs want regulation but prefer an independent regulatory body with two-thirds representatives from the NGO community. With roughly 13 million active members in the whole country, all poverty-stricken households, in fact, seem to be covered by micro-finance programmes resulting in saturation in terms of outreach. Opinions, however, differ on the extent to which poverty reduction is occurring in country. One study conducted with 1,798 households has revealed that 1 per cent of the population can lift itself from poverty each year through micro-credit programmes. Even after so many years of intervention, only 1 per cent achievement has occurred, while this result cannot be fully attributed to the intervention of NGOs alone, because micro-finance operations are not carried out in exclusively controlled areas. Certainly we cannot preclude the impact of government interventions at acro level that may have contributed to this outcome as well.

The writer is the Director of Credit and Development Forum (CDF).

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