Elisabeth Rhyne, Managing Director of Center for Financial Inclusion, visited Bangladesh a few years back and wrote about microfinance in the country. Her article was published in the World Post with the title 'Microfinance in Bangladesh: It's not What You Thought.' Arguably, the sector has been passing through remarkable changes over time. "Ask a casual observer to describe microfinance, and most likely he or she will mention Bangladesh and tiny group-guaranteed loans for women. But on a recent trip to Bangladesh, I learned that the Bangladeshi microfinance sector has moved on. Way on."
The model of microfinance in Bangladesh, thanks to Grameen Bank, usually represents tiny loans to women with fixed terms and amounts, group liability, weekly meetings, forced payments into a group savings account, etc. The package also includes a set of 16 social pledges chanted each week while standing at attention. "But while many in the microfinance industry and outside equate microfinance with the Grameen model, Grameen itself as well as the other microfinance institutions in Bangladesh have quietly re-engineered their models to pursue an expanded vision. The most dramatic shift occurred in 2002, with the introduction of Grameen II, a thorough re-tooling of Grameen Bank's operations. Throughout the past decade, most of hundreds of microfinance institutions (MFIs) in Bangladesh have followed the suit, experimenting with new lending methodologies, products and support services."
The upshot of changes that she described is as follows (at times paraphrased). It is generally perceived that microcredit loans go to women but many MFIs now serve men too, though loans to women still dominate. Second, in place of forced group savings, most MFIs now offer flexible, individual deposit services to their members. Third, unlike heavy dependence on donors, as in the past, MFIs have become largely self-funded from deposits. (The sector has $2.6 billion in total loans, financed by $2.2 billion in total savings). And unlike the original forced savings, savers can deposit and withdraw their money whenever they wish. Fourth, pre-set loan amounts and terms paved ways to borrowers who can often select the length of loan they need, and loans are now available for small businesses (up to about $15,000). Last but not least, many MFIs have developed loan and support programmes for the 'ultra poor.'
According to Elisabeth, these are all major departures from the original model. "But perhaps the biggest change is the relaxation of formal group liability. Almost none of the Bangladeshi providers I spoke with still use group guarantees in their original form to reinforce loan contracts. They do use groups to facilitate interactions with clients, and may offer various incentives for peer support. However, formal guarantees and even, in some cases, weekly group meetings have disappeared."
The author reckons that these changes, driven mostly by learning and increased competition, make microfinance more valuable for clients, both in terms of better products and simpler delivery. Microfinance has grown to an enormous scale in Bangladesh with a reported approximately 23 million borrowers in a country of roughly 150 million people. These numbers reveal the highest population saturation of microfinance in any country. If the average household size is five people, the data would suggest that most households in the country have some link to microfinance. In fact, many families have access to multiple providers, enabling them to demand greater flexibility and client-responsiveness through competition. At the same time, the providers have learned how to manage risks more flexibly, rather than hewing to the original rigid formula of stepped loans, forced savings and zero delinquency tolerance. Market pressures, among other considerations, nudged lenders to drop unpopular provisions that were not essential for risk control. A similar process some years ago led to a massive shift from group to individual lending among many MFIs in Latin America.
Moreover, and perhaps more importantly, the MFIs in Bangladesh have continually sought to make a greater strides in making a difference in clients' lives drawing upon a broader array of financial products such as savings, insurance, and specialised loans (including energy, education and housing loans, in addition to small business and ultra-poor loans). "It appears in the offer of other development services (such as schools, training, or health services) or economic activities, often through sister companies, such as Grameen Phone. BRAC, with over 5.0 million microfinance clients, is a leader in development services: To note that BRAC operates over 32,000 primary schools is only to hint at its staggering programmatic range."
One of the interesting things about microfinance in Bangladesh is that its intense market saturation has not resulted in a crisis of over-indebtedness or unmanageable default. Elisabeth observed that 'Overlapping' is common, that is, clients taking loans from several MFIs at the same time. Levels of multiple lending that would cause alarm in other countries are common in Bangladesh. Many borrowers have three, five or even more loans outstanding at the same time. Providers say they are not worried about overlapping because it has been a feature of the sector for some time without triggering major bouts of default. They attribute the avoidance of crisis to the moderate pace of growth in microfinance over the past two decades, which has allowed clients and providers alike to learn by doing. In markets that have experienced crises, like India, Bolivia and Morocco, the crisis was preceded by a very rapid run-up in loan portfolios. Annual growth rates in the range of 20 to even 40 per cent per year, as in Bangladesh, may be significantly safer than the 100 per cent or higher rates experienced prior to crises in other countries. With extremely high growth, many clients are inexperienced and many loan officers are untested which is a dangerous combination.
Because it has been a sizable sector for two decades, Bangladesh presents an interesting case study of a country in which many new clients will have grown up with microfinance as daughters (and sons) of clients. It would be interesting to examine whether clients who learned about microcredit at their mothers' knees make good debt management decisions. If that could be shown, it would provide powerful information to guide the current interest in financial literacy training.
"Meanwhile, the providers in Bangladesh are rightly proud to be part of one of the oldest and largest microfinance sectors in the world. They are confident that their sector is stable even in the face of heavy saturation and multiple borrowing. And yet, I wonder about that. Pride goeth before a fall, says the proverb, and if there is one lesson from the history of financial crises, it is that no financial sector is immune."
The writer, a former Professor of Economics of Jahangirnagar University, is Chair, Economics and Social Science (ESS),