MICROCAPITAL STORY: Bangladesh Microcredit Regulatory Agency (MRA) Limits Interest Rates for Microfinance Institutions

At a meeting recently held at the Bangladesh Bank, the Microcredit Regulatory Agency (MRA) of Bangladesh announced that microfinance institutions (MFIs) will have to limit the interest rates they charge clients to a flat 15 percent or an effective rate of 30 percent. An MRA official said that the move is an interim measure, and that the MRA will announce a final interest rate policy for MFIs after “conducting an in-depth study”. In addition to the limits on interest rates the MRA announced that MFIs cannot collect deposits totaling more than 80 percent of their total outstanding loan portfolio, in order to prevent financial fraud. Additionally, according to a senior MRA official, MFIs will be empowered to purchase any fixed asset on the basis of the executive committee’s approval instead of the board of director’s consent. The MRA also asked that NGOs offering microfinance separate their microfinance activities from other business activities otherwise all of their business activities will fall under the monitoring and supervision of the MRA.

The differing limits on interest rates imposed by the MRA results from the method of calculating flat interest payments used by many microfinance institutions. In contrast to calculating interest payments off of the declining balance of the loan, some MFIs charge flat interest rates on the original amount of the loan, even as the loan balance declines. The result is an effective interest rate substantially higher than the stated flat rate, thus the MRA’s dual restriction of 15 percent flat and 30 percent effective. Because microfinance clients are often illiterate and financially inexperienced (or too trusting of the local NGO), flat interest rates sound appealing. By imposing a limit on both flat and effective rates the MRA is trying to regulate against this deceptiveness.

As reported in a recent MicroCapital story, Enamul Huq Mustafa Shahid, the Social welfare Minister of Bangladesh, has announced that some unauthorized NGOs are taking advantage of the ‘economic weakness and helplessness’ of Bangladeshis, and has called for the need to ‘bring all NGOs under proper regulation with the cooperation of all [ministries]’, saying that ‘legal steps’ would be taken against all NGOs operating microcredit programs without authorization. The increased scrutiny of the microfinance sector by the Bangladesh Government follows a scandal involving UK based social development NGO Green Crescent which was illegally operating an orphanage-cum-madrasa (Muslim school) as well as possessing illegal arms, ammunition and explosives.

The Bangladesh government passed the Microcredit Regulatory Act in 2006 to ensure transparency and accountability of MFIs in Bangladesh’s growing microfinance industry. At the same time the government formed the eight-member MRA, headed by the governor of Bangladesh Bank. The 2006 Act makes licenses mandatory for all private MFIs, whether they are for-profit or non-profit. The MRA began to issue licenses in August of 2007, as reported in this MicroCapital story. The MRA recently extended its deadline for MFIs to meet licensing criteria from June 30 of this year to December 31, as reported in this MicroCapital story. Out of 4,240 applications received by the MRA, 411 licenses have so far been issued, 600 have been rejected for failing to meet the requirements, and 3,229 applications are still pending. In order to get a license every MFI must submit documents to the Central Bank which then must be verified for authenticity. Once an MFI receives its license it is subject to MRA monitoring and supervision. If an MFI does not comply with MRA mandates it may be subject to disciplinary action.

According to a recent study published by the Consultative Group to Assist the Poor (CGAP), a division of the World Bank Group, entitled “The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates?” MFIs are not charging unreasonably high rates. The study finds that not only are MFI interest rates declining faster than bank rates, but these rates are significantly lower than rates which microfinance borrowers would pay for credit cards or to informal money lenders. Additionally the study finds that sustainable interest rates for microloans have to be higher than for normal bank loans because of the higher operating costs involved in servicing microloans. To read a MicroCapital wrap-up of the study click here.

By Laura Anderson, Research Associate

Additional Resources:

The Financial Express: Interest Rate Policy for MFIs Streamlined

Bangladesh Bank: Home

Consultative Group to Assist the Poor: Home

The World Bank Group: Home

“The New Moneylenders: Are the Poor Being Exploited by High MicroCredit Interest Rates?” By Richard Rosenberg, Adrian Gonzalez, and Sushma Narain

MicroCapital Story: Bangladeshi Government to Investigate Activities of All Unauthorized MicroCredit Organizations Operating in the Country

MicroCapital Story: MicroCredit Regulatory Authority of Bangladesh Extends Deadline for Microfinance Institutions to Meet Licensing Criteria

MicroCapital Story August 2007: Bangladesh Micro-Credit Regulatory Authority Begins Issuance of Licenses to Microfinance Institutions