MICROFINANCE PAPER WRAP-UP: “A Microcredit Crisis Averted: The Case of Bangladesh,” by Greg Chen and Stuart Rutherford, Published by CGAP (Consultative Group to Assist the Poor)

“A Microcredit Crisis Averted: The Case of Bangladesh,” by Greg Chen and Stuart Rutherford, Published by CGAP (Consultative Group to Assist the Poor), July 2013, 20 pages, http://www.cgap.org/sites/default/files/Focus-Note-A-Microcredit-Crisis-Averted-July-2013.pdf

In this paper, Greg Chen, a senior financial sector specialist at US-based NGO CGAP, and Stuart Rutherford, author and founder of a Bangladeshi microfinance institution (MFI) Safesave, discuss the reasons the microfinance industry in Bangladesh grew rapidly between 2004 and 2007, but the number of borrowers and branch expansion suddenly leveled off in 2008. Mr Chen and Mr Rutherford studied 10 years of financial and social performance data from Bangaldesh-based microfinance organizations Association for Social Advancement (ASA), BRAC (formerly Bangladesh Rural Advancement Committee), BURO and Grameen Bank; non-financial documents; and conducted interviews of 43 rural households.

The popularity of microcredit increased steadily beginning in the 1970s. In the 1990s, the number of MFIs in Bangladesh increased; and between 2004 and 2007 the industry’s annual customer growth rate was between 15 and 28 percent. During this time, the combined gross loan portfolio of the four MFIs studied grew by 70 percent.

Mr Chen and Mr Rutherford state that around 2006, the four MFIs began to obtain new sources of funding. Previously, funding had come mostly in the form of international donations and loans from the UN’s International Fund for Agricultural Development (IFAD) and Palli Karma-Sahayak Foundation (PKSF), a nonprofit organization established by the government of Bangladesh to provide wholesale loans to microcredit lenders. Between 2006 and 2007, the four MFIs began to accept deposits from borrowers and the general public, as well as borrowing from domestic commercial banks. During this time, the MFIs also began to compete for borrowers. Mr Chen and Mr Rutherford argue that regulation, the race to claim market share before the market became saturated and international encouragement pushed the MFIs to gain new clients. The Microcredit Regulatory Act, which was passed by the Bangladeshi government in 2006, established the Microcredit Regulatory Authority. The agency proposed strict requirements for establishing new branches, which encouraged MFIs to rush to set up new branches before the regulation went into effect. By the time licensing requirements were passed in 2007, the number of branches had increased significantly.

According to Mr Chen and Mr Rutherford, this growth came to a halt in 2008 due to market saturation and internal problems such as poor record keeping associated with rapid growth. New branches were unable to obtain enough borrowers to break even. The intense competition for new clients had led to lenient borrowing requirements and the provision of loans to people with higher incomes than the original target population. Many clients had borrowed multiple loans and were unable to repay them. MFIs implemented internal audits that uncovered staff negligence and misuse of lending products. One by one, the four MFIs began to slow branch growth, discontinue certain products and tighten borrowing requirements through stricter contracts.

Mr Chen and Mr Rutherford argue 2008 marked a turning point in the microfinance industry in Bangladesh that has led to current trends of microcredit stability, prioritization of small-enterprise lending and increased diversity in savings products. Though the industry suffered during 2009 and 2010, Mr Chen and Mr Rutherford argue that a crisis was averted due to increasing deposits and decreasing loan sizes. The authors also cite a growing need to establish a special license for deposit-taking MFIs and increase mobile-phone payment services.

By Megan McGowan, Research Associate

Sources and Additional Resources

MicroCapital Article, “MICROCAPITAL BRIEF: Grameen Bank Ordinance Seen as Power Grab by Bangladeshi Government, Bank Refutes Claims by Prime Minister of 45% Microloan Interest Rates,” August 13, 2012, https://www.microcapital.org/microcapital-brief-grameen-bank-ordinance-seen-as-power-grab-by-bangladeshi-government-bank-refutes-claims-by-prime-minister-of-45-microloan-interest-rates/

MicroCapital Article, “MICROCAPITAL BRIEF: Bangladeshi Microfinance Institutions Boost All-Time Microcredit Disbursals to $2.7b,” May 16, 2013, https://www.microcapital.org/microcapital-brief-bangladeshi-microfinance-institutions-boost-all-time-microcredit-disbursals-to-2-7b/

MicroCapital Article, “MICROCAPITAL BRIEF: BRAC Applies Microcredit Strategies to Water, Sanitation, Hygiene (WASH) Programme in Bangladesh,” April 8, 2013, https://www.microcapital.org/microcapital-brief-brac-applies-microcredit-strategies-to-water-sanitation-hygiene-wash-programme-in-bangladesh/

MicroCapital Article, “MICROCAPITAL BRIEF: Central Bank of Bangladesh Requires Banks to Open 50% New Branches in Rural Areas,” December 11, 2012, https://www.microcapital.org/microcapital-brief-central-bank-of-bangladesh-requires-banks-to-open-50-new-branches-in-rural-areas/

MicroCapital Universe Profile: BRAC, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=BRAC

MicroCapital Universe Profile: Buro Bangladesh, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Buro+Bangladesh

Microcapital Universe Profile: Grameen Bank, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Grameen+Bank

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