Chapter 02Microfinance

Theoretical Review

2.1 Microfinance

Microfinance refers to a variety of financial services that target low-income clients, particularly

women. Since the clients of Micro-Finance Institutions (MFIs) have lower incomes and often

have limited access to other financial services, 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.

2.2 Functions of Microfinancea) Target the poor people, mainly women who bear the burden of poverty. This has been

made operational by accepting members/clients who own less than 0.5 acre of land

(functionally landless). By targeting exclusively the poor, this approach ensures services

only for the poor and eliminates possibility of enlisting rich people taking advantages of

the service;

b) Primarily accept women as clients who repay loans on time, invest money for productive

purposes and spend income to improve the quality of the life of their family members; the

process empowers them (women) as well;

c) Loans are collateral free; but to ensure repayment poor women are organized into groups

to take responsibility of repayment;

d) Loan amounts are small that is manageable by the poor and repayment are also small

collected in weekly installments;

e) Instead of coming to the bank the approach takes financial service at the door of the poor;

Bank’s staff members collect supervise and take care of all management tasks similar to

any commercial bank.

f) Procedures for loan applications and other administrative steps have been simplified to

suit the poor.

g) All financial transactions are made in public to eliminate any possibility of corruption.

h) Experience shows that loan money is normally invested in commonly available activities

such as livestock rearing, trading, agriculture production and small processing operations.

2.3 Objectives of MicrofinanceMicrofinance and the impact it produces, goes beyond just business loans, The poor use financial

services not only for business investment in their microenterprises but also to invest in health and

education of family members, to manage household emergencies, and to meet the wide variety of

other cash needs that they encounter. Specifically it assesses impact in the areas of eradicating

poverty, promoting children’s education, improving health outcomes for women and children,

and empowering women. A short description of the specific areas is given below:

Eradicating Poverty

Microfinance allows poor people to protect, diversify, and increase their sources of income, the

essential path out of poverty and hunger. The ability to borrow a small amount of money to take

advantage of a business opportunity, to pay for school fees or to bridge a cash-flow gap, can be a

first step in breaking the cycle of poverty. Similarly poor households will use a safe, convenient

savings account to accumulate enough cash to buy assets such as inventory for a small business

enterprise, to fix a leaky roof, to pay for health care or to send more children to school.

Promoting Children’s Education

One of the first things poor people all over the world do with new income from microenterprise

is that they invest in their children’s education. Studies show that children of microfinance

clients are more likely to go to school and stay in school longer. Student drop-out rates are much

lower in microfinance-client households. To support this priority, many microfinance programs

are developing new credit and savings products specifically tailored to school expenses. This is

also substantiated in the study findings of Khandokar (1998), which found higher levels of

schooling for children of all credit program participants and statistically significant higher rates

of schooling for girls in Grameen households.

Improving Health Outcomes for Women and Children

Households of microfinance clients appear to have better nutrition, health practices, and health

outcomes than comparable non-client households. Larger and more stable incomes generally lead

to better nutrition, living conditions, and preventive health care. Increased earnings and financial

management options also allow clients to treat health problems promptly rather than waiting for

conditions to deteriorate. Along with financial services, some microfinance institutions also

provide health education, usually in the form of short, simple preventive care messages on

immunization, safe drinking water, and prenatal and post-natal care. Some programs provide

credit products for water, sanitation, and housing. A growing number of microfinance

institutions have forged partnerships with insurance providers to offer health insurance to clients.

Empowering Women

Microfinance programs have generally targeted women as clients. Women often prove to be

more financially responsible with better repayment performance than men. Also it has been

shown that women are more likely than men to invest increased income in the household and

family wellbeing. Appropriate program design can have a strong, positive effect on women’s

empowerment, resulting in women owning more assets, having a more active role in the family

decisions, and increasing investment in family welfare. A survey of 1300 clients and non-clients

in Bangladesh by Hashemi, Schuler & Riley (1996) showed that credit-program participants

were significantly more empowered than non-clients on the basis of their physical mobility,

ownership and control of productive assets, (including homestead land, involvement in decision

making, and political and legal awareness.

Participation in Social Activities

Social linkages among villagers and community leaders and their involvement in different

associations or institutions are commonly used as indicators of social impact of Microfinance.

The research reportshows that there was clear evidence of increased involvement in community

activities.

2.5 Organizations involved in Microfinance in

BangladeshIn Bangladesh there are mainly four types of institutions involved in micro-finance activities.

These are:

1. Grameen Bank: Grameen Bank (GB), a member owned specialized institution

which is recognized internationally for its micro financing activities. More details

about Grameen Bank is described throughout the report.

2. NGOs: Around 1500 Non- Governmental Organizations (NGO) like BRAC,

Proshika, ASA, BURO-Tangail, BEES, CODEC, SUS, TMSS, Action- Aid etc.

3. Commercial and Specialized Banks: Commercial and Specialized banks like

Bangladesh Krishi Bank (BKB), RajshahiKrishiUnnayan Bank (RAKUB).

4. Government Projects: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,

Ministry of Social Welfare etc.

All the programs are targeted at the functionally landless rural poor. All the MFIs provide mostly

small, un-collateralized one-year term loans to individuals belonging to jointly liable peer

groups, and they use similar on-site loan disbursement and weekly collection methods by

forming village organizations or centers.

2.6 Bringing Microfinance Sector under Regulatory Framework

To bring microfinance sector under regulatory framework, the Government of Bangladesh

enacted “Microfinance Regulatory Authority Act, 2006” on July 16, 2006, giving effect from

August 27, 2006. Microfinance Regulatory Authority (MRA) has been established under this Act

which is empowered and responsible to monitor and supervise the microfinance activities of the

MFIs. According to the Act, no MFI can operate microfinance program without obtaining license

from MRA. Within the stipulated period, 4,236 Microfinance Institutions applied for license.

Among them, 335 Microfinance Institutions had been granted license till September 2008.

Applications of 438 institutions could not he considered. 2,599 small institutions are advised to

fulfill minimum criteria of obtaining license (either minimum balance of outstanding loan at field

level BD taka four million or minimum borrower 1,000) within June 2009. Evaluation of these

small NGOs under observation has not been done yet. The rests of the applications are being

processed.

2.7 Fund composition of the Microfinance sector in Bangladesh

The Microfinance sector of Bangladesh is broadly financed by the following types of sources:

savings collected from clients, cumulative surplus (profit), concessional loan received from

sources such as PKSF, grants received from national and international donors and commercial

bank borrowing. The chart given below shows the fund composition of the microfinance sector

in Bangladesh during the year 2013. The total amount of Fund is 276707.48 million BDT. The

total Fund composition is given below:

Source of Fund Million BDT (%)

Client' Savings 91178.01 33

Loan from PKSF 34072.27 12

Loan from Commercial Banks 42699.31 15

Donors’ Fund 7104.57 3

Cumulative Surplus 83262.38 30

Other Sources 18390.89 7

Total 276707.48 100

Table: Source of fund of NGO-MFIs in Bangladesh.

The most important source of fund turned out to be clients’ savings which was the single most

important fund support for the sector. The cumulative surplus was the second most important

source of fund. Loans from commercial Banks turned out to be the next more important one.

Loan from Palli Karma Sahayak Foundation (PKSF), a micro finance wholesale funding agency

also provides a large portion of loan fund at a subsidized rate. The least important source was

appeared to be grants from the donor agencies.

Chapter 03

The market Leader in Microfinance industry in Bangladesh

3.1 Introduction

Grameen Bank is founded on the principle that loans are better than charity to interrupt poverty.

They offer people the opportunity to take initiatives in business or agriculture, which provide

earnings and enable them to pay off the debt.

The bank is founded on the belief that people have endless potential, and unleashing their

creativity and initiative helps them end poverty. Grameen has offered credit to classes of people

formerly underserved: the poor, women, illiterate, and unemployed people. Access to credit is

based on reasonable terms, such as the group lending system and weekly-installment payments,

with reasonably long terms of loans, enabling the poor to build on their existing skills to earn

better income in each cycle of loans.

Grameen’s objective has been to promote financial independence among the poor. Dr.

Muhammad Yunus encourages all borrowers to become savers, so that their local capital can be

converted into new loans to others. Since 1995, Grameen has funded 90 percent of its loans with

interest income and deposits collected, aligning the interests of itk2s new borrowers and

depositor-shareholders. Grameen converts deposits made in villages into loans for the more

needy in the villages.

It targets the poorest of the poor, with a particular emphasis on women, who receive 95 percent

of the bank’s loans Women traditionally had less access to financial alternatives of ordinary

credit lines and incomes. They were seen to have an inequitable share of power in household

decision making. Dr. Yunus and others have found that lending to women generates considerable

secondary effects, including empowerment of a marginalized segment of society, who share

betterment of income with their children, unlike many men. Dr. Yunus claims that women still

have difficulty getting loans; they comprise less than 1 percent of borrowers from commercial

banks.

In 1976 it started its journey with only 10 members. But in the following year it became 70. By

the time Grameen officially started to work in 1983 its total number of member became 58,320.

The bank grew significantly between 2003 to 2007.

Male-Female ratio

Men Women

As of January 2013, the total borrowers of the bank number 8.6 million, and almost 97% of

those are women. The number of borrowers has more than doubled since 2003, when the bank

had 3.12 million members. Similar growth can be observed in the number of villages covered.

As of October 2013, the Bank has a staff of more than 21,851 employees; its 2,567 branches

provide services to 80,257 villages.

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20130

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

Num

ber o

f mem

bers

3.2 Credit Delivery SystemFigure-2: Number of members of Grameen

Bank

Figure-1: Male-Female proportion of the borrowers

Grameen Bank is able to provide credit to the very poor in their respective villages by means its

credit delivery system. Grameen Bank credit delivery system has the following features:

Borrowers are organized into small homogeneous groups

The Grameen Bank operates through a network of bank branches located in rural areas. These

branches comprise a bank manager and a number of centre managers representing between 15 to

22 villages.Credit officers visit these villages and through rigorous selection decide to finance

Small voluntary groups of five individuals who show commitment to viable income-generating

activities, such as rice-husking, machine repairing, pottery and garment making, weaving, and

buying of milk cows, goats, etc. Borrowers have free will to choose the nature of their productive

or investment activity based on the skills they possess.

A borrower can only receive loans by forming part of a borrowing group of five people, as trust

and peer pressure are the operational mandates for ensuring the repayment of loans. In this way,

the pressures of collective responsibility replace the need for conventional collateral

requirements and give the GB system its strength.

16 decisions

Dr. Muhammad Yunus has established 16 decisions that the loanees’ have to make before they

get the money. These are some of the most-well thought out issues you could ever bring out in a

developing country. 16 decisions are:

1. Respecting the four principles of the Grameen Bank - discipline, unity, courage and

work.

2. Wishing to give their families good living standards.

3. Promising not to live in dilapidated houses, repairing them and work to build new ones.

4. Cultivating vegetables the whole year round and sell the surplus.

5. During the season for planting, picking out as many seedlings as possible.

6. Intention to have small families, reducing expenses to a minimum and taking care of our

health.

7. Educating children and see that they can earn enough money to finance their training.

8. Seeing to it that their children and homes are clean.

9. Building latrines and use them.

10. Drinking water drawn from a well. If not, boiling the water or use alum.

11. Not accepting a marriage dowry for their son and not giving one to their daughter at her

marriage.

12. Causing harm to no one and not tolerate that anyone should do us harm.

13. Increasing their income and making important investments in common.

14. Always be ready to help each other.

15. Learning that discipline is not respected in a center and go along to help and restore

order.

16. Introducing physical culture in all centers and taking part in all social events.

This helps to:

Raising the social consciousness of the newly organized groups.

Focusing increasingly on women from the poorest households, whose urge for survival

has a far greater bearing on the development of the family.

Encouraging their monitoring of social and physical infrastructure projects - housing,

sanitation, drinking water, education, family planning, etc.

Collective responsibility of the group serves as the collateral on the loan

Initially, only two group members receive a first loan, for which they are given a six week period

to begin repaying the principal and interest before the remaining members in the group become

eligible for receiving loans. New loans for any member are only available once all previous loans

have been repaid. Because of these restrictions, there is substantial group pressure to keep

individual records clear. In this sense, the collective responsibility of the group serves as the

collateral on the loan.

Trust

No legal instrument (no written contract) is made between Grameen Bank and its borrowers; the

system works based on trust. To supplement the lending, Grameen Bank requires the borrowing

members to save very small amounts regularly in a number of funds, designated for emergency,

the group, etc. These savings help serve as an insurance against contingencies.

Interest Rate

The Grameen Bank aims to keep interest rates as close as possible to the market rate, normally

about 16 percent, while maintaining an overarching goal of programme sustainability. GB

requires a repayment scheme based on 50 weekly installments, and encourages savings by

allowing 5 percent of loans to be credited to a group fund. The Grameen Bank receives most of

its loanable funds on commercial terms from the central bank, other financial institutions, the

money market, and from various aid organizations.

Expansion of loan portfolio to meet diverse development needs of the

poor

As the general credit programme gathers momentum and the borrowers become familiar with

credit discipline, other loan programmes are introduced to meet growing social and economic

development needs of the clientele. Besides housing, such programmes include:

Credit for building sanitary latrines.

Credit for installation of tube wells that supply drinking water and irrigation for kitchen

gardens.

Credit for seasonal cultivation to buy agricultural inputs.

Loan for leasing equipment, cell phones purchased by Grameen Bank members.

Financing projects undertaken by the entire family of a seasoned borrower.

The underlying premise of Grameen is that, in order to emerge from poverty and remove

themselves from the clutches of usurers and middlemen, landless peasants need access to credit,

without which they cannot be expected to launch their own enterprises, however small these may

be. In defiance of the traditional rural banking postulate whereby "no collateral (in this case,

land) means no credit", the Grameen Bank experiment set out to prove - successfully - that

lending to the poor is not an impossible proposition; on the contrary, it gives landless peasants

the opportunity to purchase their own tools, equipment, or other necessary means of production

and embark on income-generating ventures which will allow them escape from the vicious cycle

of "low income, low savings, low investment, low income". In other words, the banker's

confidence rests upon the will and capacity of the borrowers to succeed in their undertakings.

The repayment rate on loans is currently - 95 per cent - due to group pressure and self-interest, as

well as the motivation of the borrower.

Although mobilization of savings is also being pursued alongside the lending activities of the

Grameen Bank, most of the latter's loanable funds are increasingly obtained on commercial terms

from the central bank, other financial institutions, the money market, and from bilateral and

multilateral aid organizations.

3.4 Loan Products

There are six major types of loan products in Grameen Bank’s loan portfolio. The description of

these loan products are provided below:

Basic Loan:

Grameen Bank provides Tk 10,000 to Tk 15,000 to each borrower. Generally this loan granted

for any activity that generates income such as rice-husking, machine repairing, pottery and

garment making, weaving, and buying of milk cows, goats, etc. Installments needs to be paid on

a weekly basis.

Flexible loan:

It is mainly a rescheduled loan. The introduction of this loan in GB‘s lending portfolio represents

an important step towards softening some of the control which operates in the organization.

Generally it is granted when members cannot make their payments in assigned time. A member

cannot get any other loan in the meantime.

Higher Education loan:

Loan products

Basic LoanFlexible

Loan

Higher Education

Loan

Housing Loan

Struggling Member Loan

Village Phone Program

Figure -3: Types of loan products

This loan is mainly provided to the children of the borrowers. It is applicable after the 12th

grade. Interest rate in this case is 5%. One does not have to pay any interest during current

enrollment plus one year after. Borrower will have to repay the loan in monthly basis.

Grameen Housing Loans:

In 1984, Grameen applied to Central Bank for help setting up a housing program for its

borrowers. Their application was rejected on the grounds that the $125 suggested loan could not

possibly build a suitable living structure. Grameen changed tactics and instead applied for a

“shelter loan”. They were again rejected, this time on the grounds that Grameen could not afford

“non-income generating” loans. Grameen then applied a third time, this time applying for a

“factory loan”, the explanation being that “…borrowers look after their children while they work

and they earn money from their work. Most of this activity is performed in their own homes.

Since their homes are places of work, we choose to call them factories.” Grameen was rejected

for a third time.

After this third rejection, Muhammad Yunus, the bank’s founder, met personally with the Central

Bank governor to plead for their application. When asked if he thought the borrowers would

repay the loans, he replied, “Yes, they will. They do. Unlike the rich, the poor cannot risk not

repaying. This is the only chance they have.” Grameen was then allowed to introduce housing

loans to their set of programs.

As of 1999, Grameen has given out a total of $190 million in housing loans to build more than

560,000 houses with near-perfect repayment.

Struggling members program:

In 2003, Grameen Bank started a new program, different from its traditional group-based

lending, exclusively targeted to the beggars in Bangladesh. This program is focused on

distributing small loans to beggars. The loans are completely interest-free, the repayment period

can be arbitrarily long, and the borrower is covered under life insurance free of cost. For

example, a beggar taking a small loan of around 100 taka may pay back only 2.00 taka per week.

Village Phone program:

The bank has diversified among different applications of microcredit. In the Village Phone

program, women entrepreneurs can start businesses to provide wireless payphone service in rural

areas. It has improved the livelihoods of farmers and others who are provided access to critical

market information and lifeline communications previously unattainable in some 28,000 villages

of Bangladesh. More than 55,000 phones are currently in operation, with more than 80 million

people benefiting from access to market information, news from relatives, and more

Loan disbursed:

Grameen bank has been the major lender of microfinance. It has almost 30%-35% contribution

on the microfinance industry. In 2003, it had disbursed 21,476 million BDT and over the decade

the amount of loans disbursed has increased enormously and in 2013 the principle loan amount

disbursed was 126,026 million BDT.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

20,000

40,000

60,000

80,000

100,000

120,000

140,000

21,46725,873

39,183

49,871 50,430

62,105

79,408

96,149

108,539

118,609126,026

Loan disbursed ( Principal amount)

In 2003 Grameen bank has provided microfinance opportunities to 3.2 million people over the

year the number of people who receive microfinance loans from grameen Bank has increased

geometrically. In 2010 Grameen bank has provided loan to 8.61 million people which is the

highestand in 2013 Grameen Bank has provided loans to 7.4 million people.

Figure-4 : Total Amount of loan distributed

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

1

2

3

4

5

6

7

8

9

10

No. of people who got loan

3.5 Saving products

Grameen Bank claims that they give higher interest on savings deposit than other banks in Bangladesh. They take savings from both borrowers and Non- borrowers. There are several schemes for saving, these explained below:

Figure-5: Number of people who got loan

Personal Savings:

This savings is open to all nationals and one can deposit and withdraw anytime in a day. It offers an interest of 8.5 %. Generally every borrower in GB has savings with a minimum of 10 to 20 tk deposit which is required weekly.

Grameen Pension Scheme:

Generally borrowers and employees can open this account. In this case one needs to deposit in a monthly basis. There are different kinds of schemes like

5 years scheme @10% interest

10 years scheme @ 12% interest

Less than one year @ no interest

Less than three year @8% interest

3-5years @10% interest

Fixed Deposit:

This deposit is open to all. In this case there are three types of scheme:

1year scheme @ 8.75% interest

Savings products

Personal Savings

Grameen Pension Scheme

Fixed DepositDouble in 7

year

Monthly Profit

Scheme

Figure -6: Types of savings products

2years scheme @ 9.25% interest

3years scheme @ 9.5% interest

Double in 7 year:

This deposit scheme is also open to all. In this case, the depositor will get either 10.4 % interest or double of the principle amount after 7 years.

Monthly Profit Scheme:

It is open to all. In this case 1000k taka will receive 850 taka profit.