D Da at te e o of f S Su ub bm mi is ss si io on n: :

F Fe eb br ru ua ar ry y 0 07 7, , 2 20 01 13 3

State of Microfinance in
Bangladesh
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State of Microfinance
in Bangladesh


Submitted To:
Professor M. A. Baqui Khalily
Department of Finance
University of Dhaka




Submitted By:
GROUP # 08
MBA 13
th
Batch
Department of Finance
University of Dhaka







Department of Finance
University of Dhaka

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Group Members

Group # 8

Name BBA ID MBA ID Comments

Md. Imran Hossain

11

573
Group Leader

Subarna Roy

35

557


Md. Mahfuz Alam

97

613


Md. Monsur Rahman

117

497


Thamina Tamanna

153

617



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Statement of Contribution

Name MBA
ID
Data
Down-
load
Reading Analysis Regres
sion
model
Typing Data
Compi
-lation
Report
Struc-
turing
PPT
Slide
s
Md. Imran
Hossain

573

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes
Subarna
Roy

557

Yes

Yes

Yes

Md.
Mahfuz
Alam

613

Yes

Yes

Yes

Md.
Monsur
Rahman

497

Yes

Yes

Yes

Thamina
Tamanna

617

Yes

Yes

Yes




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Letter of Transmittal

February 07, 2013

Professor M. A. Baqui Khalily
Department of Finance
University of Dhaka

Subject: Submission of the assigned report.

Dear Sir,
As per your instruction, we have prepared a report titled State of microfinance in
Bangladesh. This report will provide you the information about different aspects of
expansion &outreach of MFIs in Bangladesh, cost structure of MFIs as well as their financial
sustainability analysis from various perspectives. Also you will get information about the
regulation o MFIs and their various major issues & challenges.
I hope you will appreciate our sincere effort & accept this report and oblige thereby.

Sincerely Yours,
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.
Md. Imran Hossain
Group Leader
Group # 08
MBA 13
th
Batch
Department of Finance
University of Dhaka


Executive Summary

This study focuses on the State of Microfinance in Bangladesh and the term State has
been defined in terms of 5 parts such as: (i) History & Development of MF (ii) Financial
structure & Sustainability of MFIs (iii) Impacts of MF (iv) Regulation of MF and (v)
Challenging issues of MF.

The first part History & Development of MF shows that the microfinance sector of
Bangladesh has been performing very well after its rebirth in 1983, especially over the last
few years. The sector has been expanding their operations & outreach at a greater rate. The
time series data analysis about the microfinance sector of Bangladesh is a great matter of
hope that this sector has been contributing to the economic development of our rural as well
as the aggregate economy.

Up to June 2011, there were 576 licensed MFIs in Bangladesh and they had 18066 branches,
26.08 million clients, 20.65 million borrowers, TK 173.8 billion loans outstanding and Tk
63.3 billion savings. They have created direct job opportunities for over 1,11,800 people
among which 80% are male & 20% are female. The microfinance industry of Bangladesh has
a large contribution to the financial system of Bangladesh. It contributes 7.33% of the
countrys entire financial system.

Among the all licensed MFIs, only 21 medium, 16 large and 3 very large MFIs operating in
Bangladesh, together they constitute only 8%. The rest 92% NGO-MFIs are still either small
or very small covering not more than 17 percent share of the market in terms of outreach and
operations. It is observed that only 3.68 percent of the institutions (very large and large) are
serving 75.88% of the borrowers, and have control over 75.87% of loan amount and 75.85%
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of savings in the year 2010. Although the number of very small MFIs is very high, their
growth rate is negative. The growth rate of very large MFIs is also negative. But the small,
medium and large MFIs are increasing their market share as they have positive growth rate
over the last few years.

The analysis clearly shows evidences of development of different indicators of microfinance
sector in recent years. During the years, microcredit deepened in terms of volume. Also its
significant contribution was visible compared to important national sectors, such as, domestic
credit, rural credit, and agricultural GDP.




Although MFIs started their journey with only 2 types of products such as- credit & savings,
now there are many types of products offered by MFIs to their members & borrowers. MFIs
are now providing various products to their clients & members such as: Micro-enterprise
loan, Micro-insurance, education loan, housing loan, health insurance, remittance,
conditional cash transfer, training, seasonal loan, loans for extreme poor etc.

The global comparison of MF also shows that the performance of Bangladeshi MFIs is better
compared to other SAARC countries i.e. Nepal, Afghanistan, Maldives & India over the last
10 years in terms of outreach (no. of borrowers, members, savings & loan outstanding
balance) and portfolio performance indicator ratios (portfolio as risk, Operational &
Financial self-sufficiency). The main reason for this better performance of Bangladeshi MFIs
may be due to the fact that Bangladesh is the birth place of microfinance and this program
started firstly in this country and then the management quality of the MFIs as well as the
MRA is satisfactory.

The second part Financial structure & Sustainability of MFIs shows that in the initial years,
MFIs were operating mainly with the help of donor funds before 90s. But the MFIs
established after 90s have less dependency on donor funds and more dependency on the
borrowing from wholesale lending given by PKSF and the commercial banks. It is observed
that although the commercial banks are recently considered a potential source of fund of
microfinance, their share of the total source of fund did not increase over the last three years.

The comparative analysis of the sources of funds of ASA, BRAC, GB & BURO BD shows
that ASA has the highest amount of equity & reserves, Grameen bank has the highest amount
of member savings, BRAC has the highest amount of grants from donors & borrowings from
commercial banks & other sources in the last 10 years.

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The regression analysis shows that GB has less expense preference behavior than the other
non-GB MFIs (BRAC, ASA & BURO BD). This is due to the fact that the non-GB MFIs are
mostly funded by the donor funds or subsidized funds. Our result is consistent with the
findings of Khalily & Imam that Grameen Bank has less expense preference behavior than
Non-GB MFIs not borrowing from PKSF. Also they found that PKSF funded MFIs have
least expense preference behavior.

In the third part Impacts of MF, it is clear that microfinance can be a critical element of an
effective poverty reduction strategy. Improved access and efficient provision of savings,
credit, and insurance facilities in particular can enable the poor to smoothen their
consumption, manage their risks better, build their assets gradually, develop their micro
enterprises, enhance their income earning capacity, and enjoy an improved quality of life.

Microfinance is now recognized as an important tool towards the achievement of Millennium
Development Goal of poverty alleviation. This sector is now the pivotal part of our rural
financial market. The sector is also getting popularity and expanding rapidly among the
urban poor who are still lacking the access to formal financial market. Moreover, this sector
is reducing the poverty level through employing a considerable number of people in different
types of economic activities.

Microfinance increases employment and income of households that leads to improved quality
of life as indicated by reduced food insecurity, improved housing, health, sanitation and
education and formation of assets in many different forms. However, it should be noted that
finance alone did not lead to such changes but other developmental and macro-factors have
definitely contributed positively or negatively.

The fourth part Regulation of MF shows that significant increase in MFI numbers, the need
for ensuring appropriate fund utilization, establishing institutional structure, financial and
operational accountability and transparency called for the create of a regulatory and
supervisory environment. MFIs needed sound legal basis to get access to different fund
sources. This sector is now under close supervision and guidance of the newly formed
Microcredit Regulatory Authority in 2006 and this authority is now working closely with
the sector.

It could be concluded that regulation has brought more benefits than costs to the industry
itself and to all its stakeholders. MFIs have shown a noticeable strengthening of their
financial performance, scale and outreach of their operations under regulation, which have
benefited themselves by more integrated with the financial system. Microfinance clients have
benefited from better access to financial services, in terms on quantity, quality and variety of
products. Investors have been more interested in participating in the Bangladesh
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microfinance market because of more confidence in a regulated system. MRA has acted as a
facilitator for enhancing the growth and development of microfinance institutions.

The fifth part Challenging Issues of MF shows that Bangladesh microfinance sector is now
facing new challenges of other emerging issues such as continued vulnerability of poor due
to external factors, overlapping of microcredit services, political economy of MF, lack of
new and more demand-driven products etc.

So, the vision of microfinance in Bangladesh is very clear, that is- not only alleviate the
poverty but also play as a vital socioeconomic development mechanism. It is such an
instrument which is capable to eradicate the poverty from the below and eventually it helps
to maintain a peaceful society.


Executive summary.VI-VIII

Chapter-1: Introduction.1
1.1 Rationale for the study...2
1.2 Objectives of the study...2
1.3 Methodology..3
1.4 Limitations..........7

Part-One: Microfinance: Theory & Evidence.8

Chapter-2: Literature review9

Chapter-3: Role of Finance in Economic Growth 15
3.1 Elements of growth..16
3.2 Role of Finance in Economic Growth.17
3.3 Access to Finance & Economic growth..19
3.4 Role of finance at Macro level20
3.5 Role of finance in Micro level: (Individual level)..21
3.6 Role of finance in Micro level: (firm level)22

Chapter-4: Approaches to Rural Finance..23
4.1 Traditional Approach...24
4.2 Pitfalls of Directed credit programs25
4.3 Financial Market Approach.30

Table of Contents

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Chapter-5: Emergence of MFIs..34
5.1 Rural financial Markets in Bangladesh and the role of MFIs.35
5.2 Financial Market Failure and Birth of MFIs....36
5.3 Definition of Microfinance..37
5.4 Characteristics of Microfinance..38
5.5 Microfinance Cycle.39
5.6 MFIs Design.40

Chapter-6: History of Microfinance ..40
4.1 History of Microfinance in the World.41
4.2 History of Microfinance in Bangladesh...41

Chapter-7: Development of MF sector in BD....43
7.1 Microfinance Sector Structure in Bangladesh...44
7.2 Comparison of Market Share of Different NGO-MFIs.45
7.3 Growth rate of Different Types of NGO-MFIs.47
7.4 Structure of MFIs Sector (Three very large MFIs)...48
7.5 Division wise Distribution of Licensed NGO-MFIs..52
7.6 Product Diversification....53
7.7 Micro-enterprise loan.54
7.8 Micro-insurance..55
7.9 Outreach of MF Sector56
7.10 Deepening of Microcredit.61
7.11 Performance Comparison by Licensing Status.63
7.12 Trends & Growth of MF by Gender & Area using Panel data65

Chapter-8: Global Comparison of Microfinance 71
8.1 Microfinance Scenario around the World.72
8.2 Global Microfinance penetration..74
8.3 State of Microfinance Scenario in Bangladesh.75
8.4 Comparative Performance Analysis of 5 Countries..76

Part-Two: Financial structure & Sustainability83

Chapter-9: Sources of funds of MFIs84
9.1 Fund compostition of MF sector in BD85
9.2 Sources of Fund of ASA 2011..86
9.3 Sources of Fund of Grameen Bank (2011) .86
9.4 Sources of Fund of BRAC (2011) .......87
9.5 Sources of Fund of BURO Bangladesh (2011) .......87
9.6 Comparative analysis of Sources of funds .........88

Chapter-10: Sustainability of MFIs....90
10.1 Comparative analysis of Sustainability (SDI & ESII)..91
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10.2 Components of ESII..93
10.3 Regression analysis: Funding & Subsidy on Profitability.....97

Chapter-11: Expense Preference Behavior of MFIs.98
11.1 Expense preference as management behavior of MFIs99
11.2 Regression Analysis for expense preference behavior...100

Part-Three: Impacts of Microfinance.104

Chapter-12: Effects & Impacts of Microfinance...105
12.1 Effects of Microfinance...106
12.2 Impacts of Microfinance..107
12.2.1 Impacts on Asset Accumulation...107
12.2.2 Impacts on reducing Vulnerability...108
12.2.3 Impacts on Consumption & Poverty reduction110
12.2.4 Impacts on Women empowerment...110
12.2.5 Impacts on economic development..112
12.2.6 Impacts of MF on poverty alleviation..113
12.2.7 Impacts of Microfinance on achieving MDGs.....117
12.2.8 Economic and Social Impacts of MF...119

Part-Four: Regulation &Challenging issues of MF120

Chapter-13: Regulation of Microfinance...121
13.1 Rationale for regulation of Microfinance..122
13.2 Global Approaches to MFI regulation...127
13.3 Prudential vs. non-prudential regulation.....128
13.4 Impact assessment method: Causal-chain analysis....129
13.5 Regulatory Attempts in Bangladesh...130
13.6 Establishment of Microcredit Regulatory Authority.132
13.7 Impacts of Regulation.132
13.8 Regression Analysis: Impacts of Regulation on Profitability.133

Chapter-12: Major issues & Challenges......135
14.1 Operational and Organizational Challenges of MFIs.136
14.1.1 Drop Outs.136
14.1.2 Rising Costs..136
14.1.3 Staffing Challenges..136
14.1.4 MIS and Accounting Challenges..136
14.1.5 Legal Challenges...137
14.1.6 Inefficiencies tied to reliance on donors..137
14.2 Major Challenging Issues & Future Directions..137
14.2.1 Reaching the Hardcore Poor....137
14.2.2 Financial sustainability versus serving the poor..137
14.2.3 Higher Interest Rate..137
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14.2.4 Political economy of Microfinance..138
14.2.5 Multiple Borrowing (Overlapping).138
14.2.6 Micro-enterprise development: Scaling up of MF139
14.2.7 Resource Mobilization.140
14.2.8 Portfolio Quality140
14.2.9 Application of ICT140

Findings & Conclusion...141
Reference.143
Appendix.145



ACRONYMS

ASA Bangladeshi NGO (formerly Association for Social Advancement)
BBS Bangladesh Bureau of Statistics
BDT Bangladesh Taka
BEES Bangladesh Extension Education Services
BIDS Bangladesh Institute of Development Studies
BRAC Building Resources Across Communities (Largest NGO)[Formerly
Bangladesh Rural Advancement Committee]
BRDB Bangladesh Rural Development Board
CARB Center for Agricultural Research-Barind (a Bangladeshi MFI)
CDF Credit and Development Forum
CIDA Canadian International Development Agency
CPD Centre for Policy Dialogue
FSP Financial Service for the Poorest
FSS Financial Self-sufficiency
FY Fiscal Year
GB Grameen Bank
InM Institute of Microfinance
MFI Microfinance Institution
MRA Microcredit Regulatory Authority
NGO Non-Government Organization
OSS Operating Self-sufficiency
PDBF Palli Daridra Bimochan Foundation
PKSF Palli Karma-Sahayak Foundation
PO Partner Organization (of PKSF)
ROA Return on Asset
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RRA Rapid Rural Appraisal
SHG Self-help Group
SME Small and Microenterprise
SSS Society for Social Services
TMSS Thengamara Mahila Sabuj Shangha (an NGO)
URDEP Upazila Resource Development and Employment Project