Chapter- One

Introduction

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1.1 Introduction:
In recent years, microcredit, in its wider dimension known as microfinance, has become a much favored intervention for poverty alleviation in the developing countries and least development countries. There is scarcely a poor country and development oriented donor agency (multilateral, bilateral and private) not involved in the promotion (in one form or other) of a microfinance program. Microfinance programs claim many achievements as its impact and an outside observer cannot but wonder at the range of diversity of the benefits claimed. Although Bangladesh has huge potential for development, it is, for various socio-economic reasons, among the poorest countries in the world. About half of the country's population lives below the poverty line with 80% in the rural areas. The burden of poverty falls disproportionately on women, who constitute half of the total population. Logically, therefore, poverty alleviation and creation of rural employment are top priorities in the development agenda of the government of Bangladesh (GOB) which has adopted a broad based approach to poverty alleviation, emphasizing macroeconomic stability, economic liberalization, and support for a number of government agencies and non-government organizations (NGOs). Substantial progress has been made in implementing the microcredit program (MCP), and the scope for its efficient expansion is enormous. Considering the significance of microfinance program in poverty alleviation in Bangladesh, I have selected this topic for preparing my internship report.

1.2 Objective of the Report:

The objectives of this report can be divided into mainly two segments such as: Overall Objective: The overall objective of the report is to comprehensively analyze the success of microfinance in Bangladesh. Specific Objectives: The specific objectives of this report are to Scrutinize the rationale for Microfinance in Bangladesh. Analyze the development, nature & activities of MFIs in Bangladesh. Identify the determinants of scaling-up of MF in BD. Analyze the impacts of MF on poverty reduction, women empowerment & others. Determine the major issues & challenges as well as future directions of MFIs in BD.

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1.3 Scope of the Report:

This report covers an enormous area related to microfinance in all over the world, in particular, in Bangladesh. The scope of this report can be divided in mainly four segments as following: Regional Scope: As Bangladesh is the formal birthplace of microfinance, actually the evolution and current status of microfinance sector of Bangladesh are emphasized in this report. This report covers all areas of Bangladesh but especially the northern & southern part of Bangladesh where poverty is more and no. of MFIs are higher than other countries. Periodical Scope: This report covers the period from 2000 to 2010. Besides, the report also shows statistical & graphical information of microfinance since from the evolution of microfinance in Bangladesh. Institutional Scope: This report considers all the MFIs (Regulated & Non-regulated) operating in Bangladesh. However, it emphasizes the main three big MFIs in Bangladesh namely Grameen Bank, ASA and BRAC. Analytical Scope: In this report, the historical information of the MFIs in Bangladesh is mainly presented. Many tables & graphs in this report are shown based on the time series analysis and cross-sectional analysis. This report also contains the empirical results of various studies done by the microfinance scholars who did their studies based on various statistical & microfinance models.

1.5 Methodology:
This report primarily contains the secondary and published information. The major sources of information are the published research reports and papers, unpublished reports from reputable organizations, data from major institutions such as PKSF, InM, Microcredit Regulatory Authority (MRA), Grameen Bank, BRAC, ASA, some smaller but growing microfinance institutions, network agencies such as Credit and Development Forum (CDF), several international non-governmental organizations (NGOs) operating in the country, commercial banks, Bangladesh Bank (Central Bank) etc. The information was collected mostly from the websites of various organizations via internet. And some information has been collected from some reputed handbooks on microfinance. Basically time series analysis and cross-sectional analysis have been done in this report to compare the performance of the MFIs of Bangladesh. MS Word, MS Excel have been used for these calculations, graphical presentation and overall, in preparing this report.

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1.6 Data Limitation:

A major challenge during producing this report was absence of comparable and up to date data sets. Credit and Development Forum (CDF) used to publish a consolidated report on the sector but the latest published report presents data of 2006. Microfinance institutions also do not follow same reporting dates: some follow financial year and others calendar year. Definitions also vary, e.g. microenterprise loan of one MFI may be considered mainstream microcredit in another MFI. Lack of availability of programmatic as well as financial information for individual financial product is a big challenge for analyzing viability of individual product. For example, hardcore poor and marginal/small farmers are merged with mainstream client groups in some MFIs whereas these are separate programs for others. Segregation of income and expenditure data according to product is rare. Therefore, data have been updated and segregated wherever practicable and estimated in other cases. Anyone should not treat information about outreach, institutions or programs presented in this report as exhaustive.

1.7 Organization of the Report:

The organization of the report is as follows: Chapter 1 presents very brief background about the study, objectives of the study, methodology and limitation of the report. Chapter 2 provides the definition & characteristics microfinance, difference between microfinance & microcredit, a brief history of microfinance in the world etc. Chapter 3 scrutinizes the rationale or need for microfinance in Bangladesh as well as its importance in achieving the MDGs. Chapter 4 reflects on the historical development of microfinance sector in Bangladesh, its current status, time series analysis & other statistics of the MFIs operating in Bangladesh. Chapter 5 deals with literature review of the microfinance scholars across the world and the results of their studies done with different methodologies. Chapter 6 presents the main determinants/ success factors that helped microfinance become successful in Bangladesh. Chapter 7 reports on impact of microfinance on poverty reduction, women empowerment as well as other socio-economic benefits of microfinance in Bangladesh. Chapter 8 identifies the major issues & challenges being faced by the MFIs of Bangladesh. Chapter 9 deals with the findings of the report & recommendations to improve the present condition of the microfinance sector of Bangladesh. Appendix represents the salient features of my internship organization- Institute of Microfinance (InM).

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Chapter-Two

About Microfinance & Related Concepts

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2.1 Definition of Microfinance:

Microfinance has evolved as an economic development approach intended to benefit lowincome women and men. The term refers to the provision of financial services to low-income clients, including the self-employed. Financial services generally include savings and credit; however, some microfinance organizations also provide insurance and payment services. In addition to financial intermediation, many MFIs provide social intermediation services such as group formation, development of self-confidence, and training in financial literacy and management capabilities among members of a group. Thus the definition of microfinance often includes both financial intermediation and social intermediation. Microfinance is not simply banking, it is a development tool. Microfinance activities usually involve: Small loans, typically for working capital Informal appraisal of borrowers and investments Collateral substitutes, such as group guarantees or compulsory savings Access to repeat and larger loans, based on repayment performance Streamlined loan disbursement and monitoring Secure savings products. The term microfinance is an umbrella term rather than a precise term. It encompasses a wide array of large and small financial institutions with differing financial products offered at widely differing interest rates, operating with different business goals, and seeking different customer bases. Microfinance refers to a variety of financial services that target low-income clients, particularly women. Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers." More broadly, microfinance refers to a movement that envisions a world in which lowincome households have permanent access to a range of high quality and affordable financial services offered by a range of retail providers to finance income-producing activities, build assets, stabilize consumption, and protect against risks. These services include savings, credit, insurance, remittances, and payments, and others. According to James Roth, Microfinance is a bit of a catch all-term. Very broadly, it refers to the provision of financial products targeted at low-income groups. These financial services include credit, savings and insurance products. A series of neologisms has emerged from the provision of these services, name micro-credit, micro-savings and micro-insurance. The Canadian International Development Agency (CIDA) defines microfinance as, the provision of a broad range of financial services to poor, low income households and microenterprises usually lacking access to formal financial institutions Page | 6

2.2 Characteristics of Microfinance:

It is already proved by the pioneer Dr. Muhammad Yunus that, the poor who do not have any possession to collateral at any types of sources of financial intermediaries in order to obtain a little amount of loan are bankable indeed. These poor people are micro-entrepreneurs who have the proven record that they are not only able to repay both the principal of the loan amount and the interest on the principal amount on time but also they can make savings and developing their income generating activities. Thus microfinance gives access to financial and non-financial services to a very low income people in order to start their income generating activities. The individual loans and savings of the poor clients even though very small but have created a disciplined microfinance which has created financial products and services that collectively have enabled the low-income people to become clients of a banking intermediary. The characteristics of microfinance products can be stated as follows (Murray, U. and Boros, R. 2002): Little amount of loans and savings. Short-term loan (usually up to the term of one year). Payment schedules attribute frequent installments (or frequent deposits). Installments made up from both principal and interest, which amortized in course of time. Higher interest rates on credit Application procedures are simple. Short processing periods (between the completion of the application and disbursement of the loan). The clients who pay on time become eligible for repeat loans with higher amounts. The use of tapered interest rates (decreasing interest rates over several loan cycles) as an incentive to repay on time. Large size loans are less costly to the MFIs, so some lenders provide large size loans on relatively lower rates. No collateral is required contrary to formal banking practices.

2.3 Microfinance products:

Since the clients of microfinance 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 nontraditional methodologies, such as group lending or other forms of collateral not employed by the formal financial sector.

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A chart is given below to illustrate the types of microfinance products used by poor people: Figure 2.1: Types of microfinance used by poor people

Products common used in the microfinance sector today is: Micro savings It is a possibility to save money without any minimum balance that allows people to retain money for future use or for unexpected costs. In SHGs the members save small amounts of money, as little as a few Tk a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from household emergencies to school fees. As SHGs prove capable of managing their funds well, they may borrow from a local bank to invest in small business or farm activities. Micro insurance It gives the entrepreneurs the opportunity to focus more on their core business which drastically reduces the risk affecting their property, health or working possibilities. There are different types of insurance services like life insurance, property insurance, health insurance and disability insurance. Micro leasing For entrepreneurs or small businesses who cant afford buy at full cost they can instead lease equipment, agricultural machinery or vehicles. Often there is no limitation of minimum cost of the leased object. Money transfer A service for transferring money, mainly overseas to family or friends. Money transfers without opening current accounts are performed by a number of commercial banks through international money transfer systems such as Western Union, Money Gram etc. MFIs also use this product to serve the poor people in the villages.

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2.4 Microfinance vs. Microcredit:

In the literature, the terms microcredit and microfinance are often used interchangeably, but it is important to highlight the difference between them because both terms are often confused. Sinha (1998, p.2) states microcredit refers to small loans, whereas microfinance is appropriate where NGOs and MFIs supplement the loans with other financial services (savings, insurance, etc). Therefore microcredit is a component of microfinance in that it involves providing credit to the poor, but microfinance also involves additional non-credit financial services such as savings, insurance, pensions and payment services. Microfinance is a form of financial development that has primarily focused on alleviating poverty through providing financial services to the poor. Most people think of microfinance, if at all, as being about micro-credit i.e. lending small amounts of money to the poor. Microfinance is not only this, but it also has a broader perspective which also includes insurance, transactional services, and importantly, savings.

2.5 Microfinance Cycle:

The basic premise under which all MFIs operate on is that microfinance helps to reduce poverty by giving loans to people who would otherwise not have access to loans or financial products. The chart below gives a basic overview of the Microfinance cycle:

Figure 2.2: Microfinance Cycle

Source: Internet

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The cycle starts when an MFI qualifies an individual for a small loan. The borrower must often prove to the MFI that they possess a skill-set or a basic plan of how they will use the MFIs money to start and sustain a small business. The businesses opened by borrowers usually produce small mercantile products. Once a loan is repaid, the expectation is that a person has developed a sustainable business that will eventually pull the borrower out of poverty and will also help build the local economy. By repeating this process with multiple people in a village or region, the increased concentration of businesses in that village or region will increase its total spending power. This will lead to a reduction of poverty by creating a demand for more business that will eventually bring more commerce to the community. Thus, whole villages and geographic areas will be pulled out of poverty. The microfinance chart above visually portrays only the basic cycle of the microfinance process.

2.5 Microfinance Clients:

Typical microfinance clients are poor and low-income people that do not have access to other formal financial institutions. Microfinance clients are often self-employed, household-based entrepreneurs. Their diverse microenterprises include small retail shops, street vending, artisanal manufacture, and service provision. In rural areas, micro-entrepreneurs often have small income-generating activities such as food processing and trade; some but far from all are farmers.

2.6 History of Microfinance in the World:

Microfinance is not a new development. Some developed countries as well as developing countries particularly in Asia have a long history of microfinance. During the eighteenth and nineteenth centuries, in number of European countries, microfinance evolved as a type of the informal banking for the poor. Informal finance and self-help have been at the foundation of microfinance in Europe. The early history of microfinance in Ireland can be traced back to 18th century. It is a history of how self-help led to financial innovation, legal backing and conductive regulation, and creating a mass microfinance movement. But the unpleasant regulations promoted by commercial banking brought it down. The so-called Irish loan funds appeared in early eighteenth as charities, initially financed from donated resources and offering interest free loans. They were soon replaced by financial intermediation between savers and borrowers. Loans were granted on short-term basis and installments were scheduled on weekly basis. To enforce the repayment, monitoring process was used (Seibel Hans D. October, 2005). Though Professor Dr. Muhammad Yunus and his established Grameen Bank was awarded equally 2006s Nobel Peace prize for their efforts to create economic and social development from below by providing the first microfinancing to the poor in Bangladesh; knowledge of microcredit has come a long way according to the world history. Shore bank was the first microfinance and community development bank founded 1974 in Chicago. During the mid of 1800s the theorist Lysander Spooner was writing the benefits from small credits to the entrepreneurs and farmers to get the people out of poverty. But it was at the end of World War II with the Marshall plan the concept had a big impact. A renowned economical historian Timothy Guinnane at Yale has been doing some research on Page | 10

Friedrich Wilhelm Raiffeisens village bank movement in Germany. The bank was founded in 1864 and had reached 2 million rural farmers by the year 1901. The research means that it was already proved at that time; microcredit could pass the two tests - concerning peoples payback moral and the possibility to provide the financial service to the poor. Another organization in Quebec named The Caisse Populaire movement grounded by Alphone and Dorimne Desjardins, which was also concerned about the poverty, and passed microcredits those two tests. They founded the first Caisse between 1900 and 1906 and in order to govern them they passed a law in the Quebec assembly; they risked their private assets and consequently they must have been very sure about the idea of microcredit. But todays use of microfinancing term and modern microfinancing shaping has roots in the 1970s by the microfinance pioneer Dr. Muhammad Yunus and his established Grameen Bank in Bangladesh. A new wave of microfinance initiatives introduced many new innovations into the sector at that time, many experiment began to the poor with loan by many pioneering enterprises. The fact was revealed from the experimental programs that, the poor people can be relied on repay their borrowed amount and thus made possible to provide financial services to the poor people through market based enterprises without subsidy and that is the main reason why microfinancing was dated to the 1970s (Microfinance news and information). The evolution of microcredit programs for the poor in Bangladesh was embedded from an experimental project, which was first tried by the father of microfinance Dr. Muhammad Yunus in 1976. According to Shahidur R. Khandker (1998), the project was a test whether the poor were creditworthy and whether the credit could be provided without physical collateral. Later on, Yunuss project was supported with the assistance of the central bank of Bangladesh and fund provider IFAD. The project became successful almost seven years of experimentation and thus Yunus established The Grameen Bank in 1983. In 1972, BRAC established in Bangladesh as a charitable organization with a view to help relocate households displaced during the 1971 liberation war against Pakistan. F.H Abed, the founder of BRAC experienced that the relief work is inadequate to alleviate poverty in the country since he understood the causes of rural poverty. Therefore he developed BRAC as a framework for poverty alleviation. Then the government of Bangladesh launched a groupbased targeted credit approach based on the Comilla model by following the examples of Grameen Bank and BRAC. Later on, Comilla model was adapted throughout the nation as part of the Integrated Rural Development Program (IRDP), which was replaced by the name of Bangladesh Rural Development Board (BRDB) in 1982 under the Ministry of Local Government, Rural Development and Cooperatives as a semiautonomous government agency. In order to increase the income and employment opportunities for the rural poor, BRDB primarily focused on both for mens and womens skills development, training in group leadership and management, access to credit and savings mobilization, etc. Finally, this program was strengthened in 1988 by the Canadian International Development Agencys (CIDA) fund and renamed as the Rural Development Project- 12 (RD-12). Besides following the small group delivery approach of Grameen Bank, RD-12 also adopted BRACs skill development approach for promoting productivity of the poor (Shahidur, R. Khandker 1998).

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2.7 DEFINITIONS AND KEY CONCEPTS

Micro finance Institutions (MFIs): A microfinance institution is an organization, engaged in extending micro credit loans and other financial services to poor borrowers for income generating and self employment activities. An MFI is usually not a part of the formal banking industry or government. It is usually referred to as a NGO (Non-Government Organization). Empowerment: Empowerment refers to increasing the spiritual, political, social and economic strength of individuals and communities. It indicates the expression of self-strength, control, self-power, self reliance, freedom of choice and life of dignity, in accordance with ones values, capable of fighting for ones rights, independence, own decision making, being free, awakening, and capability. Economic empowerment: In our research, we have also emphasized on economic empowerment. As a consequence of economic empowerment, income, savings, employment and self-employment increases and thus reducing unemployment and indebtedness. Social Empowerment: Social empowerment refers mainly to the literacy rate and social awareness, especially of women who are much oppressed in many parts of the developing countries. We can say, in general, that is related to the participation of people in different community and political institutions, mobility and decision-making power, access to safe drinking water and sanitation coverage. Poverty: Poverty is a condition in which a person of community is deprived of the basic essentials and necessities for a minimum standard of living. Extreme Poverty/Absolute Poverty: Extreme poverty is the most severe state of poverty, where people cannot meet their basic needs for survival, such as food, water, clothing, shelter, sanitation, education and health care. Moderate poverty: It indicates the condition where people earns about $ 1 to $2 a day, which enables households to just barely meet their basic needs, but they still have go for many of the other things education, health care that many of us take for granted. Relative Poverty: It means that a household has an income below the national average income.

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Chapter- Three

Rationale for Microfinance in Bangladesh

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3.1 Need for Microfinance in Bangladesh:

Shahidur R. Khandker (1998) describes that providing the poor with access to financial services is one of the many ways to help increase their incomes and productivity. In many countries, however, traditional financial institutions have failed to provide this service (Adams, Graham, and Von Pischke 1984; Braverman and Guasch 1986, 1989; Hoff and Stiglitz 1990; World Bank 1975, 1993) and cooperative programs have been developed to fill this gap. Their purpose is to help the poor become self-employed and thus escape poverty. Many of these programs provide credit using social mechanisms, such as group-based lending, to reach the poor and other clients, including women, who lack access to formal financial institutions (Huppi and Feder 1990; Von Pischke, Adams, and Donald 1983; Yaron 1994). With increasing assistance from the World Bank and other donors, microfinance is emerging as an instrument for reducing poverty and improving the Poors access to financial services in low-income countries (World Bank 1990; Binswanger and Landell-Mills 1995). Shahidur R. Khandker (1998) also pointed out by illustrating as- Poverty is often the result of low economic growth, high population growth, and extremely unequal distribution of resources. The proximate determinants of poverty are unemployment and the low productivity of the poor. When poverty results from unemployment, reducing poverty requires creating jobs; when poverty results from low productivity and low income, reducing poverty requires investing in human and physical capital to increase workers productivity. In many countries, such as Bangladesh, poverty is caused by lack of both physical and human capital. Consequently, the best way to reduce poverty is to deal with both problems: increasing productivity by creating employment and developing human capital. Lack of savings and capital make it difficult for many poor people who want jobs in the farm and non-farm sectors to become self-employed and to undertake productive employmentgenerating activities. Providing credit seems to be a way to generate self-employment opportunities for the poor. But because the poor lack physical collateral, they have almost no access to institutional credit. Informal lenders play an important role in many low-income countries (Adams and Fitchett 1992; Ghate 1992), but they often charge high interest rates, inhibiting poor rural households from investing in productive income increasing activities. Moreover, although informal groups, such as Rotating Savings and Credit Associations, can meet the occasional financial needs of rural households in many societies, they are not reliable sources of finance for income-generating activities (Webster and Fidler 1995). Microcredit programs are able to reach the poor at affordable cost and can thus help the poor become self employed. Proponents of microcredit consider increasing the Poors access to institutional credit an important means of ending poverty (Yunus 1983). They argue that by virtue of their design such programs can reach the poor and overcome problems of credit market imperfections. In their view improved access to credit smoothes consumption and eases constraints in production, raising the incomes and productivity of the poor.

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It is explicit that microfinancing in Bangladesh is crucial; it has been playing a major role not only for the economic development, but also indicates the necessity to develop the rural financial markets. It is such an effective tool that can be used as a strategy for the poverty reduction, improve the institutional microfinance system, financial markets, empower the poor women, etc. ADB report 2000 on The Rural Asia study states that; In spite of the rapid growth of microfinance services, Rural Financial Markets in Asia are ill-prepared for the twenty-first century. About 95 percent of some 180 million poor households in the Asian and Pacific Region (the Region) still have little access to institutional financial services. Development practitioners, policy makers, and multilateral and bilateral lenders, however, recognize that providing efficient microfinance services for this segment of the population is important for a variety of reasons which are mentioned as follows (ADB report, June 2000)41 : 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 services can also contribute to the improvement of resource allocation, promotion of markets, and adoption of better technology; thus, microfinance helps to promote economic growth and development. Without permanent access to institutional microfinance, most poor households continue to rely on insufficient self-finance or informal sources of microfinance, which limits their ability to actively participate in and benefit from the development opportunities. Microfinance can provide an effective way to assist and empower poor women, who make up a significant proportion of the poor and suffer disproportionately from poverty. Microfinance can contribute to the development of the overall financial system through integration of financial market. Shahidur R. Khandker (1998) demonstrated as- by using the microfinance services to the poor in the developing country like Bangladesh has significantly reduced its poverty. For instance about 21 percent of the Grameen Bank borrowers and 11 percent of the BRAC borrowers managed to lift their families out of poverty within about 4 years of participation. These services also had a significant positive impact on the depth (severity) of poverty among the poor. Extreme poverty declined from 33 percent to 10 percent among Grameen Bank participants, and from 34 percent to 14 percent among the BRAC participants. This significant improvement of poverty reduction figures only by the two major MFIs (Grameen and BRAC) indicate us, in order to make the poor free from poverty mass microfinancing in Bangladesh is crucial.

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MFIs have also brought the poor, particularly poor women, into the formal financial system and enabled them to access credit and accumulate small savings in financial assets, reducing their household poverty. In general, many studies have shown that microfinance have also had a positive impact on specific socioeconomic variables such as childrens schooling, household nutrition status, and womens empowerment. However, researchers and practitioners generally agree that the poorest of the poor are yet to benefit from the microfinance program in most developing countries partly because most MFIs do not offer products and services that are attractive to this category (Hulme, D. & Paul Mosley. 1996). Thus, to increase the overall impact of microfinance on poverty reduction, it is essential to extend a wide range of services on a continuing basis to the poor who are still excluded from the benefits of microfinance (ADB report, June 2000).

3.2 Role of Microfinance in achieving MDGs:

In September 2000, the member states of the United Nations unanimously adopted the Millennium Development Goals (MDGs), a set of eight, specific, measurable, time-bound targets that challenge countries to improve the welfare of the worlds poorest people. There is mounting evidence to show that the availability of financial services for poor households microfinance can help achieve the MDGs in Bangladesh.

3.2.1 Eradicate extreme poverty and hunger:

Empirical evidence shows that, among the poor, those participating in microfinance programs who had access to financial services were able to improve their well-being both at the individual and household level much more than those who did not have access to financial services. Bangladesh Rural Advancement Committee (BRAC) clients increased household expenditures by 28% and assets by 112%. After more than eight years of borrowing, 57.5% of Grameen borrower households were no longer poor as compared to 18% of non-borrower households.

3.2.2 Achieve universal primary education:

Increased incomes, savings and education loan products provide poor people with the ability to invest in their childrens future, particularly in their education. Studies on the impact of microfinance on childrens schooling show that: In Bangladesh, almost all girls in Grameen client households had some schooling, compared to 60% of girls in non-client households. The schooling rate for boys was significantly higher - 81% of boys in client households received some schooling, compared to 54% in non-client households. Basic competency in reading, writing, and arithmetic among children 11 to14 years old in BRAC member households increased from 12% in 1992 to 24% in 1995, compared to only 14% for children in non-member households.

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3.2.3 Promote gender equality and empower women:

There is strong evidence that access to financial services and the resultant transfer of financial resources to poor women, over time, lead to women becoming more confident and assertive. Access to finance enables poor women to become economic agents of change by increasing their income and productivity, access to markets and information, and decisionmaking power. This empowerment is very real, and can take different forms: In Bangladesh, a survey of 1,300 clients and non-clients showed that credit clients were significantly more empowered than non-clients in terms of their physical mobility, ownership and control of productive assets (including land), involvement in decision making, and awareness of legal and political issues.

3.2.4 Reduce child mortality and Improve maternal health:

Increased earnings, savings, and, increasingly, insurance allow clients to seek out health care services earlier, before conditions deteriorate. In addition, many microfinance institutions actively promote health education. This may take the form of a few simple, preventive health care messages on immunization, safe drinking water, and pre-natal and post-natal care. Some programs provide credit products for water and sanitation that directly improve clients living conditions. In Bangladesh, a study of BRAC clients found that fewer members suffered from severe malnutrition than non-clients and that the extent of severe malnutrition declined the longer clients stayed with BRAC.

3.2.5 Ensure environmental sustainability:

There has been very little research on the specific impact of microfinance on environmental sustainability. Recently, new technologies, in particular inexpensive, reliable solar/lightemitting diode (LED) systems, have opened up the possibility of consumer lighting products that are cost-competitive with kerosene lighting, even for very poor people. The market for clean energy products is enormous; Grameen Shakti is a non-profit company, part of the Grameen family, which is distributing clean energy products in remote areas of Bangladesh. As of December 2006, it had installed 77,000 solar home systems and 500 biogas plants.

3.2.6 Develop a global partnership for development:

Microfinance alone will not bring about the achievement of the Millennium Development Goals. Government, donors and key stakeholders will need to work together on a series of strategies and activities to reduce poverty and achieve the MDGs, among them: education, health care, housing, transportation, improved agriculture, expanded markets, and access to information. That being said, access to financial services does allow people to improve their own human capital (schooling, health care) and allows for the potential for improved social capital as clients become more empowered and integrated into markets. Thus access to financial services provides the poor with the means to achieve most of the MDGson their own terms, in a sustainable way.

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Chapter- Four

Development of the Microfinance Sector of Bangladesh

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4.1 Past History of Microfinance in Bangladesh:

The growth in access to credit by the poor took place in several distinct phases over the last three decades. The origins of the current microcredit model can be traced back to actionresearch in the late 1970s, carried out by academics as well as practioners in organizations that were created to deal with the relief and rehabilitation needs of post-independence Bangladesh. The 1980s witnessed a growing number of non-governmental organizations (NGOs) which experimented with different modalities of delivering credit to the poor. The various models converged in the beginning of the 1990s toward a fairly uniform Grameenmodel of delivering microcredit. It sparked a sharp growth in access to microcredit during this decade. In recent years the standard Grameen-model has undergone more refinements in order to cater to different niche markets as well as to different life-cycle circumstances. The 1970s: Experimentation in providing credit to households considered unbankable by the formal financial system has its origins a few years after Bangladeshs independence war in 1971. The independence movement gave rise to a new generation of young activists who were keen on contributing to the reconstruction of this war-ravaged country. The new government and a myriad of aid agencies that arrived on the scene were unable to cope with the scale of destitution and non-governmental organizations emerged to meet the challenges. The early years of the NGO movement in Bangladesh focused on relief and rehabilitation with an emphasis on community development. However, by the mid-1970s, two of the NGOs that would subsequently expand in scale, BRAC and Proshika, found that elite capture was a serious impediment to their development objectives. As a result, a separate focus on the poor through a target-group approach was introduced. Moreover, an ideological debate within both these organizations began to brew, between those who favored economic tools (credit, savings etc) to support poverty reduction and those who believed that social mobilization against existing injustices would suffice and financial services were unnecessary. Around the same time a team of researchers at Chittagong University, led by Professor Yunus, began an action-research program that provided loans to poor households in a few villages. Borrowers were mobilized in peer groups composed of four or five individuals who were jointly responsible for each others repayment. It also included forming occupational groups but this was dropped in favor of village-based groups. The demand for loans grew rapidly and Professor Yunus enlisted the support of the Bangladesh Bank and commercial banks to provide the Grameen Project as it was then called with resources. The success of this experimentation paved the way for the establishment of the Grameen Bank under a special ordinance in 1983. The 1980s: In the early 1980s several NGOs experimented with different ways of delivering credit. One important mode tested was the efficacy of providing loans for group projects compared to offering loans to individuals with peer monitoring. The broad lesson was that the latter was more effective due to incentives and free-rider problems compared with lending to a group. Hence by the late 1980s the predominant model became one of providing individual loans to a target group of poor households, with peer monitoring and strong MFI staff follow-up. The Association for Social Advancement (ASA) is a classic example of this shift. Its initial Page | 19

emphasis was on forming peoples organizations mobilized for social action against oppression. It changed to the target group approach and then toward the provision of financial services in the late 1980s. Now ASA is the fourth largest MFI in Bangladesh in terms of clients and its unique low-cost credit delivery mechanism is being replicated in several other countries. ASA keeps paperwork requirements to a minimum, has decentralized most decision-making to the field and overall has a very lean operation (Chowdhury 2003). The 1980s and early 1990s were also important in the development of management capacity within several of the large MFIs which allowed them to expand their microcredit programs. What is particularly interesting is that the development of the know-how and confidence to implement large programs arose, in some cases, from the experience of scaling-up programs not related to microcredit. For instance in the case of BRAC, the first major experience with a nationwide program came about when it implemented an oral rehydration program to combat diarrheal disease. Thirteen million women were trained to use a simple but effective rehydration solution and BRAC staff were paid based on how many of their trainees used and retained this knowledge3. Early to mid 1990s: The early 1990s was the period of rapid expansion of the Grameen-style microcredit approach (Ahmed 2003)(See Figure 4.1). The growth was fueled largely by a franchising approach whereby new branches replicated the procedures and norms that prevailed in existing branches. The product that was offered to the client at the time was fairly narrow, focusing mainly on a standard microcredit package offered to all clients. The view was that it was easier to recruit new staff and train them quickly in a simple product during a phase when branches were opened at a rapid rate. This growth was clearly aided by the high population density and relative ethnic, social and cultural homogeneity in Bangladesh. Figure 4.1: Expansion of MFIs in the 1990s

Source: Ahmed (2003) Page | 20

A notable shift that took place during this expansion phase was a greater emphasis on individual borrower accountability for loan repayment and less reliance on peer monitoring. Staff follow-up of loans became more rigorous and professional with the use of computerized Management Information Systems. Donor funds also contributed to expanding the revolving loan funds for MFIs during this expansion phase. Moreover this period saw the emergence of PKSF as a wholesale financing institution. Following this expansion, a geographical mapping of microfinance suggests that all districts in Bangladesh have microcredit services, though there are many smaller pockets with little or no coverage (e.g. Chittagong Hill Tracts). A closer look shows that there is somewhat greater coverage of poor households in the central and western districts. The south-east and pockets of the north-east are areas with room for more expansion (PKSF 2003) Mid 1990s onward: Feedback from the field, academic research and international experience contributed to an increasing emphasis on providing diversified financial services for different groups of households from the mid 1990s onward. The benefits of a narrow focus on microcredit during the expansion phase was that it kept costs low, operations transparent and relatively straightforward management oversight. However, it became clear that the standard Grameen model of providing microcredit with fixed repayment schedules, with standard floors and ceilings on loans sizes, was not sufficient to meet the needs of the extreme poor or the vulnerable non-poor group. Moreover, existing microcredit borrowers also required complementary financial and nonfinancial services. The standard practice for MFIs until the late 1990s was to collect compulsory weekly savings from their clients, holding the money as a de-facto lump sum pension returned when a client left the organization. Access to these deposits was otherwise limited, which curtailed a potentially important source of consumption-smoothing. Recognizing these limitations an increasing number of MFIs in Bangladesh have introduced an open access current account scheme in addition to the fixed deposit scheme. Moreover, many MFIs have life insurance products whereby outstanding microcredit debts are written off and other benefits are paid following the death of a borrower. Non-credit services can also take the form of input supply, skill training and marketing support for microentrepreneurs. A complementary package to microcredit can also take the form of providing education for the children of borrowers. Grameen Bank for instance has a scholarship program for female secondary education and a student loan program for tertiary education. Similarly many MFIs have community health programs, legal literacy training and provide information on accessing local resources. MFIs began to experiment with catering to new niche markets as the traditional microcredit business became standardized (and horizontal expansion slowed) and required less attention. For instance several NGOs began providing larger loans to graduate microcredit borrowers and in some cases to households who were not part of the microcredit system but which wanted a microenterprise loan. These loans typically range from 20,000 taka (around $320) to 200,000 taka ($3,200). Innovative solutions are also emerging to address the problem of access to finance for the small enterprise sector. For instance, BRAC established a separate Page | 21

financial institution, BRAC Bank that focuses on lending to the smaller end of the small enterprise sector, with loans averaging 400,000 taka. Moreover, evaluation studies pointed out that extremely poor households were struggling to benefit from the standard microcredit model, even if they joined the programs. The main reasons were: (i) minimum loan floors for a first loan that sometimes exceeded their own perceived needs, (ii) fixed weekly loan repayments could be difficult to commit to in light of sharp seasonality of income, (iii) other members of peer-monitored groups sometimes do not wish to guarantee loans for extremely poor households etc and (iv) residing in remote or depressed areas. Programs that have been developed to cater for these constraints include (i) introducing more flexible repayment schedules such as ASAs Flexible Loan Program, (ii) lowering first loan floors so that amounts as small as 500 taka ($9) can be borrowed, (iii) Grameens program that offers zero interest loans to beggars, (iv) the Resource Integration Centers program that specializes in offering loans to a specific vulnerable group - the elderly poor, (v) various programs that combine food aid with microcredit and training e.g. BRACs IGVGD program, and (vi) targeting remote areas through for instance ASAs cost-effective mini-branch system and Integrated Development Foundations work in the Chittagong Hill Tracts. Figure 4.2: Structure of the Financial System & Microfinance Delivery Mechanism:

Source: Bangladesh Microfinance Review, August 2011 Page | 22

4.2 Microfinance Sector Structure:

In terms of memberships/clients (and consequently portfolio size) the structure of the microfinance sector is as follows: Three very large MFIs: Three very large organizations ASA, BRAC and Grameen Bank- dominate the microfinance sector, each having more than 7 million members/clients in 2008 (ASA 7.28 million, BRAC 8.15 million and Grameen Bank 7.67 million) all products combined (see Table 4.1). These three organizations had embarked a major lateral expansion beginning 2003/04 that led to doubling to tripling their sizes by 2008. These three MFIs have achieved spectacular lateral expansion, that is, to include new clients in same or new geographical areas by enhanced management efficiency, standardized management practices, products and policies, and mobilizing financial resources. The three combined has 8,547 branches, 19.16 million borrowers and loan outstanding of Taka 125,876 million at the end of December 2008 (ASA Taka 35,735 million, BRAC Taka 45,746 million in March 2009 and Grameen Taka 44,396.63 million). All three organizations have branch networks throughout the country except in a few remote char and coastal areas.

Large MFIs: The sector has got a group of large MFIs whose memberships vary between 50,000 to one million. All of them are PKSF partner MFIs except BURO Bangladesh. Even within the group two organizations, TMSS and BURO-B separate them from the others and have expanded more than into 40 districts with their networks. Their expansion also came during 2005-2008 period and continues. Medium Size MFIs: Above two groups are followed by organizations with 5-50,000 members (3 to 30 branches) which are local or regional organizations mostly financed by PKSF. Small MFIs: MRA has a cut-off point of 1000 membership and Taka 4 million loan outstanding for receiving license. Several hundred such MFIs operate in the country although the exact number is not known. Very small MFIs: We see even smaller NGOs with very limited resources for loan disbursement, use mostly savings, are still operating which may face extinction for not qualifying for license. Table 4.1: Structure of MFIs Sector (Three very large MFIs)

Indicators

Member (Million) 8.15 7.67 Borrower (Million) 6.38 6.90 Loan outstanding (million 45,745 44,396 Taka) Savings balance (million 11,264 16,306 64,177 Taka) Branches 3,303 2,705 2,539 Source: Compiled by author from CDF/InM

ASA (Dec. 2008) 7.28 5.88 35,735

BRAC (Dec. 2008)

Grameen (Dec. 2008)

Total of Aggregate these 3 MFIs 23.10 33 19.16 26.78 125,876 158,807 91,747 8,547 Page | 23 104,590 14,441

4.3 Times Series Analysis of Outreach and Portfolio:

Here Table 4.1 shows that an estimated 33 million members and 26.78 million borrowers (81.1%) including multiple memberships or so called overlapping are served by the sector at the end of December 2008. A total of 14,441 branches serve these members/clients. The total estimated portfolio is Taka 158,807 million of which ASA (22.50%), BRAC (28.81%) and Grameen Bank (27.96%) account for about 79.26%. The rest 20.74% is under about 700 smaller MFIs that shows heavy concentration of portfolio in these three organizations. The important issue is that the three MFIs have become so big that microfinance sector cannot afford any one of them to fail. Due to resource and management constraints the smaller MFIs are not expected to grow fast to increase market share. Such skewed structure is expected to continue. The aggregate time series data between 2003 and 2008 (see Table 4.2 to Table 4.5) shows that the sector has hugely expanded as reflected by memberships, borrowers and portfolio: membership has increased by 186%, borrowers by 199% and portfolio by 302.4%. The savings balance has also proportionately increased by 362%. Table 4.6 to Table 4.7 provides further insight about the growth pattern: the growth has actually come from the three very large organizations. Grameen has expanded 2.45 times in membership, 2.46 times in borrowers and 2.77 times in portfolio size. ASA has expanded 3.1 times in membership, 2.75 times in borrowers and 3.09 times in portfolio size. Similarly, BRAC has expanded more 2 times in membership, 1.82 times in borrowers and 2.77 times in portfolio size. The average loan outstanding per borrower was Taka 3,902 in 2003 and Taka 5,928 in 2008, an increase of only 52%. That is, average loan disbursement per borrower was Taka 7,804 in 2003 and Taka 11,856 in 2008. That would mean the disbursement size did not really increase as one would have expected. Discussion with industry experts suggest that a number of factors have caused such situation: a) resource constraints of smaller MFIs; b) risk aversion attitude of staff members; c) low absorption capacity of borrowers; d) large number of young new membership or membership switching, that affects gradual growth of loan size because new members (although she/he is experience of borrowing from other MFIs) normally start with smaller loans. Table 4.2: Aggregate time series data (Grameen Bank included) Description Branches (#) Members (#) Borrowers (#) Portfolio (Taka mill.) 2003 6,837 2004 9,165 2005 9,253 2006 11,368 2007 14,577 2008 14,441

17,754,747 20,681,349 24,373,389 27,420,570 31,367,009 33,018,926 13,457,991 15,617,075 15,617,075 15,617,075 26,119,391 26,787,120 52,510 64,354 83,651 106,411 133,375 158,807

Source: Compiled by author from CDF/InM

Page | 24

Description ASA BRAC* Grameen Bank Other MFIs**

Table 4.3: Membership growth of MFIs 2003 2004 2005 2006 2,341,819 4,065,957 3,123,802 8,223,169 2,996,660 4,858,763 4,059,632 8,766,294 5,988,134 4,837,099 5,579,399 7,968,757 6,455,979 5,310,000 6,908,704 8,745,887

2007 6,663,734 7,370,000 7,411,229 9,922,046

2008 7,276,677 8,150,000 7,670,203 9,922,046

Total 17,754,747 20,681,349 24,373,389 27,420,570 31,367,009 33,018,926 *data for 2008 are of March 2009; **CDF reported; in absence of up to date data for 2008, figure of 2007 has been repeated for 2008.

Membership growth of MFIs

12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2003 2004 2005 2006 2007 2008 ASA BRAC* Grameen Bank Other MFIs**

Source: Compiled by author from CDF/InM Table 4.4: Borrower growth of MFIs Description ASA BRAC* Grameen Bank** Other MFIs*** Total
2003 2,130,982 3,493,129 2,811,421 5,022,459 13,457,991 2004 2,771,627 3,993,525 3,653,668 5,198,255 15,617,075 2005 4,168,821 4,159,793 5,021,459 5,613,209 15,617,075 2006 5,163,279 4,550,000 6,217,833 6,382,901 15,617,075 2007 5,422,787 6,400,000 6,670,106 7,626,498 26,119,39 1 2008 5,877,440 6,380,000 6,903,182 7,626,498 26,787,120

Borrower to 75.8 75.5 77.8 81.4 83.2 81.1 member ratio (%) *data for 2008 are of March 2009; ** Estimated: 90% of members;***CDF reported; in absence of up to date data for 2008, figure for 2007 has been repeated for 2008 Source: Compiled by author from CDF/InM Page | 25

Table 4.5: Portfolio growth of MFIs (Taka in million)[December] Description 2003 2004 2005 2006 2007 ASA BRAC* Grameen Bank Other NGO-MFIs** Total 11,538 11,493 16,017 13,462 52,510 13,776 14,491 20,008 16,079 64,354 19,379 17,805 27,970 18,497 83,651 24,077 24,355 33,235 24,744 106,411 27,764 36,344 36,336 32,931 133,375

2008 35,735 45,745 44,396 32,931 158,807 5,928

3,902 4,121 4,411 4,769 5,106 Average per capita loan balance (Taka) *data for 2008 are of March 2009; **CDF reported; in absence of up to date data for 2008, figure for 2007 has been repeated for 2008 Source: Compiled by author from CDF/InM

Member Savings
Total savings balance in 2008 was Taka 104,590 million (see Table 5.6).The average savings balance per person did not register much growth because almost all MFIs except BRAC have made savings withdrawal easy. This is also reflected in the withdrawal rate: 70.85% withdrawal in 2007 (see Table 5.7). Besides, the average savings per week has not also increased much, varies between Taka 10-50 per week. MRA has stopped collection of time deposit, that is, deposit of small savings per week to receive a lump-sum at the end of 3 to 5 years. Whereas this type of savings in Grameen Bank, called GPS, is the most popular savings product among the members.

Table 4.6: Savings balance (Taka in million) Description ASA* BRAC Grameen Bank ** Other NGO-MFIs*** 2003 2,804 6,285 13,306 6,471 2004 2,828 7,657 20,717 7,322 2005 3,035 9,159 31,659 8,149 2006 7,755 10,595 44,274 10,397 2007 9,538 13,467 51,918 12,843 2008 11,264 16,306 64,177 12,843

28,866 38,524 52002 73,021 87,766 104,590 Total (Taka in million) *ASA: Includes security funds beginning 2006; **GB: Includes savings from non-members; ***CDF Reported and in absence of up to date data for 2008, the figure for 2007 has been repeated for 2008 Source: Compiled by author from CDF/InM

Page | 26

Table 4.7: Savings growth (December) Excluding Grameen Bank Items 2007 (N=535) Net savings per member (Taka) Savings withdrawal rate (%) 1,291 70.85 2006 (N=611) 1,201 69.75 2005 (N=690) 1,082 68 2004 (N=721) 1,072 67 2003 (N=720) 1,063 63

Source: Compiled by author from CDF/InM

Key Performance:
The aggregate portfolio quality of has remained high till 2007 as indicated in Table 4.8. Although overall sector information at the end of 2008 is not available at the time of preparation of the report but information from major MFIs (ASA, BRAC, Grameen and a few other large MFIs) shows that the portfolio quality has remained good except in Sidr and severely poverty stricken districts. From 2005 onwards recovery has remained above 99% and the overdue as percentage of outstanding loan was 1.52% in 2007. Although no systematic study is available but practitioners in the sector reports that loan recovery in 200809 period is in decline and portfolio quality is under stress due to economic slowdown, reduced employment opportunities in rural areas, price hike of 2008 and probably institutional weakness created due to over-expansion. Overdue as percentage of loan outstanding has increased for ASA, BRAC and Grameen between 2006 between 2006 and 2008 [Bangladesh Bank 2008]. Table 4.8: Performance Ratios (As of December) Items 2007 (N=535) 180 2006 (N=611) 203 2005 2004 2003

Outstanding borrower per credit staff (No.) Loan portfolio per credit staff (Tk.) Recovery Rate (%) Overdue - Outstanding loan ratios (%)

(N=690) (N=721) (N=720) 212 202 233

889,772 99.21 1.52

920,874 99.12 1.63

846,656 99.07 1.89

748,947 98.79 6.25

798,510 98.76 3.63

Source: CDF/InM Page | 27

4.4 Microfinance Today:

The fact that the microfinance industry has been able to provide access to credit, currently, to nearly 25 million poor households in Bangladesh is truly remarkable. There are around 535 regulated NGO MFIs and about 500 non-regulated NGO MFIs in Bangladesh but the industry is dominated by three large MFIs (ASA, BRAC, and Grameen Bank) that serve around 22 million or 87 percent of all clients. Table 5.9 illustrates the scale of these institutions. These three institutions combined have over Tk 69649 million in outstanding loans and around Tk 24880 million in savings. The differences between the number of borrowers and members reflect differences in the variety of services offered by these MFIs. BRAC offers a range of services to their members, while Grameen and ASA focus on the provision of microfinance services. Table 4.9: Microcredit Portfolios of the big Three MFIs in Bangladesh (as of December 2009)
Name of MFIs ASA BRAC Grameen Bank Total Number of Branches 3,281 2,661 2562 8,504 Clients Number 5,912,550 8,297,985 7970616 22,181,151 Borrowers Number 4,573,222 6,408,802 6426415 17,408,439 Employees Number 24,638 25,641 23283 73,562 Loan Outstanding 24,194,815,729 45,399,623,699 54714600 69,649,154,028 Net Savings Recovery Rate 99.64% 99.24% 99.46% Interest Rate Charged 15% 15% 20%

7,807,942,390 16,989,298,547 82953620 24,880,194,557

Source: Bangladesh Microfinance Statistics 2009 The largest three MFIs account for 87% of the gross loan portfolio in the microfinance industry of Bangladesh. Figure 4.3 shows that percentages which indicate that the largest 3 MFIs have a substantial portion in the total outstanding loan portfolio as of 2009. Figure 4.3: Distribution of Outstanding Portfolio 2009

Distribution of Outstanding Portfolio 2009

29% 21% 13% 37%
Grameen Bank BRAC ASA Others Source: Bangladesh Microfinance Review, August 2011 Page | 28

Contribution to the Financial System:

The microfinance industry of Bangladesh has Tk 190.4 billion of credit outstanding, which amounts to 7.33% of the Tk 2597 billion outstanding in the countrys entire financial system. Figure 5.4 shows this statistic below. This is significant relative to the equally large Indian microfinance sector, which contributes just 0.64% to the Indian financial system. Figure 4.4: Microfinance as part of the Financial System

MF as part of the Financial System

7.30%

MF portfolio
92.70%

Bank Credit

Source: Bangladesh Microfinance Review, August 2011 Though there are a few hundred NGO-MFIs operating in the market, the two very large organizations occupy the major share. Figure 5.5 indicates market shares of different types of institutions in terms of borrowers served, loans and savings portfolios of these institutions. 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% of savings. Figure 4.5: Market Share of Different Types of NGO-MFIs (June 2009)

Source: (NGO-MFIs in Bangladesh, Volume-6, June 2009; Published by-MRA) Page | 29

4.5 Fund Composition:

Previously donor driven NGOs are now increasingly trying to become more dependent on local fund with the decline of foreign fund, which stood at 3.10% in 2009. Savings from the clients and surplus income from microcredit operations appeared as two major sources of fund during this period. Table 5.10 shows sources of fund of the microfinance sector for the year 2008 and 2009. As of June 2009, contributions from clients saving and cumulative surplus were 30.62% and 28.01% respectively. PKSF, the government owned wholesale funding agency, provides a large portion of loan fund at a subsidized rate. However, contribution of PKSF in total fund has been declining from 18.50% in 2008 to 15.62% in 2009. It is observed that commercial banks are now considering microfinance as potential sector for investment. 18.86% of total fund was contributed by the banking sector in 2009. Table 4.10: Sources of Fund of NGO-MFIs

Source: (NGO-MFIs in Bangladesh, Volume-6, June 2009; Published by-MRA)

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Chapter- Five

Literature Review

Page | 31

5.1 Introduction:
Over the past three decades, the development community has been increasingly interested in microfinance as an approach for reducing poverty, supporting gender equity, encouraging more equitable income distribution, developing the private sector and promoting participatory development. Access to modest financial services and other forms of microenterprise support are key strategies to reduce poverty - providing the poor with opportunities for self-reliance through entrepreneurship and stabilizing the livelihoods of the poor during difficult times. Microfinance is one of many tools to reduce poverty. Microfinance is significant source of finance for poor, lower income people in developing countries. It provides the funding for these people to run their micro-business and to smooth their households consumption. Poor, lower income people have difficulties in obtaining finance from formal financial institutions such as commercial banks, due to barriers such as high collateral requirements and complicated application procedures (Yunus, 2001; and Hulme &Mosley, 1996). However, there is strong demand for small-scale commercial financial services (for both credit and savings) among the economically active poor in developing countries. These and other financial services help low-income people improve household and enterprise management, increase productivity, smooth income flows, enlarge and diversify their microenterprises, and increase their incomes (Robinson, 2001). These effects were evident from a number of impact studies of microfinance. Based on the recent studies on this subject, microfinance has significant impact on income, expenditure, assets, educational status, health as well as gender empowerment. This positive impact of microfinance on income was confirmed in studies undertaken by Hulme and Mosley (1996); Mckernan (2002); Khandker et al. (1998); Copestake et al. (2001); Sichanthongthip (2004); Shaw (2000); Mosley (2001); and Copestake (2002). Most existing studies on the impact of microfinance examine two sets of indicators economic and social indicators at different levels. Despite the variation in the methods used and the results of studies conducted in various countries, the main impact of microfinance impact is on change in income, expenditure, assets, educational status, health as well as gender empowerment. The studies that have examined the impact of microfinance on these indicators are discussed below:

5.2 Impact studies of microfinance on income:

The effect on income has been analyzed at the individual, household and enterprise levels. Hulme and Mosley (1996), conducted various studies on different microfinance programs in numerous countries, and found strong evidence of the positive relationship between access to a credit and the borrowers level of income. The authors indicated that the middle and upper poor received more benefits from income-generating credit initiatives than the poorest. McKernan (2002), moreover, evaluated three significant microcredit programs in Bangladesh and discovered that the profit for self-employed activities of households can be increased by program participation. These Economic indicators are normally measurements for microfinance impact as income, level and patterns of expenditure, consumption and assets.

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Social indicators to measure the impact of microfinance became popular in the early 1980s as educational status, access to health services, nutritional levels, anthropometric measures and contraceptive use, for example (Hulme, 2000). Hulme (2000) identified levels of assessment in different units as individual, enterprise, household, community, institutional impacts and household economic portfolio such as households, enterprise, individual and community programs were also examined at the village-level impacts in the study of Khandker et al.(1998) which showed that they have positive impact on average households annual income, especially in the rural non-farm sector. Copestake et al. (2001), estimated the effect of an urban credit programme a group-based microcredit programme in Zambia, and found that microcredit has a significant impact on the growth in enterprise profit and household income in case of the borrowers who have received a second loan. Sichanthongthips study (2004) also pointed to a positive impact of microcredit on the income level of individual borrowers. This can be seen from the higher monthly income earned after the member accessed credit, in the empirical study of Lao microfinance on Saithani case. Shaw (2000) studied two microfinance institutions (MFIs) in Southeastern Sri Lanka and showed that the less poor clients microbusiness that accessed loans from microfinance programs could earn more income than those of the poor do. Mosley (2001) evaluated the impact of loans provided by two urban and two rural MFIs on poverty in Bolivia. He found that the net impact of microfinance from all institutions, at the average level, was positive in relation to borrowers income, even though that net impact for poorer borrowers might be less than the net impact on richer borrowers. Copestake (2002) conducted the case study of the Zambian Copperbelt, applying the village bank model to investigate the effect on income distribution at the household and enterprise levels. The study showed that the impact on income distribution depends on who obtains the loan, who move on to larger loans and who exits the program: group dynamics was also an important factor. As he discovered, Some initial levelling up of business incomes was found, but the more marked overall effect among borrowers was of income polarization.(Copestake, 2002: 743).

5.3 Impact studies of microfinance on expenditure:

Expenditure is another indicator to measure the impact of microfinance. Pitt and Khandker (1996 and 1998) estimated the effect of microcredit obtained by both males and females for the Grameen Bank and two other group-based microcredit programs in Bangladesh on various indicators. They showed that the clients of the programs could gain from participating microfinance programs in many ways. It can be seen that income per capita consumption could be increased by accessing a loan from a microcredit program such as the Grameen Bank. Khandker (2003) also conducted research on the long-run impacts of microfinance on household consumption and poverty in Bangladesh by identifying types of impact in six households outcomes as outlined below: Per capita total expenditure; Per capita food expenditure; Per capita non-food expenditure; The incidence of moderate and extreme poverty; Household non-land assets

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The author found that the microfinance effects of male borrowing were much weaker than the impact of female borrowing and there was decrease in return to borrowing all the time. Moreover, he noted that the impact on food expenditure was less pronounced than the one on non-food expenditure. Besides, he showed that the poorest gained benefits from microfinance and microfinance had a sustainable impact in terms of poverty reduction among program participants. In addition, the author discovered that there was spillover effect of microfinance to reduce poverty at the village level.

5.4 Impact studies of microfinance on wealth:

A further indicator of the impact microfinance is wealth. Montgomery et al. (1996) examined the performance and impact of two microfinance programs in Bangladesh. They found that there were positive impacts of a microcredit program, such as the Bangladesh Rural Advancement Committees (BRACs) Rural Development Program (RDP), on both enterprise and household assets. Clearly, even though total value of household assets had a slight increase after the borrowers obtained last loans, there had significant increase in the value of productive assets. Pitt and Khandker (1996 and 1998) also noted that the microcredit had a positive impact on womens non-land assets. Mosley (2001) also pointed out that there was positive impact of microfinance on asset levels. He further stated that accumulation of asset and income status was generally highly correlated, which led to extreme correlation between income poverty and asset poverty. Coleman (1999) investigated the impact of a village bank on borrower welfare in Northeast Thailand. He found that there was a slight impact of program loans on clients welfare. However, he discovered that the village bank had a positive and significant impact on the accumulation of womens wealth, particularly landed wealth but this result included bias from measured impact (discussed in methodology below). In contrary to the positive results, Mckernan (2002) found an inverse relationship between participation in program and household assets. Mckernan also found that households with fewest assets benefit most from participating in a program.

5.5 Impact studies of microfinance on educational status:

Many impact studies of microfinance have focused on educational status. Chowdhury and Bhuiya (2004), studied the impact of a microfinance program, BRAC poverty alleviation program, in Bangladesh, and found that both member and nonmember groups of BRAC had improved in educational performance. However, the BRAC member households benefited much more than poor non-member households. Furthermore, girls gained more than boys. Holvoet (2004) investigated the effects of microfinance on childhood education by examining two microfinance programs in South India one with direct bank-borrower credit and another one with group mediated credit. The author showed that loans to women, through womens groups, had a significant positive impact on schooling and literacy for girls, whereas it remained mainly unchangeable in the case of boys. However, in case of direct individual bank-borrower lending, there was no improvement in educational inputs and outputs for children. Pitt and Khandker (1996) found that a credit to the participants provided by a microfinance institution like the Grameen Bank, could grow school enrolment for children. Page | 34

5.6 Impact studies of microfinance on health:

Indicators related health issues are also applied as proxies to examine the impact of microfinance. Chowdhury and Bhuiya (2004) found that microfinance program, led to a good improvement in child survival and nutritional status. Pitt and Khandker (1996) also noted that there was a rise in contraceptive use and decrease in fertility in case of the participants obtaining a credit provided by the Grameen Bank. However, there was no evidence to prove that an increase in contraceptive use or a decrease in fertility resulted from the participation of women in group-based credit programs. But fertility reduction was observed and contraceptive use slightly increased in case of mens participation (Pitt et al., 1999).

5.7 Impact studies of microfinance on women empowerment:

Microfinance also leads to the empowerment of women. Hashemi et al. (1996) studied two main microfinance programs in Bangladesh, the Grameen Bank and the Bangladesh Rural Advancement Committee (BRAC). They noted that the participation of the programs had important positive impacts on eight different dimensions of womens empowerment: Mobility, Economic security, Ability to make small purchases, Ability to make larger purchases, Involvement in major household decisions, Relative freedom from domination by the family (especially, womens ownership of productive assets), Political and legal awareness, Participation in public protest and political campaigning. In another study, Pitt and Khandker (1998) found that the behavior of poor households was significantly changed in case of womens participation in the program credit, in Bangladesh. It, for example, could be seen that every 100 additional taka credit provided to women by the microcredit programs, namely the Grameen Bank, BRAC and BRDB, increased yearly expenditure for household consumption by 18 taka, whereas that provided to men from the same programs grew yearly household consumption expenditure by 11 taka. However, there exists a counter argument that microcredit programs inflicted extreme pressure on women by forcing them down to meet difficult loan repayment schedules (Goetz and Gupta, 1996). Besides the microfinance impact on the indicators mentioned above, one study tried to examine how the savings group in Laos affects the behavior of member of a village savings group. It showed that the behavior of the village savings group members was changed as a result of participating in a program. While previously savings were kept in the form of gold, livestock, jewelry, deposits in the bank, and savings at home, members now saved in the savings group (Kyophilavong and Chaleunsinh, 2005). Thus all the literatures eventually show that microfinance has a positive impact on poverty reduction, health, education, women empowerment and so on.

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Chapter- Six

Determinants of MFIs Success in Bangladesh

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FACTORS THAT LED TO THE SCALING-UP OF MICROFINANCE: 6.1 Institution building leadership, staff incentives and learning by doing:
It is unquestionable that the vision and persistence of the leaders of the NGO/MFI movement is a key factor behind the success of the microfinance industry in Bangladesh. Leadership skills were instrumental at the initial stages in persuading a skeptical public that providing credit to the poor could become a viable and replicable proposition. These skills were equally important during the process of scaling-up. These included being able to recruit and motivate staff, decentralizing authority away from the center, building management information systems and internal controls as well as having the humility to learn from mistakes. Effective internal controls are also important in ensuring effective staff performance. First of all the fact that financial transactions are carried out publicly, in the weekly meetings and in the branch offices, is a major check against any form of discretionary behavior by fieldworkers. Many NGOs, particularly the ones that have successfully expanded in scale, have developed measures that include frequently rotating staff within and between branches, regular field visits by senior management, a strong internal audit team and annual external audits. A fundamental part of the scaling up of Bangladeshs NGOs and more specifically the microfinance movement has been the ability to learn from experiences and adapt programs accordingly. This learning process takes place both through informal feedback by field staff during regular interactions with management as well as through a formal monitoring and evaluation process.

6.2 A constructive donor-client relationship:

External resources played an important part in the experimentation process, subsequent growth in outreach and institutional strengthening of the microfinance industry. At the same time, the large microfinance institutions have been successful in managing donors. A large part of these donor investments went to the capitalization of MFIs loan funds, crucial to the rapid expansion that took place in the 1990s, as well as into developing institutional capacity through management information systems and human resource development. Finally, the 1990s have seen dependence on donor resources progressively declining for the large MFIs.

6.3 An enabling macroeconomic and regulatory environment:

The early experimentation and later scaling-up of the microfinance industry in Bangladesh was helped by an appropriate enabling environment. Firstly the macro-economy has been, by and large, soundly managed and one should not underestimate the significance of this. The rate of inflation has been kept to single digits and economic growth over the past decade has averaged around 5 percent per annum, thereby creating economic opportunities for microcredit financed investments. Second the Government of Bangladesh has thus far maintained a balanced approach toward regulating and supervising the activities of the NGO sector. The Central Bank, PKSF and representatives of MFIs are currently working to produce a set of guidelines and standards that will strengthen the regulatory framework for microfinance. Page | 37

6.4 Population density, ethnic homogeneity and religious tolerance:

Aside from the Chittagong Hill Tracts area, Bangladesh is ethnically a relatively homogenous country, with a high population density and good communication networks. Moreover this largely homogenous market is also very large in absolute terms. The contrast with Nepal for instance is striking and the difference in microcredit outreach between these two countries is partly due to these factors. It is also striking how in Pakistan, Afghanistan, Egypt and certain other Muslim countries, MFIs have found religion to be a factor that has led to a relatively lower demand for microcredit and MFIs that are more cautious about expanding. In contrast, even conservative religious forces in Bangladesh have been largely tolerant of microfinance activities and the greater economic empowerment and mobility of women. This point was made by Stephen Rasmussen in a personal communication.

6.5 A professional apex body for microfinance:

The Palli Karma Sahayak Foundation (PKSF) was created in 1990 and is governed by a board composed of both public and private sector representatives. It is a public-private apex body that channels funds for microfinance to MFIs has been critical in the expansion and improved professionalism of the microcredit industry in Bangladesh. PKSFs core functions include (i) lending money to MFIs which meet certain eligibility criteria to expand their microfinance operations, (ii) capacity building and hands-on assistance to strengthen MFIs and move them toward financial sustainability, and (iii) advocacy on microfinance issues and helping develop an appropriate regulatory framework for the industry. PKSF has been instrumental in contributing to the sharp increase in access in microcredit that took place in the 1990s by expanding the capital base for MFIs to on-lend to the poor. For instance, as of December 2003, PKSF loans constitute around 30 percent of ASAs current revolving loan fund. PKSF is also widely credited for sharpening the focus of many MFIs toward financial sustainability and also in setting appropriate standards that will ease the way for a strengthened regulatory structure for microfinance.

6.6 The Policy: Innovation, Design and Specification:

There are many overlapping explanations of why the Grameen model worked. They explain how it produced a product that met client needs, developed relatively low cost delivery mechanisms and generated resources that permitted it to survive and expand. Here we extract findings from Hulme and Mosley (1996). Jain and Moore (2003) provide a critical approach to many of these explanations. Targeting: In order to reach those most in need and/or those most able to effectively utilize credit to alleviate their own poverty, Bangladeshi MFIs have adapted combinations of direct targeting, using an effective indicator-based means test (e.g. a combination of effective landlessness and involvement in manual labor combined with being female), and indirect targeting, through self and peer-selection. Screening out bad (non-poor and too-poor/non-viable) clients: Charging market related interest rates and client involvement in group selection.

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Ensuring repayment: Intensive borrower supervision by field staff; peer group monitoring; performance incentives to staff; progressively larger loan sizes; and, compulsory savings. Reducing costs: Accessing no-interest or low-interest loans from donors; building up low cost client savings to on-lend; cost recovery by charging market-related interest rates. Administrative efficiency: Working with groups; transferring transaction costs to clients; standardized products and procedures. Equally important is the heightened ability of innovative targeting, screening and monitoring mechanisms.

6.7 Great Man, Great Men, Great (Little) Women:

Organizational and policy success is often explained in terms of the exceptional ability and performance of leaders (Leonard 1991). This has been common for the Grameen Bank (there is a vast idolizing literature on Mohammad Yunus). Similarly, both BRAC with Fazle Hasan Abed and Proshika with Dr Qazi Faruque Ahmed have been seen internationally as achieving great results at a massive scale. However, the contribution of the Grameen Bank (and other MFI) clients must also be recognized. For many observers of the countrys MFIs there is recognition of the heroic contribution that the clients have made Millions of little women (in terms of social status as well as height and body-mass index) have shown extraordinary agency and capacity to use MFI services, improve the well-being of their households, and repay their loans.

6.8 A Favorable Environment:

There were a number of environmental factors that supported the microfinance industry. In particular: The countrys high population densities make it possible to drive down the costs of service delivery. The basic infrastructure for service delivery (bank branches with security facilities, roads) are available in all but the most remote areas. There was, and continues to be, a regular supply of new university graduates with few other employment opportunities. Levels of law and order mean that fieldworkers and bank branches are relatively secure. Foreign aid donors have had large budgets available to support viable projects.

6.9 The Political Economy of Success:

Identifying and establishing a successful policy (or organization) requires much more than simply getting the right design. In particular, it requires a careful and continuous analysis of the domestic and international political economic environment to ensure that the policy can function and that groups who might oppose the policy can be co-opted and out-maneuvered. As a starting point one must note that the human agency behind the early Bangladeshi MFIs grew out of the political economy of Bangladesh in the early 1970s. However, it can be clearly said that the success of the microfinance in Bangladesh was due to the foresaid factors which, in other terms, can be defined as the determinants of success of MFIs in Bangladesh.

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Chapter-Seven

Effects and Impacts of Microfinance

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7.1 Introduction:
I have distinguished two terms - effects and impacts of microfinance in Bangladesh. By impact I define the changes in the personal and households level leading to changes in quality of life mainly due to increase (or decrease ) of income from investment in income generating activities. Common indicators are impact on income, food, clothing, housing, health, schooling, water and sanitation, building of assets, empowerment etc. By effect I mean many different services and benefits that have emerged with the proliferation of microfinance such as decline in dependence on moneylenders, enhancement of business skills, expansion of non-farm businesses, easier access to financial services, access to better market information, access to training and social development services and so forth which would not have been otherwise available to the poor. The effects are no less important than the direct impact of services on quality of life.

7.2 Effects of Proliferation of Financial Services:

The following can be considered as the direct broader effects of massive proliferation of microfinance in Bangladesh:

Access to savings and credit services from formal (licensed) organizations: Aside from impact due to increase in income the proliferation of MFIs (now most of them have received license from MRA) has allowed people to transact with formal financial institutions. We can say 33 million poor have savings account with accumulated savings of Taka 91,747 million. No time in the history of the nation that so many poor people had access to formal institutions, be it for savings or for loan. It is an achievement by itself that formal institutions are reaching the poor with professional financial services and poor people in their life have access to them. Decline in dependence on moneylenders (undignified borrowing): The above phenomenon has helped reduce dependence on moneylenders who would only lend to a few of their choice, of course at an exorbitant rate (120% per annum). Besides, such personal lending-borrowing relationship creates an undignified situation where lender may take other advantages. Access to market information: The interaction of members within the groups provides opportunities for informally receiving market information such as price of various inputs, commodities, and farm produces. Access to training services: Many government and donor agencies and NGOs provided millions of man-days of training on numerous topics mostly for free. Most common training courses are awareness building on social issues, poultry and livestock rearing, fisheries, health and family planning, various agricultural products such as vegetable and crop production, tailoring, business management, accounting etc. However, these supplydriven training courses may not be always effective but over a long period of time and long association with NGO-MFIs has enhanced skills, confidence as well as technological skills of millions of poor. Access to technological information: Access to technological information and demonstration of production technologies have benefited the participants of microfinance programs but may not be always physically visible.

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Access to social and marketing network: Poor people through groups/samities have also developed social and marketing networks. Employment generation and development of professional human resources: MFIs are one of the largest employers for education men and women. An estimated 171,599 persons are directly employed by the MFIs excluding the Grameen Bank. Expansion of service providers (e.g. training): Individuals and private institutional providers have emerged to provide management and technological training to the group members as well as to MFIs (staff members and organizations). Extension and other services through MFIs and groups: MFIs and groups have also participated in other programs such as health, family planning, renewable energy promotion etc where microcredit groups have been used as platform for dissemination of information and ideas. Expansion of non-farm businesses: Main recipient of microcredit are trading, shops and small processing/manufacturing, repairing and many other services (rural transport). This has enabled millions households to access capital to develop and earn from non-farm sources that has reduced pressure agriculture for creating new jobs. Besides, the poultry, livestock and fisheries sector, that is, non-crop agricultural activities got serious boost due to microcredit creating employment and generating income from these sub-sectors. That is, the process has enabled diversification within broad agricultural sector. However, this is not to mean that only microfinance contributed to this situation. Other business services have also proliferated to aid the situation.

7.3 Impacts of Microfinance:

There have been many impact studies conducted on microcredit programs beginning mid1980s through 1990s. The objectives were to clearly and verifiably prove the financial and economic impact of microcredit programs on the lives of the poor as well as level of reduction of poverty. These are discussed below under different headlines:

7.3.1 The impact of microfinance on poverty reduction:

Poverty is more than just a lack of income. Wright (1999) highlights the shortcomings of focusing solely on increased income as a measure of the impact of microfinance on poverty. He states that there is a significant difference between increasing income and reducing poverty (1999). He argues that by increasing the income of the poor, MFIs are not necessarily reducing poverty. It depends on what the poor do with this money, oftentimes it is gambled away or spent on alcohol (1999), so focusing solely on increasing incomes is not enough. The focus needs to be on helping the poor to sustain a specified level of wellbeing (Wright, 1999, p.40) by offering them a variety of financial services tailored to their needs so that their net wealth and income security can be improved. It is commonly asserted that MFIs are not reaching the poorest in society. However, despite some commentators skepticism of the impact of microfinance on poverty, studies have shown that microfinance has been successful in many situations. According to Littlefield, Murduch and Hashemi (2003, p.2) various studiesdocument increases in income and assets, and decreases in vulnerability of microfinance clients. They refer to projects in India, Page | 42

Indonesia, Zimbabwe, Bangladesh and Uganda which all show very positive impacts of microfinance in reducing poverty. Figure 7.1 shows that how MFIs have an impact on poverty through their financial services. Figure 7.1: Microfinance poverty reduction Nexus

Source: ADB report (2000): Finance for the poor: Microfinance development strategy p.7 The pioneering impact study on the microcredit program of the Grameen Bank was by Mahbub Hossain [Hossain 1988] who evaluated it using the indicators like reaching the target groups, size of loan disbursed, loan utilization, accumulation of capital, generation of employment, and income, and poverty status, and used before and after as well as comparison between borrowers and non-borrower control groups to see the impact of

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microcredit. The study [Hossain 1988] reported a number of concrete contributions of microcredit from the bank:

Borrowers have increased their business capital by an average three times within a period of 27 months; Asset in the form of livestock increased by 26% per year; About one third of members who reported to be unemployed became self-employed after joining microcredit program of the bank; Grameen Bank members had incomes about 43% higher than target groups in control villages, and 28% higher the target group non-participants in the project villages. The enhanced income is from the income generating activities undertaken by using microcredit. The program is general enhanced overall income of households in the project villages: average household income is about one-sixth higher in project villages than in the control villages. Thus microcredit has reduced poverty.

A summary of major quantitative impact studies has been presented by Rahman [2000] as reproduced below: Table 7.1: Impact of microcredit on household income/expenditure
Source Name of Income or expenditure Participants organization per annum (Taka) studied GB GB BRDB BRAC-RDP Proshika PKSF BRAC GB RD-12 BRAC PKSF Proshika Income, per capita Income, per capita Income, per household Income, per household Income, per household Expenditure, per household Expenditure, per capita Expenditure, per capita Expenditure, per capita Expenditure, per capita Expenditure, per capita Income per household 1762 3524 6204 2844 22,244 26,390 5180 5050 4931 8244 36,528 48,635 Control (nonparticipants) 1346 2523 4260 1560 17,482 23,802 4202 4335 4279 6480 33,732 43,584 % change 30.9 39.7 45.9 82 27.2 10,9 23.3 16.5 15.2 27.2 8.3 11.6

Hossain 1984 Hossain 1988 BIDS 1990 BIDS 1990 IMEC 1995 Rahman 1996 Khandakar 1998 Khandakar 1998 Khandakar 1998 Halder 1998 BIDS 1999 IMEC 1999

Source: Rahman [2000]

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Alamgir (1996) followed a low-cost method, that is, qualitative measurement of impact of microcredit program of PKSF and its partner organizations. Two objectives of the study were to ascertain whether partner organizations of PKSF had reached the poor and whether borrowers had benefited from this program. Table 7.2 describes the results of this study. Table 7.2: Comparison of the quality of life before and after taking loan
Serial No. Indicators Decreased Same as before Improved Total

# 1 2 3 4 5 6 7 8 Family income Quality and quantity of food Clothes Health Child education Housing condition Productive employment of family members Overall quality of life 42 43 32 58 21 18 7 26

% 0.71 0.72 0.54 0.97 0.35 0.30 0.12 0.44

# 697 1166 758 1309 962 532 765 792

% 11.71 19.60 29.55 22.00 16.17 42.55 12.86 13.31

# 5211 4741 4160 4583 4967 3400 5178 5132

% 87.58 79.68 69.92 77.03 83.48 57.14 87.03 86.25

# 5950 5950 5950 5950 5950 5950 5950 5950

% 100 100 100 100 100 100 100 100

Source: Survey, 20 POs reported in Alamgir (1996) Therefore, while much debate remains about the impact of microfinance projects on poverty, we have seen that when MFIs understand the needs of the poor and try to meet these needs, projects can have a positive impact on reducing the vulnerability, not just of the poor, but also of the poorest in society.

7.3.2 The impact of microfinance on Women Empowerment:

Microfinance has the potential to have a powerful impact on womens empowerment. Empowerment is a complex process of change that is experienced by all individuals somewhat differently. Women need, want, and profit from credit and other financial services. Strengthening womens financial base and economic contribution to their families and communities plays a role in empowering them. What Do We Mean When We Talk About Empowerment? Most of us, when asked, have a great deal of difficulty defining empowerment. According to UNIFEM, gaining the ability to generate choices and exercise bargaining power, developing a sense of self-worth, a belief in ones ability to secure desired changes, and the right to control ones life are important elements of womens empowerment. Empowerment is an implicit, if not explicit, goal of a great number of microfinance institutions around the world. Page | 45

EVIDENCE OF EMPOWERMENT: Although the process of empowerment varies from culture to culture, several types of changes are considered to be relevant in a wide range of cultures. Some of these changes include increased participation in decision making, more equitable status of women in the family and community, increased political power and rights, and increased self-esteem. Impact on Decision Making Womens ability to influence or make decisions that affect their lives and their futures is considered to be one of the principal components of empowerment by most scholars. It is much less clear, however, what types of decisions and what degree of influence should be classified as empowerment in different contexts. Impact on Self-Confidence Self-confidence is one of the most crucial areas of change for empowerment, yet it is also one of the most difficult to measure or assess. Self-confidence is a complex concept relating to both womens perception of their capabilities and their actual level of skills and capabilities. Impact on Womens Status and Gender Relations in the Home Access to credit and participation in income-generating activities is assumed to strengthen womens bargaining position within the household, thereby allowing her to influence a greater number of strategic decisions. Particularly in poor communities, mens domination of women is strongest within the household. Impact on Family Relationships and Domestic Violence Microfinance programs can strengthen womens economic autonomy and give them the means to pursue nontraditional activities. Evidence suggests that participation in microfinance programs may give women the means to escape from abusive relationships or limit abuse in their relationships. Impact on Womens Involvement and Status in the Community Studies of microfinance clients from various institutions around the world show that the women themselves very often perceive that they receive more respect from their families and their communities particularly from the male membersthan they did before joining a microfinance program. Impact on Political Empowerment of Women and Womens Rights By contributing to womens knowledge and self-confidence and by widening their social networks, many microfinance programs give women the tools and skills they need to participate more effectively and successfully in formal politics and to informally influence decisions and policies that affect their lives.

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7.3.3 Economic and Social Impacts:

Although microfinances initial objective was not primarily in the social realm, if at all, most MFIs do now identify one or more social goals womens empowerment, childrens school attendance, awareness of and demand for health services, for example. Evidence of the social impact of microfinance in Bangladesh has also been mixed, but again, on balance, suggests that microfinance and the associated activities of MFIs have had positive social effects. Indeed, it often seems as if this fundamentally economic approach has performed best in the social domain. Khandker (2005:266) notes that the earlier WB/BIDS study support the claim that microfinance programs promote investment in human capital (such as schooling) and raise awareness of reproductive health issues (such as the use of contraceptives) among poor families, and that microfinance helps women exercise power in household decision-making. A summary of the findings of many studies done by various scholars in the recent years is given in the following figure: Figure 7.2: A summary of the findings of IAS (Impact Assessment Studies)

Source: Salehuddin Ahmed (PKSF)

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Salehuddin Ahmed also showed the indicators of the impact of microcredit, types of changes and causes of changes under two broad categories (Table 7.3). Figure 7.3: Economic & Social impacts of Microcredit

Source: Salehuddin Ahmed (PKSF) The summary of findings of economic and social impacts is as follows: Asset formation: Across all four programs beneficiaries have been able to increase assets in the form of livestock, rickshaw, and improved housing. The findings on asset formation have been very much expected because the focus of training program has been on livestock. A hardcore poor woman finds it convenient and profitable to go into livestock rearing in addition to what she has been doing before joining the group. She is also responsible for household chores. Occupation Pattern and Employment: With training and credit it is normally expected that majority of trained beneficiaries as well as others will have opportunities to enter into new income generating activities, increase present work and or expand existing activities. The process leads to changes in occupational pattern, temporary or permanent, depending on success and length of association with the MFIs. Page | 48

Land ownership: One important impact of financial services program is increase in landownership, especially for the hardcore poor families many of whom even do not have homestead land. With financial services participants of all four programs have been able to increase agricultural and homestead land. Over the same period, average land ownership has decreased in control households. Other forms of productive assets have also increased substantially compared to the control households except in case of Plan international. Savings and household assets: There has been positive savings in all the households whether program or control. Highest level of savings belongs to IGVGD followed by Control and FSP households. Household assets in terms values have substantially increased, the most important items across all programs are cot, quilt, sweater and new saree. Social Benefits: The main social benefits are manifested in better sanitary and health condition and increased empowerment of women, their increased health consciousness and freer movement and participation in family and societal affairs. There has been positive attitudinal change among the households regarding the rights of womanhood. Alamgir (1999) assessed the impact of credit program on family income, food, cloths, housing conditions, Children education, Sanitation etc. The results are as follows (see Table 7.3):
Table 7.3: Impact of microcredit on repeat borrowers (4 times or more)

Indicators 1 2 3 4 5 6 7 Family Income % Quality and quantity of food % Clothes % Housing conditions % Children education % Sanitation

Improved 661 97.93% 598 88.59% 593 87.85% 508 75.26% 509 75.41% 464 68.74% 641

Same as before 12 1.78% 77 11.41% 82 12.15% 162 24.00% 101 14.96% 210 31.11% 33 4.89% 482 71.41%

Decreased 2 0.30% 0 0.00% 0 0.00% 5 0.74% 13 1.93% 1 0.15% 1 0.15% 1 0.15%

Total 675 100.00% 675 100.00% 675 100.00% 675 100.00% 675 100.00% 675 100.00% 675 100.00% 675 100.00%

% Overall improvement in quality of life % 94.96% Land ownership 192 % 28.44% Source: Alamgir (1999)

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7.3.4 National-level impacts:

We have received a lot of things from the international community, but we have given the model of microcredit to the world. - Prime Minister Begum Khaleda Zia Bangladesh is internationally renowned, not for its cultural heritage or beautiful natural environment of which its citizens are justifiably proud, but for poverty, floods, famine, disease, war, overpopulation, oppressed women, corruption, ferryboat disasters, water contaminated by arsenic. Bengali Nobel Prize winners Rabindranath Tagore and Amartya Sen are claimed by India, the Royal Bengal Tiger is endangered, and we probably shouldnt mention the cricket. But Bangladesh is now also famous for the .invention. of microfinance; for the commitment and insight of Dr. Muhammad Yunus and other NGO leaders; for the vast cadre of competent and honest NGO field staff who put the microfinance model of poverty alleviation into practice every day; and even for narrowing formerly huge gender gaps in economic participation, education and health11 (arguably largely through microfinance and the other activities of NGO MFIs). Employment creation by the MFIs themselves above and beyond the effects on clients has been enormous. We estimate that there are at least 50,000 credit officer-type positions across the country, and considering their own households, many times this number derive their livelihood from the provision of microfinance services. Below we discuss the crucial role played by the early .social entrepreneurs as creators and developers of MFIs and the microfinance industry in Bangladesh, but an important oft-overlooked effect of the current industry is its role in creating the next generation of social entrepreneurs.

7.3.5 Conclusion:
In all cases, the findings show that 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. The changes come over a period of time that needs continued access to finance. 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. On the whole the researches have proved the positive impacts of financial services for the poor. Bangladesh microfinance sector now passed beyond doubt the era where studies were conducted to prove its effectiveness but now faces new challenges of other emerging issues such as continued vulnerability of poor due to external factors, overlapping of microcredit services, impact on microfinance in an era of slow or no growth of economy, and lack of new and more demand-driven products etc.

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Chapter- Eight

Major Issues & Challenges

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8.1 Major Issues:

When examining the impact of microfinance on livelihood security and poverty, it is important to be aware of the current debates that are taking place in the field of microfinance. These are described below:

8.1.1 Reaching the Poor:

As highlighted, one of the key roles microfinance has to play in development is in bringing access to financial services to the poor, to those who are neglected by the formal banking sector. This is their social mission. Mainstream banks target clients that have collateral. The poor do not have assets to act as collateral, therefore they are ignored by the formal financial sector. These banks tend to be found in urban centers while the majority of the poor in the developing world live in rural areas, where financial services are not provided. Therefore, if MFIs are to fill this void they must reach the rural poor. However, according to most studies, microfinance is only reaching a small fraction of the estimated demand of the poor for financial services (Littlefield and Rosenberg, 2004). MFIs do not have the depth of outreach that is needed to meet the demands of the rural poor. Serving the rural poor in the developing world involves a major financial commitment, as it is expensive to run rural microfinance projects. Claessens (2005) states that high transaction costs, small volumes and the high costs of expanding outreach, make it unprofitable to serve the rural poor. It is for this reason that commercial banks are positioned in areas of high population density. However, if MFIs are to meet their social mission of serving the poor then financial services need to reach the rural poor. The onus is therefore on other MFIs to develop products and services that will meet the needs of the very poorest if the social mission of microfinance is to be achieved. MFIs therefore need to improve their depth and breadth of outreach. They must design appropriate products based on the needs of the poorest and they must ensure such products are delivered in a costeffective manner (Simanowitz with Walter, 2002)

8.1.2 Financial sustainability versus serving the poor:

MFIs have more than just a social mission. Markowski (2002, p.117) states they have a dual mission: a social mission- to provide financial services to large numbers of low-income persons to improve their welfare, and a commercial mission- to provide those financial services in a financially viable manner. We have already seen that MFIs are not fulfilling their social mission to the extent needed to meet the demands of the poor for financial services. Simanowitz with Walter (2002) argue that microfinance is a compromise between this social mission and commercial mission. As there is more emphasis on financial and institutional performance, opportunities for maximizing poverty impact and depth of outreach have been compromised. They call for a balancing of social and financial/commercial objectives because the current focus on financial objectives means fewer of those most in need of microfinance services are being targeted. To do this they argue it is now time to innovate and design services that maintain high standards of financial performance, but which set new standards in poverty impact (2002, p.3). Page | 52

8.1.3 Higher Interest Rate:

The rate of interest on loan product is a controversial issue in Bangladesh. Although the rate of interest of microcredit programs is expected to be higher than commercial banks lending rate due to small size of loan and high delivery cost (service is delivered at the neighborhood of clients) but there is general public perception that MFIs charge excessive interest on loan. Such views have been vented by high political and government officials in public forums. It would be useful to review the prevailing and past rates in the sector. Table 8.1 provides interest rates of prominent MFIs both on savings and credit products: Table 8.1: Interest rate (May 2009) Organizations Interest on credit products (%) [flat rate] 14.4 15 10 Hardcore poor:10 Others: 12.5 Approximate Interest on savings effective rate on (%) credit products (%) 28.8 30 20 Hardcore poor: 20 Others: 25 <5% 5 Regular savings: 8.5 Time deposit:12.5 4-5 4-6

ASA BRAC Grameen Bank PKSF Funded MFIs Other MFIs

15 30 Sources: Respective organizations; * varies every year

Therefore the current challenges facing MFIs are threefold, it concerns, not only, financial sustainability, but also outreach - extending the services to greater numbers of poor, and higher rate of interest charged for their financial services. MFIs should be very careful about these major current issues in the microfinance sector of Bangladesh.

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8.2 Challenges:
The main challenges faced by the MFIs of Bangladesh are described below:

8.2.1 Reducing vulnerability:

The external events, macro-economic instability or natural calamities, have serious implications on the management and viability of microfinance institutions. Several national and regional MFIs which were forced to suspend microfinance operations (recovery and disbursement) that led to loss of income and portfolio. Some large MFIs have declared writing off loans but smaller MFIs could not afford to do so. The sector seems yet to fully understand the dynamics and depth of the problem and devise response against such situation.

8.2.2 Economic Growth and Microfinance Sector:

Microcredit provides capital to the poor and near poor for investing in various farm and nonfarm income generating activities. The implicit assumption is that there are millions of such profitable investment opportunities and increasingly created in the rural economy so that more and more people with larger investment funds (large loans are given in successive years) can profitably invest. This is only possible when these sectors are growing at reasonable rate. Slow growth in rural economy is expected to have adverse impact on microfinance.

8.2.3 Policy and the Producing Class:

Government economic policies have direct implications on profitability of income generating activities, and consequently on poverty and portfolio quality of the MFIs. One policy can put the whole sector along with financing MFIs in trouble, which exemplifies linkage of government policies with production, profitability, portfolio quality and poverty. Similar examples of anomalies in policies can be found in other sectors that directly affect the poor.

8.2.4 Diversification of Products:

The sector is diversified according to some broad product-market segments. The products are still standardized and uniform that does not reflect the need and cash flow of individual clients. The real diversification will need cash-flow based lending and adopting appropriate management system to handle such lending product, especially in case of larger loans. Some MFIs are trying to move into other services such as micro-insurance (life and non-life) but that would require research and innovation in product development as well as management system.

8.2.5 Research and Innovation:

Bangladesh microfinance sector depends on the innovation of only a few organizations. Most of small and medium MFIs either do not have the capacity or willingness to take the risk of trying out new things. This approach of replication limits innovation and competition. The sector also lacks resources and wiliness to research related to microfinance.

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8.2.6 Resource Mobilization:

PKSF, several commercial banks and two much smaller apex organizations are providing wholesale fund for mainstream microcredit and other loan products. But demand for finance from BRAC and other larger MFIs, if they want to reach farmers and microenterprises, will be much greater than these institutions can supply. The most practical solution is savings mobilization using various types of short and long term instruments.

8.2.7 Regulatory Environment:

Microfinance is now regulated under the Microcredit Act 2006 enforced by the Microcredit Regulatory Authority (MRA). But MRA is yet to introduce the body of regulations that are supposed to actually guide the MFIs. A number of areas of regulations will be critical: savings mobilization, use of and access to savings; pricing of savings and loan products; governance of MFIs; accounting and financial policies and reporting. The uncertainty about the time and scope of regulations will delay professional growth of microfinance sector, especially in governance.

8.2.8 Institutional and HR development:

Microfinance sector is a mix bag of institutions in terms of institutional and human resources capacity. The complexity of serving different clients groups and increased size of organizations poses major challenges for top and mid-level human resources. The sector needs more sustainable supply of short and longer-term training and other institutional services from private and public institutions.

8.2.9 Portfolio Quality:

Portfolio quality of very large and other smaller MFIs have been declining over the last 2-3 years. The exact reasons have been thoroughly studied, analyzed and understood. It seems the sector as a whole, at least major players, may need to undergo a period of consolidation of their mainstream microcredit product.

8.2.10 Application of ICT:

Application of information and communication technology in management of MFIs is limited. A few large MFIs have introduced accounting and MIS software at the branch level but the management system remains largely manual. MFIs will find it difficult to manage diversified products and effectively control internal management without deeper applications of ICT. Overall ICT can be used by MFIs, PKSF, and MRA to improve efficiency, ensure transparency, improve monitoring and internal control, disseminate accurate information and offer better services to respective clients and other stakeholders.

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Chapter- Nine

Findings, Recommendations & Conclusion

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9.1 Findings of the Report

Here I am presenting the overall findings of this report in a sequential manner: 1. The microfinance industry of Bangladesh has been able to provide access to credit, currently, to nearly 25 million poor households in Bangladesh. There are around 535 regulated NGO MFIs and about 500 non-regulated NGO MFIs in Bangladesh but the industry is dominated by three large MFIs (ASA, BRAC, and Grameen Bank) that serve around 22 million or 87 percent of all clients. 2. 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. This is significant relative to the equally large Indian microfinance sector, which contributes just 0.64% to the Indian financial system. 3. 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. 4. Microfinance services can also contribute to the improvement of resource allocation, promotion of financial markets, and adoption of better technology. Thus, microfinance helps to promote economic growth and development. Microfinance can contribute to the development of the overall financial system through integration of financial market. 5. Microfinance can provide an effective way to assist and empower poor women by providing financial assistance. It also provides various sociological & economic benefits. 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. On the whole the researches have proved the positive impacts of financial services for the poor. 6. Microfinance also plays a vital role in achieving MDGs of Bangladesh such aseradicate extreme poverty and hunger, achieve universal primary education, promote gender equality and empower women, reduce child mortality and improve maternal health, ensure environmental sustainability, develop a global partnership for development etc.

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7. The crucial success factors that led to the scaling-up of microfinance in Bangladesh are-institution building leadership, staff incentives and learning by doing; constructive donor-client relationship; an enabling macroeconomic and regulatory environment; a professional apex body for microfinance; the policy innovation, design and specification etc.

8. There are some debates that are currently taking place in the field of microfinance in Bangladesh such as- outreach of microfinance to the poorest people, retaining financial sustainability, charging higher interest rate etc. 9. MFIs are now facing challenges of some emerging issues such as- continued vulnerability of poor due to external factors, overlapping of microcredit services, impact of microfinance in an era of slow or no growth of economy, lack of new and more demand-driven products, lack of research & innovation, application of ICT etc.

9.2 Recommendations
Based on my intuition, here I am giving some recommendations regarding the improvement of the current status of the microfinance sector of Bangladesh: Maintaining a focus on the hardcore poor: MFIs are striving to meet donors pressure for rapid financial sustainability. This has led some to abandon the poorest of the poor. Donors need to provide incentives for MFIs to guard against upward pressure on their portfolio and keep their focus on the poorincluding the very poorwhile striving for high levels of financial sustainability. Lowering interest rate: MFIs should reduce their current interest rate to a tolerable extent for the hardcore poor borrowers so that they can repay the loan in due time as well as improve their living standard. Acceleration of Research & Innovation: MFIs should deploy more funds & efforts to accelerate the speed of research & innovation process in order to improve the functioning of existing microfinance models as well as to develop new models, products etc. Expanding institutional capacity: The demand for microfinance is beginning to generate a flood of donor financing for the sector. MFIs need grant funding to build their capacity before they can handle large volumes of financing. They require technical assistance to make the transition from start-up projects to financially sustainable institutions. Some need further assistance in making the transition to a formal financial intermediary. Promoting sustained linkages to commercial capital: Commercial banks need to provide funding packages that encourage MFIs to move quickly toward commercial sources of financing, to avoid becoming dependent on donated funds. Page | 58

Introducing additional Services/Products for diversification: Domestic Remittance: Domestic remittance service is an important for the poor families when family members travel all over the country for work and live in different places. MFI networks could be effectively utilized to transfer funds to the rural poor with the help of information and communication technology. International remittance: Millions of Bangladeshi workers live outside Bangladesh who value safe and secured transfer of their hard earned money. International remittances are largely handled by commercial banks but they do not have good networks in rural areas. A number of commercial banks have engaged MFIs as their agents to distribute remittance. The whole domestic and international remittance service could be commercially viable if appropriate policies were introduced and the necessary technological resources deployed. Micro-Insurance: Insurance services are another major area where experimentation has begun and further work is required. MFIs directly, or possibly by setting up insurance companies, and/or in collaboration with other private providers should be encouraged to experiment and allowed to develop and offer such insurance services. Management and Application of Technology: Application of information and communication technologies by MFIs for managing complex operations involving many different types of products and customer groups, and for internal control will be essential. MFIs need to be proactive to embrace technology to improve efficacy and better serve their clients. Regulatory Environment Body of Regulation: A full body of regulations that is expected ensure good governance and transparency, protect the savers and borrowers, and encourage long-term sustainability of MFIs but discourage excessive risk-taking for short-term gain by the MFIs should be quickly introduced and enforced. Long-term savings products: Introduce regulations by MRA permitting long-term savings products by selected NGO-MFIs, the latter to be selected through predetermined criteria developed by MRA. Ensure proper supervision by MRA and reporting by the NGO-MFIs. For additional safety, mandatory savings insurance policies may be introduced. Microfinance banks: Introduce a new law or extend the microcredit law to allow a few of the large NGO-MFIs to convert into microfinance banks under the supervision of the Central Bank or MRA. This would enable them to enhance their capital resources substantially and potentially by offering appropriate long-term savings products to their existing members/clients; offering a full range of savings products & services to the wider public; and attracting additional (equity) investment. Non-financial Services: MFIs are expected to expand and offer larger loans to micro entrepreneurs and small/marginal farmers. Borrowers will require non-financial services for expanding their businesses. Whether this is to be provided by the NGO-MFIs or from external sources, probably commercial sources, such support will be essential in order to ensure that borrowers are successful in their ventures.

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9.3 Conclusion
It is apparent that microfinance has been a policy success in Bangladesh. This is a firmer conclusion than other studies. Why is that? Partly because microfinance, its institutions and impacts, have stood the test of time and has extended and expanded what it is doing and is achieving. And partly because the microfinance sector in Bangladesh no longer exaggerates the claims about its impacts as much as it did ten years ago. At that time MFI leaders and staff insisted that all their members were the poorest of the poor that every loan was a success for the borrower and that the gender and class empowerment being generated was rapidly producing a more egalitarian society.

Finally, why has microfinance been a policy success in Bangladesh? I agree with Zaman (2004) that visionary leadership, a supportive (or more accurately, not too unsupportive) policy/regulation environment, effective action by donors, a suitable physical and social environment and, recently, PKSF to provide scaling up finance and improve industry standards have been key factors. I would also add that the visionary leadership needs not only to be technically able but needs to have the skills and social resources to manage the domestic and international political economy, and that the institutional processes have to permit learning and allow effective implementation systems to be operated. It must also be noted that millions of little women (see earlier), the clients, have made microfinance a success. So, the vision of microfinance in Bangladesh is explicit, that is; not only alleviate the poverty but also play as a vital socioeconomic development mechanism. Through the microfinance program participation, the poor can be covered by savings mobilization and sustainable credit market. It is such an instrument which is capable to eradicate the poverty from the below and eventually it helps to maintain a peaceful society. Nobel peace committee, 2006 said that Development from below also serves to advance democracy and human rights. Therefore, our long-term vision can be eradicating the poverty not only from Bangladesh, but also from other developed and underdeveloped countries in the world.

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Appendix

Overview of the Internship Organization

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Institute of Microfinance (InM)

Towards a Poverty-Free World

Introduction:
Institute of Microfinance (InM) is a non-profit organization established primarily for meeting research and training needs of national as well as global microcredit programs. It endeavors to enhance and improve the microfinance-related research and training climate particularly in Bangladesh. The Institute is contemplating a transition to a much broader center of excellence in the area of microfinance, enterprise development, poverty reduction and allied areas at the national and international levels through collaborative approach to research, knowledge management, training and education, and participation of reputed institutions and scholars in its programs. The Institutes main focus is on developing itself as a center of excellence with emphasis on research, training, academic and knowledge management. However, research is the most prominent among all the activities and its research activity centers around microfinance, poverty and development issues. InM was initiated and promoted by the Palli Karma-Sahayak Foundation (PKSF), and is now registered as an independent non-profit institution under the Societies Registration Act 1860.

Mandate:
The Institute of Microfinance (InM) started its journey officially from November 1, 2006. The Institute has been registered as a non-profit institution under the Societies Registration Act 1860. It sets to emerge as an internationally acclaimed center of excellence with focus on research, training, academics and knowledge management.

Vision:
The vision of the Institute is to see an efficient and sustainable microfinance sector that will cover all poor households and provide them with their required amount of microcredit and other financial assistance for the purpose of alleviation of poverty.

Mission:
The mission of the Institute is to see an academic and institutional set up to develop the capabilities of the microfinance institutions (MFIs) as well as of other stakeholders for an efficient and sustainable microfinance sector in Bangladesh and other countries through training and research, and to provide a platform for advocacy. InM seeks to provide these services in efficient, socially responsive, transparent and sustainable manners that encourage experience, resource sharing, and the promotion of the industrys best practices.

Basic Objectives:
The basic objectives of InM are: to conduct research on microfinance and its effect on the economy, poverty alleviation, lessening of inequality and vulnerability;

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to collaborate with national and international agencies and universities in research and other professional activities like training, experimentation, and academic degree programs in Bangladesh and other countries; to design, develop and manage the activities of microfinance institutions (MFIs) in Bangladesh; to develop and maintain database on the global microfinance operations; to organize seminars, workshops and conferences independently and/or jointly with other institutions in Bangladesh and other countries; to initiate, undertake and arrange training programs for microfinance professionals and practitioners from home and abroad; to set standards, prepare guidelines, and formulate policy documents for the microfinance sector; and to offer an academic degree program in microfinance jointly with leading universities of the country.

Key Areas of InM

InM has three unique divisions viz. Research, training and Knowledge Management. The key activities are:

Research:
The underlying objectives of the research agenda are to get insights into the issues of poverty, microfinance and development and to assess the impact of different interventions including microfinance services. InM addresses a wide range of research subjects such asPoverty and Socio-economic Development Microfinance and Rural Economics Human Rights, Governance, Gender and Equity Health, Hygiene, Sanitation, Nutrition and Demographic issues Environmental and Natural Resource Economics and so on. Besides, InM also encourages initiating action research targeting poverty reduction programs.

Training:
Inadequacy of knowledge and skills at all levels of the microfinance sector is seen essential for the proper growth of the sector. Enhancing skills through imparting training help builds human resources needed in the sector. Alongside the microfinance personnel InM provides training to the development practitioners, journalists, senior executives of different MFIs, policymakers, regulators, government officials and international agencies. In addition, it acts as a facilitator in capacity building of the existing training institutions. InM has a plan to organize training programs for the participants even from outside Bangladesh. So far, InM has organized the following training programs: Training Program for the Journalists Research Methods for the Partner NGOs

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Knowledge Management:
As part of knowledge management activities, InM has been using Internet and Internet-based different utilities, managing MFI data base, physical library, and publications and documentations; such as: Local network: To provide access to the resources available in the network a fast Ethernet based Local Area Network (LAN) has been set up in the institute, Internet facilities: At present by using a 512 KBPS dedicated bandwidth internet connectivity radio link services has been achieved, Website: A 1000 MB web space has been allocated and people are able to browse the site globally and get updates from it, Intranet: As one of the objectives of the institute is to reduce the use of paper significantly an Intranet site is under construction in the institute, Database: Statistical Database of NGO/MFIs (400 NGO/MFIs) data of member/borrower/income/expenditure etc. (time series 2000-2007),

Dialogue, Seminar and Workshop:

The Institute in its effort to promote the microfinance sector has been organizing dialogues with top MFIs, special seminars, and a monthly seminar series on topics of interest, and workshops on various leading issues.

Academic Program:
InM will offer M.S. or M.B.A. degree in microfinance and MIS jointly with the University of Dhaka and/or selected number of private universities. It will also give certified professional training to MFI professionals and any person interested in the field of Microfinance.

Intern Services:
InM has an internship program under which interns from the leading local, national and also from international universities are allowed to work with InM. InM allowed the intern who has the granted academic qualification, such as, undergraduate, graduate & post graduate student from reputed university. The internship basically exists for three months, more or less, depends on the type of the internship.

Internal & External Collaboration:

The Institute will establish a collaborative relationship with leading national and international institutions. The objective of such collaboration will be to learn from others, exchange views, and for joint work with others. As such, InM has been collaborating with Micro credit Summit Campaign (MSC), UNDP, Asian Technology of Thailand (AIT), Microfinance Transparency USA, Plan Bangladesh, Japan International Cooperation Agency (JICA),Bangladesh etc. After all, since its establishment, InM has been contributing a lot to the development of the microfinance sector of Bangladesh with its all activities including Research, Training & Knowledge Management and so on. Page | 64

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Khandker SR, Khalily B, Khan Z. 1995. Grameen Bank: performance and sustainability. World Bank Discussion Paper No. 306. The World Bank: Washington, DC. Khandker SR, Khalily B. 1996. The Bangladesh Rural Advancement Committeees credit programmes: performance and sustainability. World Bank Discussion Paper No. 324. Khandker S (2003) Microfinance and Poverty: Evidence Using Panel Data from Bangladesh,World Bank Policy Research Working Paper 2945 Mahmud S. 2001. Participation of micro-credit program and household social well-being. In Monitoring and Evaluation of Microfinance Institutions, Zohir et al. (eds). 2001. PKSFBIDS, Morduch J (1998) Does Microfinance Really Help the Poor: New Evidence from Flagship Programs in Bangladesh, Department of Economics and HIID, Harvard University. Morduch J, Haley B. 2002. Analysis of the effects of microfinance on poverty ReductionNYU Wagner Working Paper No. 1014, (mimeo) Pitt M, Khandker SR, Cartwright J. 2003. Does micro-credit empower women? Evidence from Bangladesh. Research Working Paper No. 2998, The World Bank. Sinha S (ed.). 1998. Micro-credit: impact, targeting and sustainability. IDS Bulletin 29(4). Wood G and I Sharif (1997 eds.) Who needs credit? Poverty and finance in Bangladesh Yunus M (1998) Banker to the Poor UPL, Dhaka Zaman H (1999) Assessing the poverty and vulnerability impact of microcredit in Bangladesh: a case study of BRAC Policy Research Working Paper Series 2145, WB Zaman, H. (2004.), The Scaling up of Microfinance in Bangladesh: Determinants, Impact, and lessons, World Bank Policy Research Working Paper 3398, September 2004 Zohir S. 2001. Microfinance and Economic Well-being In Monitoring and Evaluation of Microfinance Institutions, Zohir et al. (eds). 2001. PKSF-BIDS, Dhaka. http://www.asabd.org http://www.brac.net www.cdfbd.org http://www.grameen-info.org http://www.pksf-bd.org http://www.google.com http://www.wikipedia.com

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