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Microfinance Regulations in Bangladesh: Development & Experiences

Microfinance Regulations in Bangladesh: Development & Experiences. Microcredit Regulatory Authority (MRA) Contributors: 1. Mr, Khandakar Muzharul Haque, EVC, MRA 2. Mr. Jamsheduzzaman, Economist, MRA 3. Ms. Lila Rashid, Director, MRA 4. Mr. Ranjit Kumar Roy, Assistant Director, MRA

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Microfinance Regulations in Bangladesh: Development & Experiences

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  1. Microfinance Regulations in Bangladesh: Development & Experiences Microcredit Regulatory Authority (MRA) Contributors: 1. Mr, Khandakar Muzharul Haque, EVC, MRA2. Mr. Jamsheduzzaman, Economist, MRA3. Ms. Lila Rashid, Director, MRA 4. Mr. Ranjit Kumar Roy, Assistant Director, MRA International Conference On “Microfinance Regulations: Who Benefits?” 15-17 March 2010, Dhaka, Bangladesh

  2. Economic Condition of the Country • Bangladesh has impressive achievements • Despite devastation of the liberation war, repeated catastrophes and initial poor condition • Poverty Incidence declined • 72 percent in 1970 • 59 percent in 1980 • 49.8 percent in 1990 • 41.4 percent in 2004 • No estimate available afterwards

  3. Economic Condition of the Country (Contd.) • GDP annual average growth rate shows improvement • 1970s – 3.8 percent • 1980s – 3.8 percent • 1990s – 4.8 percent • 2000s – 5.8 percent

  4. Social Development Social Indicators Demographic Indicators

  5. Economic Condition of the Country (Contd.) Map 1: Poverty Headcount Index- 2000 Despite Improvement Poverty remains the main concern

  6. Financial Sector and Its Reforms Formal Financial Sector is confined to the banking sector. Rise in non performing loans, Availability of limited tools to manage monetary policy Financial Sector Reform Program was undertaken in 1990s. Second Phase started in early 2000.

  7. Salient Features of Financial Sector Reforms and its outcome • Major attempts of Financial sector reform programs were - • liberalized Interest rates • floated Exchange rate • Open market operation • Attempts were made to improve corporate governance, legal aspects, loan recovery position, disclosure and transparency standards, State Owned Commercial Banks’ functions, core risk management, efficiency of Bangladesh Bank etc. • Results of above actions improved- • Corporate Governance • Net classified loans as percentage of total loans declined, • Risk management improved. • However, Financial Inclusion and Deepening remains Challenges

  8. Financial Market Failure

  9. History of Microcredit in Bangladesh Back in 19th Century Cooperative Movement Comilla Model by Akhter Hamid Khan – 1960 Bangladesh Rural Development Board (BRDB)- 1970 Swanirvar Movement – After liberation war Grameen Project—1976 Grameen Bank –1983 Huge growth of Development NGOs –After 1990

  10. Banking Sector Bangladesh Bank 4 State-owned Commercial Banks 5 Government-owned Specialized Development Banks 30 Domestic Private Commercial Banks 9 Foreign-owned commercial Banks 29 non-bank financial institutions Microfinance Sector Government sponsored program Separate windows of Banks Grameen Bank Over 500 licensed NGO-MFIs Formal Financial Market and Microfinance Sector

  11. Information: NGO-MFIs (As of 30 June 2009)

  12. Changes in the Microfinance Market • The sector is growing fast • Only 8 percent of institutions are occupying over 80 percent of the market • Outreach grew by 20% • Outstanding credit is more than 3 times higher than deposits • credit risk and liquidity risk are steadily going up • Systemic Risk rose • very high share of 2 big NGO-MFIs : 63% in microcredit and 54% in micro-savings. • An imperfect market condition.

  13. History of Regulatory Attempts • Usurious Loan Act, 1918 • Bengal Money Lenders Act, 1933 • Agricultural Loan Act, 1937 • Money Lenders Act, 1938 • Cooperative Societies Act, 1940 • Debt Settlement Board, 1950 • Grameen Bank Ordinance, 1983 • Creation of NGO Affairs Bureau --1990 • Creation of PKSF --1990 • Formation or MRRU --2000 • Microcredit Regulatory Authority Act, 2006

  14. Triggering Factors of New Law (MRA Act, 2006)-1 • Declining foreign Fund for NGO Sector • Rising funds from internal sources • Rising contribution of Clients’ savings • Rising contribution of income Source of Resource Mobilization Source: Different publications of MRA & CDF

  15. Triggering Factors of New Law (MRA Act, 2006)-2 Significant increase in number of NGO-MFIs after 1990 Increase in number of savings product –Voluntary savings, DPS, other long term savings Increase of savings in Volume

  16. Protection of Savings Debates around service charge, Ownership structure of MFIs, Practice of good governance, Use of surplus fund Sources of fund and question of sustainability Integration with the formal financial market Triggering Factors of New Law (MRA Act, 2006)-3

  17. Background of Microcredit Regulatory Authority (MRA) • Bangladesh Bank, commissioned a study in December 1997 to examine "the Regulatory Aspects of Microfinance Institutions (MFIs) and Linking it with the Formal Financial Sector". • government formed a Committee under the chairmanship of the Governor of Bangladesh Bank in October 1999 to • a) recommend an effective credit and savings policy for this sector, • b) ensure transparency and accountability into their activities and • c) make some recommendations regarding a regulatory framework and to propose a body to regulate and supervise these institutions • On the basis of recommendations a Unit namely "Microfinance Research and Reference Unit (MRRU)" was established in Bangladesh Bank under the supervision of a National Steering Committee in June 2000

  18. Work done under MRRU • Prepared Guidelines such as accounting manual, reporting format, etc. • Communicated with near about 1000 NGO-MFIs working in different areas of the country under various legal systems to make them aware about government’s intention to bring them under a single legal umbrella. • Collected information from them about their operations and trained them mostly on how to prepare financial statements, importance of reporting, etc. • Prepared a draft structure of a legal framework • The draft law suggested for an independent regulatory authority that would be responsible for providing license to the MFIs and monitoring their activities.

  19. Establishment of MRA • “Microcredit Regulatory Authority Act, 2006” was passed by the Parliament in July 2006, • Accordingly, the Microcredit Regulatory Authority (MRA) has been established in August 2006 • MRA is the regulatory and supervisory body of microfinance institutions in Bangladesh. • License from the MRA is mandatory for operating microfinance activities in Bangladesh.

  20. Important contents of Microcredit Regulatory Authority Act, 2006 • Formation of Microcredit Regulatory Authority (MRA) • Duties of the Authority • Prerequisites of license for MFIs • Rights and responsibilities of MFIs • Deposit Insurance Fund • Governance of MFIs • Reserve Requirement • Profit distribution • Operational requirement

  21. Governance issues Savings collection Service Charge/ Interest rate Rights and responsibilities of Clients Reserve requirement Liquidity requirement Use of surplus fund Record keeping Reporting requirement Inspection and Audit Contents of Draft Rules under the Act

  22. Received more than 4000 applications from the then existing NGOs, who had operations before the enactment of the Act More than 60% are very small organizations Provided license to 503 NGO-MFIs till February 2010 Few areas are highly concentrated MFIs are diversified in terms of size, operations and performance Few MFIs have solid Institutional arrangement Experiences of the MRA

  23. Areas Can be Explored Further • Whether credit or savings should be promoted? • Demand for savings remains in the rural market • Savings can increase national savings rate • Contribute in financial sustainability of MFIs • Bottom line of service charge or interest rate? • Simple cap? • On the basis of cost? Which cost? • Spread between interest on credit and interest on savings? • Sources of fund and question of sustainability • Balance between sustainability and social issues • Taping more local funds • How long on subsidized fund?

  24. Areas Can be Explored Further (contd.) • Deposit collection and legal issues • Protection of savings • Interest on savings • Issue of good governance • Neither public nor private ownership • “Members” of NGOs are not like “Members” of Cooperative or Grameen Bank • Tax rebate and social objectives

  25. Conclusion • From the above facts it is easily understood that the market size of microfinance in Bangladesh is not at all comparable with the situation of other countries. • There are lots of arguments regarding taking this huge responsibility by a new organization like MRA. • Existing issues of service charge, sustainability of the sector, problem of overlapping borrowers, establishing effective supervisory tools to monitor, new issues like foreign investment and securitization etc need to be addressed with caution. • All these issues pose huge responsibilities on the shoulder of MRA.

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