Given the milestones that have marked the recent history of the overwhelmingly successful microfinance institution (MFI) business model, it is only appropriate that there be some consideration of retrenching and maintaining some sustainability in the MFI market. Surely none of us are so secure in the obvious beneficences of micro-finance that we cannot fathom that in even in such a vulnerable market we might observe incidents of interest rate gouging and other less-than- beneficent practices.
So it is in this spirit that some of the speakers at the conference– appropriately title “Microfinance Regulations: Who Benefits?”–suggested that the microfinance managerial and business practice lags behind MFI market penetration.
Indeed, as the Daily Star reports, the Finance Minister of Bangladesh AMA Muhith claimed that “Microfinance has some problems. To me, these are high interest rates and charges,” he said while inaugurating a three-day international conference on microfinance at Sonargaon Hotel in the city.”
Again, according to the Daily Star “Muhith said the borrowers are getting into “a debt trap” in microfinance. The number of people coming out of poverty level through microfinance is not that much.”
Furthermore, “lamenting that the microfinance is also leading people to low-level technology trap, he said: ‘We have to think how to get out of this trap.’”
The problem is the following: MFI’s serve the poor, but the rates at which the loans are returned are too high to sustain the savings of the poor and therefore investment and growth in any business these entrepreneurs might establish. Whereas banks serve 44% of the adult population in Bangladesh, MFI’s provide credit to 24% of Bangladesh’s adult population, but at exorbitantly high interest rates. This market though smaller is much more fragile and harder to examine And, of course, this market is constituted only by those individuals who also happen to be among the poorest in the country.
Though stake holders have long favored establishing non-profit MFI’s or setting a low, flat rate, these ideas have not gained traction. Given the small amount of credit doled out the high interest rates do not seem to pose a very big risk to firms and the repayment rate remains high because the amounts to be repaid are fairly small. Nevertheless the industry has long maintained its own governance structure but as more MFI’s are being overseen by an increasing web of nepotist family connections, the case for regulation has grown stronger.
To that end, the DFID Bangladesh country representative Chris Austin said: “Sound regulation prevents the kind of irresponsible financial practices that we have witnessed in the recent past in developed markets.”
The government of Bangladesh will shortly approve the first set of regulations governing the operation of MFI’s. Among other tasks, the Microcredit Regulatory Authority in Bangladesh will be charged to help bring about policies that will increase and keep safe the savings of the poor.
