Archive for: Bangladesh

This is a guest post and therefore the views reflected in this post are those of the author, and not of CGAP.

Since 2006, when Muhammad Yunus, along with the Grameen Bank, was awarded the Nobel Peace Prize, worldwide support for expanding microcredit grew based on its potential to alleviate poverty and lead to economic justice. Over the past 30 years, this innovative banking program, pioneered in Bangladesh, has helped millions of poor people, especially women, to improve their lives with small loans used to start businesses. My colleague Hassan Zaman and I recently published an op-ed on the impact of microfinance in Bangladesh which can be found here.

Owing to its innovative program design and practices, microcredit reaches many poor people who lack access to formal finance.  This is clearly a major gain that protects the poor and other disadvantaged groups from resorting to informal loans at extortionate rates.  Development literature abounds with examples of the many ways in which microcredit has benefited the poor. Microcredit’s empowerment of women in particular can play a pivotal role for poor families. Read the rest of this page »

Like most microfinance practitioners, particularly in the sub-continent, I have thought a lot about the issue of over-indebtedness in the last few months. It’s not that it was any less of an issue before, but the Andhra Pradesh meltdown really made me question seriously whether we in Bangladesh have also been cavalier to the point of being reckless about the amount of credit we have sold to our clients.

Milford Bateman in an earlier post  in this series seemed to suggest that it was the ‘commercialization’ of microfinance and alleged tendency of senior managers to enrich themselves that are to blame for borrower over-indebtedness. Maybe he is right with regard to some other countries, but this is not the case as far as Bangladesh is concerned. Sure, MFIs in Bangladesh have “commercialized” insofar as they have moved away from donor funded microfinance in the 1990s to a self-sustaining microfinance model in the 2000s. But almost all microfinance players here are non-profits that re-invest surpluses back into their portfolio and there is little or no evidence of abnormally high salaries or private enrichment of senior managers.

Yet, though due to the absence of any credit profile I have no way to know the exact percentage of borrowers who fall in the over-indebted category,  I have a hunch that the percentage is high enough, particularly in certain regions of the country, for us to be concerned about it. While I don’t agree with Mr. Bateman that it is commercialization that is solely to blame, I do agree that almost all the microfinance players bought into the idea propagated by some advocates that microcredit is the silver bullet to eradicate poverty and all that the poor people need is more and more microcredit.

This belief prompted MFIs to seek fantastic growth in the numbers of borrowers and sizes of portfolio over a 15 year period in which they, or we, did not stop to assess whether more and more credit was causing some people to become over-indebted. (I strongly believe though that the vast majority of microfinance borrowers in Bangladesh have economically benefitted from having access to institutional financial services.)

I completely agree with Richard Rosenberg that every credit program will leave some borrowers worse off. This might be because of pure bad luck, as Mr. Rosenberg has demonstrated with a great example in an earlier post. In Bangladesh, many borrowers become unable to repay their loans midway through the loan cycle because a sudden health shock in the family or a natural calamity wipes out their assets and income source.

In these cases as well, one cannot blame the loan officer or the borrower for taking a loan that ultimately made her worse off. What matters in these types of situations is what action the MFIs take once the borrower starts to default, as that can further deepen vulnerability or help build resilience. That, however, is a separate discussion.

But what about those instances where a borrower, at the very outset, takes on more debt than she can possibly repay, or will become economically worse off as a result of paying back? I have heard some microfinance practitioners argue that the MFIs are not to blame for this because they are not forcing anyone to take loans. The problem, they say, is created by the borrowers themselves because they don’t know when to stop. There is of course some truth to this. However, I belong in the camp that thinks that the MFIs here are, at least in part, to blame for borrower over-indebtedness, whatever the extent of it may be.

It is true that often the borrowers take on too much debt, wittingly or unwittingly, and the loan officers lack the capacity, the information, or both, to recognize this and pull back on disbursements. But just as often if not more so, it is the loan officers of MFIs who seduce their clients into taking on too much debt because they are incentivised on hitting sales targets that, at least for some time, were over ambitious. This was made worse by the fact that the microfinance industry, though chasing fantastic growth on one hand, had stopped innovating on the other and was offering much the same product to every type of borrower.

Whether it is the borrowers who took on more debt than they could handle or the MFIs that pushed too much debt on to borrowers or whether both have been complicit in this, I believe that MFIs now have a responsibility to intervene on both the demand and supply sides to counter the problem of over-indebtedness.

On the demand side, the MFIs can work to increase the financial literacy of their clients so that borrowers can take better financial decisions. Providing financial literacy training to millions of borrowers will, of course, drive up costs. But perhaps the time has come for governments and donors to subsidize these kinds of activities of MFIs rather than the loan fund itself. On the supply side, the MFIs can work to ensure that too much credit is not pushed on to borrowers through a number of steps.

First, the MFIs can set more realistic and sensible growth targets that are desegregated over space and time. Second, MFIs can re-train their frontline staff and assess their performance not only in terms of sales targets and portfolio quality but also in terms of other non-financial indicators of borrower wellbeing. Third, MFIs can work towards a greater sharing of information among themselves through the setting up of a microcredit bureau so that decisions are not based on partial information in a country where multiple loans are an endemic feature of microfinance.  And lastly, there is tremendous scope for innovation and product development in the microfinance space.

I do see signs of progress on most of the issues in Bangladesh, particularly on the supply side. The large MFIs seem to be revising down their growth targets, there are ongoing experiments with new products and there is some hope that a microcredit bureau, at least on a limited scale, will see the light of day within a year or so. These are positive signs as far as I am concerned and indicate that MFIs have begun to counter the problem of over-indebtedness before it becomes a major issue in this country.

–Shameran Abed, Programme Head, BRAC Microfinance Programme

This post is the next in the blog series on over-indebtedness. In the coming weeks we’ll be featuring a variety of voices from across the globe on this topic. We welcome your participation in this discussion through comments.

(Plus afterthoughts on mission drift and the quality of Bangladeshi microcredit products.)

I recommend reading David Roodman’s blog from last Wednesday about framing a “bottom line” verdict on microcredit.  I was particularly interested in his concluding observations:

…[W]hile high-quality impact studies are valuable, they can never give us the whole story, for each is a static snapshot. (Often, it should be said, of impacts at low doses, because randomized trials are often performed as MFIs roll out services to new customers, which in microcredit means making those small first loans.) Much of the story of the impact of credit lies in the dynamics of the market, how it evolves over time, as we have just seen here in the United States. You don’t understand those through traditional impact studies.

It also means, by the way, that impact studies ought to report doses and impacts with equal prominence.

Some would argue that USAID’s AIMS impact studies did not successfully screen out selection bias.  But my recollection is that the impact that they found (whether truly caused by the microcredit or not) tended to be associated with a series of loans, not just one, let alone the initial MFI loan that is often far below what the client wants and can handle.  That doesn’t mean that we should ignore the results of randomized trials that cover 15 or 18 months of entering clients’ experience.  But it does suggest that longer-term results, if obtainable, should be a lot more significant.

While we’re on the subject of small initial loans…  People tend to see loan size as a rough proxy of client poverty, which appears to be more or less true as long as you say the word “rough” very emphatically.  But the first few loans that an MFI makes to a client typically reflect, not the client’s ability to use and repay the amount, but rather the MFI’s risk management policy (i.e., we’ll give the client more serious money only after she’s established a good track record in repaying little—i.e., low risk—loans.)  This is one of several reasons why it is a serious mistake to view increase of average loan size as ipso facto evidence of mission drift in an MFI.

When Compartamos started out, no client could get an initial loan bigger than $50.  After some years of great loan collection performance, management decided that they could loosen the reins a bit, and give clients the choice of a range of initial loan sizes, from $50 up to several hundred.  Once the new policy was implemented, almost no one chose a $50 loan, and most new clients took the maximum loan size.  This produced a big increase in average loan size, which had nothing to do with the poverty level of the incoming clients.

Microloans per 1000 households (or per 1000 poor households) are a lot higher in Bangladesh than anywhere else.  Why is the country such an outlier, with some other countries appearing to approach market saturation at much lower levels?  And why haven’t we seen more signs of price competition and pressure on profit levels in Bangladesh, given that large percentages of potential clients have access to multiple providers.  My speculation is that both of these things may reflect MFI loan size policies that are not well matched with client needs and repayment capacity.  Anecdotally, one hears that there are very high levels of multiple indebtedness in Bangladesh.  But I’ve seen a couple of studies reporting that in Bangladesh, unlike most other countries, multiple indebtedness has not been strongly correlated with repayment problems.  Maybe the MFIs are handing out loans that are too small, forcing clients into the hassle of going to multiple MFIs to borrow an amount that fits their needs and repayment capacities.  If I want loans from all three MFIs in town, the fact that one of them charges a little more interest than the others is unlikely to deter me.  In an environment like that, one wouldn’t expect to see much price competition.

If any readers have any data bearing on this speculation, I’d be very interested to hear about it.

Participants of the Global Meeting

In late November 2009, the nine partners in the CGAP-Ford Foundation Graduation Program met in Bangladesh, during a workshop hosted by BRAC Development Institute. The first part of the meeting was kept to pilot implementers only—it proved to be an incredible forum for candid discussions about the challenges of implementing such a demanding model.

There was a particularly lively discussion on targeting. The graduation model is intended for the poorest—food insecure households, those at the bottom of the economic ladder, and often excluded from regular microfinance. Targeting, to ensure both that the poorest are reached and that better off households are excluded, is therefore an extremely important element of the program. And because the program is based on household-level economic activities, only people who are physically or mentally able to manage enterprises can join.

Read the rest of this page »

Congratulations to former CGAP Excom chair, Fazle Abed, founder and chairperson of BRAC, for his new year honour. Fazle Abed is to be appointed Knight Commander of the Most Distinguished Order of St. Michael and St. George (KCMG) by Her Majesty Queen Elizabeth II for his work in tackling poverty and empowering the poor in Bangladesh and in other parts of the world.

There’s been some on-line argument lately in the list-serves about the relative development merits of microcredit and small/medium enterprise (SME) credit. Some have complained that all the resources devoted to microfinance have starved SME finance of the support it deserves.

I know something about microfinance but much less about SME finance, and certainly am not qualified to opine on which does more for poor people. But I’d like to point out one factor that may help explain why microfinance gets so much more airtime than SME finance with most donors.  I’m speaking on the basis of impressions, not hard data, and would welcome correction from anyone who has more of the latter to add to the discussion. Read the rest of this page »

Casual empirical evidence suggests that borrowers who take loans from more than one MFI are more likely to default on their loans. Here is a graph that researchers from BRAC, one of Bangladesh’s largest MFIs, have produced based on client data in the district of Tangail. While 9 out of 10 BRAC-only clients repay their loans regularly, repayment drops to 50% for households with membership in three or more MFIs other than BRAC (we should add, though, that this finding is not representative for the whole industry, and other experiences are reported elsewhere). What are we observing here? Rising competition of MFIs that leads to a lack of repayment discipline? Or is it due to the effects of over-indebtedness caused by multiple loans from different institutions? Read the rest of this page »